Did you know that almost half of American Millionaires do not live in upscale neighborhoods? It is not a secret that many people who live in expensive homes and drive luxury cars do not actually have much wealth – yet many people still succumb to the infamous lifestyle creep.

Wealthy people tend to live a lifestyle that revolves around accumulating money.  According to Dr. Thomas Stanley, those who successfully build wealth have seven common denominators.

  1. They live well below their means.
  2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
  3. They believe that financial independence is more important than displaying high social status.
  4. Their parents did not provide economic outpatient care.
  5. Their adult children are economically self-sufficient.
  6. They are proficient in targeting market opportunities.
  7. They chose the right occupation.

I am not suggesting you sell your beautiful home and move to a neighborhood where you might feel unsafe.  But, if any of these concepts are making you feel bad about yourself, maybe some insecurities are shining through.  Or, maybe you don’t value any of this, so just stop reading.

For the rest of you – Do you have a Big Hat and No Cattle?

Although we likely all have varying definitions of “wealthy”, the universal way we determine nominal wealth is through net worth or our cattle.  Net worth = Assets – Liabilities.  Have you ever wondered how much you should be worth by this point in your career? The research conducted in “The Millionaire Next Door” gives a very simple rule of thumb in computing your expected net worth.

Multiply your age times your realized pretax annual household income from all sources except inheritances.  Divide by ten.  This, less any inherited wealth, is what your net worth should be.

If you sell commercial real estate, and you make $600,000 as a forty-year-old — $600,000 x 40 = $24,000,000 ÷ 10 = $2,400,000.

For a software or medical device sales rep, if you make $250,000 at 36 years old — $250,000 x 36 = $9,000,00 ÷ 10 = $900,000.

These numbers might shock you.  I do believe this is a little excessive.  It also implies that you have been earning your high income consistently, for a long period of time.  If you take your last 10 earnings years and divide it by 10 to give yourself an average income and do the same exercise it will be more realistic.  Yes, you are still likely behind.

What do you do if you feel like you are underperforming this benchmark created by our Ph.D. friend?

  • Conduct a financial audit of 2018. Technology should make this very easy for you.
  • Work with your partner to make sure you spend on things you value.
  • Create a spending plan on a go-forward basis that incorporates 25% savings rate on your income.
  • If you are W-2, do nothing but monitor your spending and investing behavior. And go sell more.
  • If you are self-employed or 1099, collaborate with your financial life manager and tax advisor to find savings through tax loopholes.
  • Think very hard about your car payments, your mortgage, why you own what you own and what your lifestyle means to you today, versus where you want to be tomorrow? I know a Values-Based Financial Planner who can help you with these discussions.

Stay tuned for more excerpts from Dr. Stanley and The Millionaire Next Door. Follow @lifemanaged_ for more insights.

 

 

*Athanassios Panagiotakopoulos is an Investment Advisor Representative with Dynamic Wealth Advisors dba Life Managed. All investment advisory services are offered through Dynamic Wealth Advisors.

 

 

 

 

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