Written by: Corey Janoff
This post was originally published on our previous blog website on February 8, 2018 and has since not been revised and/or updated.
If you haven’t read the book The Millionaire Next Door, by Thomas J. Stanley and William D. Danko, I strongly suggest you do. The original version was first published in the mid 1990’s, but has since been updated. Given a lot of the data is over 20 years old, due to inflation, some of the numbers aren’t as impressive today. However, the core principles hold true. The authors detail the findings of two opposite categories of people: Under Accumulators of Wealth (UAWs) and Prodigious Accumulators of Wealth (PAWs). As one would expect, the majority of millionaires (people with a net worth equal to or greater than $1 million) fall into the PAW category, but the demographic of that population is somewhat surprising.
They found that most PAWs come from blue-collar backgrounds, live in middle class neighborhoods, drive inexpensive cars, prioritize savings and avoid luxury goods. To the contrary, many high-income white-collar professionals fall into the UAW category and fail to become millionaires. UAW’s enjoy luxury goods, feel their high incomes mean that they are deserving of higher class amenities, live in more expensive neighborhoods, drive expensive cars, and end up neglecting savings and investing.
Today’s blog post isn’t meant to be a book review of The Millionaire Next Door, but many of the concepts I discuss can be found in research-backed detail in the book.
So, do you have the mindset of a millionaire?
Live Below Your Means
To set the stage, people with a millionaire mindset understand they need to spend less than they earn in order to achieve their goals. If they are going to pay off debt and add to their investments every year, they need to keep their expenses as low as possible.
When looking for a house to buy, they don’t ask the mortgage loan officer to calculate the maximum amount they can qualify for and then start searching in that price range. In the book, the authors note how most millionaires rarely carry a mortgage that is more than two times their annual income.
People with a millionaire mindset will first look at their income and other expenses, determine their savings and investing goals (and any other goals they want to direct money towards) and then calculate how much they can afford to spend on housing. They make sure their housing expenses are low enough to allow them to reach their other goals within the timeframe they want to reach them.
This mentality extends beyond housing costs. The same rules apply when buying or leasing a car. What is the least amount I can spend on a vehicle that suits my needs? Everyone knows cars are depreciating assets and hold zero value after about 15-20 years (if they are still even running at that point), so let’s keep that expense to a minimum.
Clothes, groceries, you name it. People with a millionaire mindset spend as little as possible on everyday purchases. They look for deals. They use coupons. They bend down to pick up spare change. Money is money. Let’s save it whenever possible.
Paying Off Debt
People with a millionaire mindset hate debt. Yes, they may have taken out student loans to finance their education, but they can’t stand them and want to pay them off rapidly. Yes, they likely borrow money in the form of a mortgage to purchase their first house, but they make it a goal to pay off that mortgage faster than the typical 30 year requirement.
Credit card balances are paid off in full each billing cycle. Never have they ever carried a credit card balance over from one month to the next and accrued interest. Not even when they were a broke college student (well maybe once or twice then, but that was a former life and the balance never carried over for more than a couple of months. After the spring break trip was over, they went back on the top ramen and tap water diet and hammered away at that credit card).
Zero percent interest rate deals on the new sofa are cute, but people with a millionaire mindset would rather pay up front and be done with it. They don’t want to waste their time dealing with a new line of credit for $2,400 and paying $100/month for 24 months. They understand that if they can’t afford to pay $2,400 cash today for a piece of furniture, they probably shouldn’t be buying that piece of furniture.
Accumulating Wealth is Mandatory
Millionaires, for the most part, only become millionaires by saving and investing over time. Occasionally it will come in the form of an inheritance, but if the heirs have a millionaire mindset, they will continue to grow the wealth moving forward. Otherwise it will be squandered away quickly.
People with a millionaire mindset make a commitment to saving and investing each and every year, every month, and every paycheck. Saving and investing is as routine as brushing their teeth every day.
The IRS maximums on 401(k) and IRA contributions are not a goal, they are a restriction. Maxing out their tax-advantaged investment vehicles are a given. The challenge is deciding where to invest above and beyond that. Every year they make it a goal to invest more than they did the year before.
It’s like a weightlifter addicted to going to the gym. How many more reps can I do? How much more weight can I add today? How much more can I invest? I’m going to increase my monthly contributions to my investment account by $100 today. And then increase by another $200 in six months when I get a pay raise.
Any time they get a pay raise or pay off a debt, they direct some of that extra money towards long-term investments to continue accumulating wealth. Investing and accumulating is a must.
People with a millionaire mindset make it a priority to invest at least 20% of their gross income each year in long-term investment vehicles. Many will shoot for 25%, 30%, even 50% of their income. They set a target goal of how much to invest each year and track their progress towards reaching that goal.
It’s Not What You Earn, It’s What You Keep
Anyone who is in business or accounting likely knows the formula that is taught in Accounting 101: Assets + Liabilities = Equity. As a business, the owner’s (or stockholders) equity is the sum of the assets and the debts. Obviously the debts are a negative number on a balance sheet, so they bring down the total value of the business. If your business owns $1 million worth of stuff (cash, real estate, equipment, etc.), but have outstanding debts of $1.5 million, your equity in the business is negative $500,000.
If the business owns $1 million worth of stuff and has zero debts, then the equity is $1 million. Congratulations, you are now a millionaire!
This doesn’t mean debt is a bad thing, but it needs to be used strategically. Many start-up businesses have negative equity as they are reinvesting in the business and in growth mode. But as time goes on, they should see their balance sheets grow as they accumulate assets and pay off debts and become less reliant on debt.
Same goes with your personal finances. Your net worth is your personal balance sheet. What do you own? What do you owe? The sum of your assets plus your debts is your net worth. Many young professionals who are saddled with student loans and have only been working for a couple of years will have a negative net worth. But once you are done with your education and training years and are up and running in your career, you should see your net worth sprint in the positive direction.
Paying down debts faster than required and putting significant energy into accumulating income producing assets and investments will push your net worth in the positive direction. People with a millionaire mindset take this very seriously. It excites them to calculate at their net worth and see the progress they are making. It further fuels the fire and motivates them to save and invest even more and pay down debts even faster. It is addicting.
If you earn a six-figure income, there is no reason you shouldn’t achieve millionaire status at some point in your 40’s.
Even if you earn $40,000 per year, you can become a millionaire without punishing yourself. Here is how. Start investing 20% of your gross income every year in your mid-20’s. That is $8,000 of your $40,000 income. Assuming you get a 3% pay raise each year to account for inflation and you continue to invest 20% of your new income each year, you will likely have an investment portfolio north of $1,000,000 by your 60’s. That is assuming your investments only grow by an average of 5% per year. If they grow by 7% per year on average, you will be well north of $2 million by your mid-60’s.
So, Do You Have the Mindset of a Millionaire?
If you do, achieving a net worth of $1 million will happen for you. You will make it happen. Heck, $1 million is probably just the starting point. You are probably shooting for $2 million. $5 million. $10 million. You are aiming for more than that? You’re talking dirty now.
A lot of people will talk the talk, and say they want to do what it takes to reach financial independence. But then they don’t walk the walk and don’t actually do what they need to reach their goals. If you have the mindset of a millionaire, you will set yourself up to reach your goals in the timeframe you want to reach them, and then let all of the other pieces in life fall into place. Partly because your goals will be realistic. Partly because you will be determined to reach them. Success is a choice and you get to define what success is.
It’s the order of operations. What is important to you? What do you really want to accomplish? OK, let’s make sure you get there. Then spend money on all the things in life that don’t really matter. If you start by spending money on all the things that don’t really matter and then try to figure out how to stretch the little you have leftover to achieve your goals, you are going to fall short.
People with a millionaire mindset don’t fall short. Or if they do it is because they set an intentionally lofty goal.
So challenge yourself. If you already have the mindset of a millionaire, push yourself further. If you want to change your mindset, there is no better time to start then now.
Disclosures:
Any examples are hypothetical and for illustrative purposes only. Any investment can involve potential losses, including total loss of principal. Consult with your financial advisor before making any investment or financial planning decisions.
