To Be Wealthy, Don’t Get Trapped in Trappings

Gold diggers apparently have it all wrong.

You can’t spot a millionaire by looking for a fancy car, a Rolex watch or an expensive suit. The bulk of America’s millionaires--and there are now 3.5 million of them--drive unremarkable domestic automobiles and wouldn’t think of spending more than $1,000 for a watch.

In fact, the average American millionaire is a 57-year-old married man with three children, an old car, a $320,000 home--that he bought years ago for substantially less--and an annual household income of $131,000. Still, he’s got a net worth amounting to a stunning $3.7 million.

How did a relatively average guy like that accumulate such an extraordinary amount of money? The dull way--through hard work, perseverance, planning and self-discipline, says Thomas J. Stanley, co-author of a new book called “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.”

You can follow the millionaire’s lead and become wealthy too--even if your income is modest, Stanley says. In fact, 80% of today’s millionaires are first-generation rich. Precious few inherited any money, much less millions of dollars. Many even put themselves through college without the financial backing of a parent, Stanley adds.

Consider Charles Bobbins, a 41-year-old firefighter. He and his wife, a secretary, earn $55,000 annually. However, they have amassed $460,000 in net worth. That’s the value of their assets--such as stocks, bonds and real estate--minus their debt. True, it’s not yet a million, but at this pace, it won’t be long before it is.

How do you do it?

Live below your means. Save prodigiously. And don’t get caught up in keeping up with the Joneses, says Stanley, a PhD who has been studying the affluent for 23 years.

To be sure, Stanley’s wealth-generating advice is not exactly ground-breaking. Financial planners have been urging their clients to follow these simple rules for decades, says Kathy Stepp, a certified financial planner with Stepp & Garrett in Kansas City, Mo.

“There is no question that if you learn to live below your means, you can become wealthy,” Stepp says. She explains that living on less and saving the rest not only boosts your nest egg, it reduces the size of the nest egg you’ll need. That’s simply because the amount of money you need to live on in retirement is based on your lifestyle. If you spend less, you need less. It’s that simple.

However, heeding that advice is easier said that done, experts acknowledge. Stanley thinks he knows why. Americans idolize the person who is a financial success, but since few people are privy to other people’s balance sheets, success is judged on a fairly superficial level--through the trappings of wealth, such as expensive homes, fancy cars, luxury vacations and the like.

Consequently, people who want to feel successful acquire the trappings of wealth--before they can afford them--which puts them on a consumption treadmill that requires spending more, working harder, but never really getting ahead.

However, if rich people are role models, it should soon become chic to be cheap, Stanley says. Where lots of middle-income families have wallets stuffed with credit cards from the likes of Neiman Marcus and Nordstrom, the two most popular store credit cards in millionaire’s wallets are from Sears and J.C. Penney. By and large, millionaires live in middle-income neighborhoods, surrounded by people who earn--and save--a fraction as much. They budget religiously, invest carefully and for the long term and rarely get caught up in costly habits.

This fact came home to Stanley the first time he was assigned a major research project where he interviewed multimillionaires--people who had accumulated $10 million or more, in fact--for a bank trust department. Believing these people would be accustomed to the finest of everything, Stanley rented a suite and stocked it with gourmet food and wine. The multimillionaires hated it. They were far more comfortable in later research projects, when Stanley began serving sandwiches and beer.

You want to gauge whether you’re on track to be wealthy?

Stanley suggests you first determine your net worth by taking the value of all your assets and then subtract your liabilities--or debts. Compare your net worth to targets generated by a simple mathematical test.

That test: Multiply your age times your pretax annual household income from all sources, except inheritance. Divide by 10. This, minus any inherited wealth, is what your net worth should be, if you’re an average saver, Stanley says. Those on track to be rich would have a net worth that’s nearly twice as high, he adds. But the average American consumer would probably have half as much.

If you’re not where you want to be, it’s time to kick the spending habit, Stanley says.

“You tell a 35-year-old who drives a BMW that he’s going to have to start shopping at Penney’s and it’s going to be deflating,” he acknowledges. “But there are trade-offs. You have to make a determination: ‘Am I going to continue with the pool and the house and the cars and spend my life being subject to the demands of others, or am I going to become financially independent?’ To me, that trade-off is pretty easy.”