If you want to be rich, you need to stop acting like you have money in the bank and start
living beneath your means. That's the message in the most recent book from Thomas J.
Stanley, author of "The Millionaire Mind" and the "The Millionaire Next Door."
Bankrate asked Stanley to explain what's fueling America's hyper-consumptive ways and
unquenchable thirst for top-shelf brand vodka -- among other indulgences.
Q: In your book "Stop Acting Rich...and Start Living like a Real Millionaire," you say that
rich people don't necessarily act the way that the rest of us might think they do. In fact,
millionaires are more likely to be extremely frugal. Why is that?
A: There are many factors that explain frugality among the rich.
First, their parents tended to be not only frugal, but well-disciplined. Most millionaires
today came from middle-class backgrounds. Their parents were not wealthy, but somewhat
comfortable. Millionaires tell me that they never felt embarrassed by where they lived or
the type of home they had. To a considerable degree, it is the uniquely American upward
socioeconomic mobility that fuels much of the hyper-consuming engine of the market for
luxury goods, prestige products, upscale brands, expensive homes and so on.
Beyond income, one's vocation has much to do with accumulating wealth. Educators, engineers,
business owners and retail store managers have a tendency to live below their means and to
be quite efficient in transforming their income into wealth.
It is the home/neighborhood environment that most explains one's ability to accumulate
wealth. It may be useful for people to understand that there are 1,138,070 millionaire
households living in homes valued under $300,000. This is far more than the 403,211 who live
in homes valued at $1 million or more.
Q: You describe different levels of wealth in the book. There are the glittering rich, the
income (statement) affluent and the balance sheet affluent.
A: The glittering rich make up a small fraction of 1 percent of the household population.
They have a minimum annual household income of seven figures and a net worth of eight
figures and more. They are extremely wealthy people, and they spend accordingly.
But, as I said in "Stop Acting Rich," no matter what they spend their money on, it is just a
fraction of their overall net worth. In other words, even the glittering rich spend below
their means. There are no more than 80,000 glittering rich households in a nation of more
than 115,000,000 households.
The income statement affluent are those with high incomes and relatively low levels of net
worth. They are not very productive in transforming their incomes into wealth. Many of the
people in this category are highly compensated physicians, attorneys and executives. Many
are driven to hyper-consume by their need to display high social status.
Farmers are found in high concentrations among the segment I refer to as balance sheet
affluent. The balance sheet affluent are highly productive at transforming their income into
wealth.
Among the most productive of this group are educators, engineers, owners of small
businesses, and as mentioned, farmers.
Q: Who is buying most of the top-shelf brand vodkas, extravagant cars and homes and why?
A: The question of "who" really has two answers.
Status products and homes are more likely purchased by people who have higher incomes. Look
at three socioeconomic measures: net worth or wealth, household income and the market value
of a home. Which of these variables is best at predicting consumption of the items
mentioned? The value of a home ranks first, income ranks second and wealth ranks third.
Again, while it is true that the people at the upper level of these measures have a higher
propensity to consume prestige products, it is not necessarily the most significant market.
For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires.
Yes, people with very high incomes, high levels of wealth are more likely to drive status
automobiles. But in sheer numbers, the largest consumer segment for pricey cars, vodkas and
homes is not the millionaire population, it is the aspirationals. These are people who think
they are acting rich via their adoption of prestige brands, but in most cases they are only
acting like each other.
Why do these people act this way? In large part, they are trying to imitate economically
successful people. They take their cues from Hollywood and the advertising industry. The
problem is that most aspirationals know few, if any, really wealthy to emulate.
Would they still continue to drive prestige makes of cars if they knew that the No. 1 make
of automobile among millionaires is the Toyota? Along these lines, would they still crave
living in a $1 million home when they find out that nearly three times more millionaires
live in homes valued at under $300,000 than live in those valued at $1 million or more?
Q: Should financial freedom be everyone's ultimate goal, and where does that leave the
people whose life goals are simply to have some of the trappings of wealth, such as the nice
house in the tony suburb and a European sports car?
A: America is often referred to as the land of the free. But most people in this country are
not really free. They are tied to debt and a treadmill existence in terms of earning a
living.
At this moment, our federal government has promised future social benefits in excess of $50
trillion. That figure is approximately the same amount of the total personal wealth held by
Americans.
In the future, it is very likely that the government will not be able to provide the
promised social benefits to our seniors. The typical household in the United States has a
net worth of just over $90,000. That is about the same annual cost of a decent quality
nursing home.
Also, if home equity and equity in motor vehicles is netted out of the $90,000, then the
typical household's net worth drops down to about $30,000. That is only about 60 percent of
the typical household's annual income. Therefore, it should be everyone's goal to provide
for their economic future by being fiscally responsible.
Otherwise, what will happen when millions of seniors are no longer able to work and have
little or no wealth accumulated? Many of them will become completely dependent upon their
adult children or become destitute. The money that they spent on the trappings of wealth
yesterday (the house in a tony suburb or a European sports car) will not pay for tomorrow's
food, clothing and shelter (possibly a nursing home).
Q: How do you recommend that people become prosperous if they would prefer to get off the
consumer treadmill?
A: The simplest way is to live below one's means.
The typical household should be able to put away 5 percent of their annual income while they
are in their 30s, 10 percent when they are in their 40s, and 20 percent when they are in
their 50s.
This is also related to satisfaction with life overall. There is a highly significant
correlation between satisfaction in life and living in a home and neighborhood which are
easily affordable.
What is a good rule if you are determined to become wealthy?
The market value of the home you purchase should be less than three times your household's
total annual realized income. Also, if you are not yet wealthy, but want to be someday,
never purchase a home that requires a mortgage that is more than twice your household's
annual realized income.
Q: Do you have a sense that American consumer values are shifting from aspirational luxury
purchases that seemed to be heavily marketed in the early 2000's asset bubble days to more
frugal ones?
A: No, I don't think that the values are shifting.
The only reason that people aren't spending as much as they did prior to the current
economic meltdown is that they don't have as much money to spend right now. We are a nation
of hyper-consumers. We encourage our children to major in consumption and minor in
frugality!
The smartest people in the world are in the marketing and advertising industries in this
country. How else can you explain that 300 different brands of vodka coexist in our domestic
market? In 2009, about 2.3 million American seniors will pass away. What did they do with
the more than $2 trillion in income that they earned in their lifetimes?
I estimate that only 2.3 percent will leave behind a gross estate (all assets included) of
$1 million or more. What did the other 97.7 percent of the decedents do with all of their
income? If they did not save their income, invest it or allocate it to things that
appreciate, where did the money go?
Beyond the basic necessities, an awful lot of it was spent on things, many things that now
reside in landfills and thrift shops. We are and will continue to be a culture of
hyper-consumption.
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