What springs to mind when I ask you to imagine a millionaire? Someone standing on a yacht with an attractive companion, a bottle of Champagne in one hand and perhaps a cigar in the other? I don’t blame you if you were thinking of something along these lines. It is, after all, the sort of image promoted in lavish TV adverts and on Instagram.
According to Thomas Stanley and William Danko, however, the reality is quite different. Following years of research — culminating in the publication of their classic 1996 tome, The Millionaire Next Door — they discovered that most ‘real’ millionaires rarely present themselves as being rich. Quite the opposite, in fact. You’ll probably walk past a few today and never know it. Let’s take a quick look at some of the lessons we can draw from their research.
Spend less than you earn and avoid status
It might seem obvious but spending every last penny of your monthly paycheck won’t increase your net worth. To truly become wealthy, you’ve got to be frugal and shun a lavish lifestyle. This was the top reason, the authors found, for why the people they studied were able to accumulate wealth.
Linking in with the above, Stanley and Danko also found the millionaires they met weren’t particularly concerned with impressing others. Financial independence over status was far more important. So, not only did they spend less than most, they didn’t feel the need to spend anyway.
A perfect example of this would be Warren Buffett, generally regarded as the greatest investor that’s ever lived. Despite being worth billions not millions, Buffett still lives in the same five-bed house in Omaha, Nebrasksa, he purchased way back in 1958 for $31,000. He could buy any house he wants but chooses to value his health and friendships over possessions.
Start investing early
Naturally, being disciplined with your money will only go so far. That’s why would-be millionaires need to take calculated risks to improve their lot. As far as the authors were concerned, this means learning about budgeting and investing from an early age. The more time spent planning your financial future (and less spent shopping), the better.
Obviously, there can be no guarantees in investing. That’s why here at the Fool UK, we think it makes more sense to control the only thing that you can, namely your risk tolerance. There’s little point investing in small-cap shares, for example, if you can’t bear the thought of your holdings falling by double-digit percentages on some days. Recognise too that a lot of tiny companies fail, taking once-optimistic investors’ money with them. In sum, only invest in what will still allow you to sleep at night.
Aside, from investing intelligently, the authors discovered millionaires were far more likely to work for themselves, often supplying goods or services, however mundane, to those who are already rich.
Be financially responsible
Most millionaires are self-sufficient because they didn’t rely on handouts from their parents. Stanley and Danko found those who received a lot of financial help tend to develop into what they label Underaccumulators of Wealth. In other words, they have low net worth relative to their income.
By contrast, the importance of being independent is then passed on by millionaires to their children who (hopefully) become financially savvy.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.