Even most multimillionaires in America don’t live in expensive homes. I recently tabulated the 2007 IRS estate data (the latest data available) for those decedents with an estate valued at $3.5 million or more. I estimated that the median market value of a decedent’s home was $469,021, or less than 10 percent of their median net worth. On average these decedents had more than two-and-one-half times more of their wealth invested in investment real estate than in their own personal homes.
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They chose the right occupation.
This concept is perhaps best expressed by those wise and wealthy Texans who refer to our trust officer’s type as Big Hat No Cattle. We first heard this expression from a thirty-five-year-old Texan. He owned a very successful business that rebuilt large diesel engines. But he drove a ten-year-old car and wore jeans and a buckskin shirt. He lived in a modest house in a lower-middle-class area.
Conversely, those people whom we define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.
Most move into the “American normal” range within one or two generations. This is why America needs a constant flow of immigrants with the courage and tenacity of Victor. These immigrants and their immediate offspring are constantly needed to replace the Victors of America.
Nevertheless, because 95 percent of millionaire households are composed of married couples, and because in 70 percent of these cases the male head of the household contributes at least 80 percent of the income, we will usually refer to the typical American millionaire as “he” in this book.
Webster’s defines frugal as “behavior characterized by or reflecting economy in the use of resources.” The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and hyperconsumption.
I have always been goal-oriented. I have a clearly defined set of daily goals, weekly goals, monthly goals, annual goals, and lifetime goals. I even have goals to go to the bathroom. I always tell our young executives that they must have goals.
Financially independent people are happier than those in their same income/age cohort who are not financially secure.
We often find that highly productive auctioneers are also excellent investors. Take, for example, an auctioneer who specializes in auctioning commercial real estate. What area of investments does he know a great deal about? Commercial real estate. He is his own investment analyst. What if your auctioneering specialty is antique furniture and American firearms? Should you invest in high-tech securities? Probably not.
Another acquaintance, a manager of a department store, always studied trade journals to learn how to make his store more productive. Later he leveraged his reading habits into investing in growth stocks in the retailing area.
A high-income-producing marketing manager, Mr. Petersen, was employed in the high-tech field. But he never invested a dollar in Microsoft or any other growth company. Never, in spite of having considerable knowledge about many of the firms in the technology industry.
Never did Mr. Friend equate “better off” with accumulating wealth. Again, being “better off” meant displaying one’s high income via the conspicuous display of high-status artifacts. Teddy never gave much thought to the benefits of building an investment portfolio. To him, a high income was the way to overcome a feeling of social inferiority. A high income was the product of hard work. “Income in the form of capital gains” were foreign words to him.
To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).
Most millionaires measure their success by their net worth, not by their realized income. For the purposes of wealth building, income doesn’t matter that much. Once you’re in a high-income bracket, say $100,000 or $200,000 or more, it matters less how much more you make than what you do with what you already have.
If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.
Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.
There is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future.
Most millionaires who are PAWs are self-employed. Being self-employed gives one much more control over one’s economic future than does working for others. Conversely, employees today, even high-income-producing executives, have less control over their livelihoods than ever before. Downsizing, for example, is taking its toll, even among the most productive employees. More often than not, even high-income-producing employees are not likely to be millionaires.
Those who succeed among the ranks of the self-employed never take their economic position for granted. Most middle-aged people who are self-employed have seen good as well as bad economic times. They tend to offset the inevitable changes in their revenue by planning and investing. They must build and manage their pension plans by themselves. They have to rely on themselves for their current and future financial situations. More often than not, only the well-disciplined self-employed survive economically over the long run.
Overall, only about 9 percent of the millionaires we have interviewed hold their investments for less than one year. In other words, fewer than one in ten millionaires are “active investors.” One in five (20 percent) hold, on average, for a year or two; one in four (25 percent) hold for between two and four years. About 13 percent are in the four-to-six-year category.
The so-called active investor is one of the more difficult types of millionaires to find for interview purposes. He may be an ideal target market for stock brokers. He certainly spends considerable amounts for brokerage fees related to his trading. But he represents a very small minority of the millionaire population. In fact, we have encountered more nonmillionaire active traders than millionaires who actively trade. How can this be possible? Because it is very expensive to buy and sell, buy and sell, buy and sell one’s equity holdings each day or week or month.
Money should never change one’s values…. Making money is only a report card. It’s a way to tell how you’re doing.
The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.
Who is more confident, more content, more able to deal with adversity? It’s not the Ms. BPFs of America. It’s those who have been brought up by parents who rewarded independent thought and behavior. It’s those who don’t concern themselves with other people’s money, who are more concerned about succeeding than about how much is in someone else’s estate. Also, if one lives below one’s means, one doesn’t have to be concerned with the possibility of being forced to reduce one’s standard of living.
The parents of Ms. BPF have failed to obtain their objective. Their goal was to have a daughter who would “never have to worry.” But the method they used yielded just the opposite result. People often attempt to shelter their children from the economic realities of life. But such shelters often produce adults who are in constant fear of tomorrow.
It’s amazing what you can do when you set your mind to it. You’ll be surprised how many sales calls you can make when you have no alternative except to succeed.
After even just a few years of receiving aggressive and overbearing economic outpatient care, Beth and her husband have lost much of their ambition, economic self-confidence, and independence. No one will ever know if this couple could have functioned productively on its own. Beth and her husband were never given this opportunity.
But the willingness and ability to work hard, take risks, and sacrifice were the qualities that made him a successful and affluent business owner. Somehow, like many of his peers, he forgot how he became wealthy.
They lived the high-status/high-consumption lifestyle so popular in America today. It’s no wonder their sons and daughters attempt to emulate them. Conversely, adult PAWs whose parents were wealthy have told us time and time again: I never knew my dad was wealthy until I became executor of his estate. He never looked it.
Ken’s focus today is on achievement. He is a key executive with a major communications and entertainment corporation. He is also an astute investor in both commercial real estate and quality public corporations. Also like his father, Ken is a prodigious accumulator of wealth. He lives in a modest home and drives used cars.
Good health, longevity, happiness, a loving family, self-reliance, fine friends … if you [have] five, you’re a rich man…. Reputation, respect, integrity, honesty, and a history of achievements!
But business owners have a set of beliefs that helps them reduce their risk or at least their perceived risk:
♦ I’m in control of my own destiny.
♦ Risk is working for a ruthless employer.
♦I can solve any problem.
♦ The only way to become a CEO is to own the company.
♦ There are no limits on the amount of income I can make.
♦ I get stronger and wiser every day by facing risk and adversity.