The Millionaire Next Door

• They don't eat caviar and vintage wine, but stick to regular food.
• More than 80% have accumulated their wealth during their lifetime.
• Most people who live in expensive homes and drive luxury cars do not actually have much wealth.
• Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthy.
• Wealth is usually the result of hard work, perseverance, planning, and most of all, self-discipline.
• Portrait of a typical millionaire:
  1. I am a 57 year old male, married to my first and only wife, with three children. I've lived in the same town my whole life.
  2. Among us millionaires, one in five is retired. Two thirds of us who are working, are self employed. Three out of four of us who are self employed consider ourselves to be entrepreneurs.
  3. Many of the businesses we are in could be classified as 'dull-normal.' We are typically welding contractors, auctioneers, rice farmers, owners of mobile home parks, pest controllers, coin and stamp dealers, and paving contractors.
  4. Our household's total annual taxable income is $130,000.
  5. Most of us own homes valued at an average of $320,000.
  6. We're fairly well educated. Only one in five of us is not a college graduate. Many of us hold advanced degrees.
  7. On average, we invest nearly 20% of our household income each year. Most of us have at least one account with a brokerage company, but we make our own investment decisions.
  8. I am a tightwad. That's one of the main reasons I completed a long questionnaire for a crispy $1 bill.

We prefer to define wealth not as net worth, but as a comparison between net worth, and what net worth you would expect someone to have based on their age and income. A rule of thumb equation is: multiply your age by your realized, pre-tax annual household income from all sources except inheritances. Divide by ten. This is your expected net worth. If you've accumulated only half the expected amount, you are an under achiever. To qualify as a prodigious accumulator of wealth (PAW) you should be worth twice the expected level.

You aren't what you drive
About 15 years ago we did an interview with 10 millionaires. Afterwards, we walked into the parking lot and were surprised to see that almost all were driving Buicks, Fords and Oldsmobiles. One of us said, "These people buy automobiles by the pound!" It's true. The full size Buick four-door sedan sells for less than $6 per pound. A BMW 740 sedan costs more than $15 a pound.

Planning to be rich
Planning is a strong habit among people who have a propensity to accumulate wealth. Millionaires spend significantly more hours per month planning and managing investments than non-millionaires. Nearly all the millionaires we surveyed own stocks; most have 20% or more of their wealth in publicly traded stocks. Yet most don't follow the ups and downs of the market day by day, or trade stocks in response to daily headlines. 42% of the millionaires in our survey had made no trades in the year prior to our interview with them. They focus on mastering their understanding of a much smaller set of investments.

If you aren't wealthy, examine your lifestyle:
Does your household operate on a budget? For every 100 millionaires who don't budget, there are 120 who do. Among the non budgeters, more than half use a "pay yourself first" strategy, investing a minimum of 15% of their income before they pay any other bills.

Millionaires are very goal oriented. One high-school drop-out with more than $10 million told us: "I've always been goal-oriented. I have a clearly defined set of daily, weekly, monthly, annual and lifetime goals. I even have goals [for when I] go to the bathroom."

The Millionaire's Method
Most people try to improve their financial position by realizing more income, which is subject to attrition by tax. The millionaire next door is Revenue Canada's worst nightmare. Because he is frugal, he doesn't need to spend much money, so he doesn't need a large income. The typical millionaire in our surveys has a total annual realized income of less than 7% of his wealth. So less than 7% is subject to income tax. The typical North American family realizes $35,000 to $40,000 each year, or 90% of its net worth. The result is that the typical household in America pays the equivalent of more than 10% of its wealth in income taxes every year. On average, the millionaires we surveyed paid a bit over 2% of their wealth in taxes. The fact is that the super affluent got that way by being masters in minimizing their realized income. For the purpose of wealth building, income doesn't matter much. Once you're in a high income bracket, say $100,000 or more, it matters less how much you make than what you do with what you already have.