Who are The Rich in America Today? Introducing The Frugal Rich.
Posted: September 7th, 2011 | Author: Joe | Filed under: Debt, Tips | Tags: Building Wealth, debt and wealth, How To, Tips | 3 Comments »Who are The Rich in America today?
Most of the wealthy in America are 1st generation wealthy, meaning they earned their wealth and didn’t inherit it. So who are The Rich? They are mostly entrepreneurs and small business owners.
According to Thomas Stanley and William Danko, “Wealth is what you accumulate, not what you spend.”
Stanley and Danko are the authors of the fascinating book, The Millionaire Next Door (Surprising Secrets of America’s Wealthy), and they’ve made a study over the years of the habits of the wealthy in America.
What they learned about America’s wealthy is summed up in this quote from the book:
“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes, wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
There are many lessons in this book, and that quote touches on a few of them. The most important lesson is that you don’t need to be born into the right circumstances to become wealthy. It sometimes takes luck, but mostly takes self discipline and perseverance. In short, stop finding excuses – you too can become rich!
I know, that probably sounds a bit like an infomercial for some get rich quick scheme, but it’s not. They never say you can do it over night or that its something you can do on the weekends in your spare time. Quite the contrary. It takes years of planning and discipline, but that’s not to say it takes as much as a career or full time job. You just need to have a plan and keep at it.
OK, enough cheerleading about how you can do it… let’s answer a basic question: What is wealth?
The definition of wealth.
Wealth can be defined in many different ways, but in its most common use it equates to a person’s net worth. That is, the value of everything a person owns, minus what a person owes.
That’s overly simplistic, but you get the idea. Having a fancy Mercedes Benz in the driveway doesn’t make you any more wealthy if you owe more on the loan than the car is worth… or if you’re leasing it and don’t actually own it at all. That’s because the car is a liability, not an asset. An asset is something that either puts money in your pocket, or can be sold to generate cash. A liability is something that costs you money.
But there’s a difference in assets too. Some are liquid, and some are not. Stocks for instance are generally more liquid than real estate, since you can sell a shares of a stock much easier than you can a house.
How the wealthy view (and use) money.
The wealthy get rich by maximizing their return on investment. They may still spend big bucks on discretionary items, but they view those purchases as investments, not mere expenses. They are more apt to maximize quality and value, regardless of price. But that’s not the same as buying expensive name-brand merchandise for the sake of owning expensive name-brand merchandise. This has especially been true of the rich during the recession.
There are definitely plenty of people with money who act rich, but when their finances are viewed more closely it’s clear that they are only suffering from Affluenza (The All-Consuming Epidemic).
Don’t be one of them.
The rich and debt.
You may think that the wealthy eschew debt and pay only in cash, but that turns out not to be the case entirely. Stanley and Danko found that most American millionaires tend to pay for large ticket items like cars, homes and boats with cash and to the extent that they use debt it is for investment purposes. This is likely a big difference between the middle class wage earner and the millionaire, but if the wage earner can get to a point where he can buy those big ticket items without debt, then he’s well on the road to a more financially free lifestyle if not the road to riches.
Tips for increasing your wealth.
OK, enough about how we’re different from the rich. Here’s how to become more like them financially:
- Don’t look to debt to fund your lifestyle – this includes getting a college degree. Going $30,000 into debt for a degree and getting a job with an income ceiling of $30,000 probably isn’t worth it in the long run.
- Have cash on hand to cover your unexpected expenses (emergency fund).
- Live below your means – spend less than you earn and avoid Lifestyle Creep !
- Plan – plan for today, tomorrow and 30 years after retirement.
- Diversify – invest in mutual funds and bonds, not just cash. Add exposure to commodities and real estate.
- Don’t use credit for purchasing – unless you can (and do!) pay off the balance each month!
If I had to distill the lessons learned in The Millionaire Next Door into one simple concept it would be this:
Break out of the debt cycle; plan, save and work to avoid going into debt for any reason.
If you master that, you’ll have the tools and resources on hand to accumulate wealth instead of payments.
Great book, the Millionaire Next Door. Love the idea of the guy with the Camry parked in the driveway is a millionaire and you wouldn’t know it. I definitely agree that it takes a lot of work and determination. Glad you referenced the book. It is a great read.
Having experienced being in debt and being debt free, I can say that the latter is far better! It is not easy in today’s society to resist the temptation of instant gratification, but it is essential to avoid spending more than you make, especially on items that are not useful or necessary. The increasing popularity of personal finance blogs has exposed more people to frugal living, ways to avoid debt, and the necessity of saving money for an emergency. Your gave valuable tips and advice in this post, and thank you for the information.
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