by Scott Pape - August 11th 2011
LEAN in a little closer. Today I’m going to show you how to become wealthy for life. Even in these turbulent economic times. And I’m not just giving you my ‘opinion’ – it’s all backed up by rigorous research.
Twenty years ago two academics, Thomas J. Stanley and William D. Danko, set out on what has now become a landmark study on how to market things to the very wealthy.
The pair started their search in some of the wealthiest American suburbs, figuring that was the best place to interview millionaires about their buying habits. But after countless interviews, the researchers uncovered something astonishing.
Their interview subjects looked wealthy, with their expensive homes, European cars, and fluffy dogs in handbags – but when the academics examined their financial position they found that they weren’t actually millionaires. Most had high incomes but they were asset poor.
They were posers. Or perhaps they were just trying to replicate the stereotype of what society says a millionaire looks and acts like. The researchers ploughed on and eventually uncovered the real millionaires, which became the basis of their book The Millionaire Next Door.
So who are these real millionaires, and how did they get so rich?
Well it turns out they are normal, everyday people, who’ve become millionaires by doing exactly the opposite of what the wannabe millionaires do.
In short, they aren’t wankers. Instead of buying a McMansion, leasing a BMW and enrolling their kids in stuffy school, they keep things real: they tend to own a modest home in a working-class suburb, drive a good second-hand family car, and send their kids to public schools.
Simple, right?
They also work extremely hard, and tend to own their own business (or they treat their job as if they’re self-employed). Either way, earning money is a high priority – but not so they can give it to David Jones like the wannabes.
The real millionaires are religious savers. They spend less than they earn, and invest the difference. The academics found that 95 per cent of the millionaires owned stocks, but few traded them.
Rather than getting freaked out by the financial headlines, they systematically put a set amount of money into good-quality blue-chip shares and hold them for the long term. (That’s one way to smooth out bumps like we’ve seen this week – as prices move down, your set amount of money buys more shares, and as they move higher it buys less.)
When you break it down, what the real millionaires choose to ‘spend’ their money on is a long-term stress-free financial life: $100 a week invested in the share market over 30 years ends up costing $150,000, but it grows to be worth $550,000 in today’s dollars – and by that time it’s growing at a compound rates of around $35,000 each year.
That’s how everyday people become millionaires.
Now even though this was an American study, it perfectly mirrors my real-life experiences. The millionaires I know all have the same important trait: they value their financial security over their status – and when you truly understand this, you’ll be on your way to being wealthy for life too.
Tread Your Own Path!
A Real Millionaire Next Door
Read about a real Barefoot Millionaire Next Door here
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29 comments
Thanks for the post Scott, the Millionaire Next Door is a fantastic book. Some of my friends invest independently through sites like CommSec, and others invest only through a broker. Which would you recommend? Thanks!
Great article Scott.
My favourite quote to explain to people why some are rich and some aren’t is by US financial author Dave Ramsey; “millionaires don’t know who got voted off the island”.
I totally agree with the article about rich people not being wankers and living modestly. My father who grew up in Italy and had to stop going to school in grade 5 because of the war came to Australia with nothing. He couldn’t even speak English. Both he and mum learned English and worked very hard in menial jobs but they saved hard and never showed off. They are now living a very comfortable retirement. Dad taught me the same values and now at 48 my husband and I have paid off our family home and almost paid off an investment property. I now want to start buying shares but I am scared because I don’t know much about them or what are the best shares to buy. Where can I go to learn a bit more about them. We have quite a bit of money in our ING account which we want to put towards purchasing shares but we don’t know where to start.
Being scared is good, buy all the books on starting out, and start to follow companies that interest you. the alternative is to pay for advice from Marcus Padley, Alan Kohler and maybe Scott Pape also does it. Just buy their newsletter with lots of ideas, good luck. By the way the market is cheap now and this is the time to go in, there will be a awful lot of turbulence or volitility for a long time, and I like Telstra as you will get 9% tax free dividend whatever happens, money back in 11 years!
So what do these people do with their money? They work, earn and save for what? The sake of it? You call rich people wankers for working and spending but laud these people for working and saving. There are many faults with capitalism, but this approach to life sounds really very depressing.
Hello? Andy? Wakey, wakey smell the eggs and bakey, dude.
The perceived ‘rich’ aren’t necessarily rich, it’s an illusion – that’s the point of the article. Modest folk invest in financial security through saving, they’re not beholden to their desires. It’s a healthy sign of maturity to resist crap you don’t need! They’re not monks, mate, just sensible people with the gift of foresight.
Aye on that one!
The people who act rich are wankers not because the spend what the earn but because its all illusion. They are not wealthy now (despite earning lots of money) and they will not by wealthy later. In fact, by not saving and living debt free, they have to continue to work…and work and work to maintain the illusion which must be very stressful.
The person who earns $150,000 a year and spends $150,000 a year is not wealthy, they just earn a lot. The person who earns $80,000 a year but only spends $60,000 and saves/invests $20,000 is the one who is wealthy now and will be extremely wealthy when they retire because they already spend less than what they earn so adjusting to the retirement drop of income wont be an issue AND they have a huge pool of assets to pay for their non-working years
Andy, I don’t know what these people do with their savings. I’m sure I know what they don’t do however!! That’s sit around whining about how tough things are cause the electricity bills are going up to power the 5 bed mcmansion & how they might have to get rid of the third car even though the family commutes to jobs they hate & how they’ll have to work till their 70 cause the Super they don’t bother to learn about has dropped & how the public health system might fail them when they’re older & how could they afford private hospitals etc etc. No the savers won’t do that cause they’ve had the foresight prepare for those eventualities thru……guess what??!!……..Saving.
Exactly! This is our exact philosophy. We don’t have flash cars (both under $30k) or a fancy dine out lifestyle in a trendy suburb. But our house is paid off, we have invested in a number of companies via shares, and have extra stashed away for a rainy day. So sure, I don’t know/care who won Masterchef, or which smartphone is the best, or which designer “is like, so hot right now”. But as a family we are going overseas for 5 weeks, staying 4 & 5 star and there is no concern about affording to live when we get back.
Too much style over substance everywhere these days – and finances is just another example.
Is financial security overrated? I bought my own house for 750k in cash at the age of 34. Now two years later, it is probably worth 700k due to depreciating property values. I have about 800k in savings and super. However, I don’t own a tv and drive a ten year old toyota. I own two $7 chairs purchased from officeworks. I am financially secure but is this how life should be?
Jo, sounds like you have worked so hard to save that you never learned to spend. It is incredible to have THAT much in assets at 36 and I am not advocating going crazy with spending but just to not feel guilty when you spend.
Im all for the concept of not wasting money but there are times when the $7 chair may serve the purpose of providing a chair but its not really a chair you want to sit in for a long period of time and they are not designed to last for very long.
Go shopping for quality, not brands. Spending more for something that will last for years and you will use for years is a sensible investment.
To answer you question, I dont believe you are living as life is meant to be lived. If you are asking ‘is this all’, you have reached the point when you need to discover something new to do so give yourself permission to have a holiday. Periods of not working are not missed opportunities but a chance to recharge and work harder when you get back.
Additionally its a chance to explore ideas for what else you can do. Just because you have been say a laborer for all your working life to date does not mean you have to be one for the rest of your working life. Take a sabbatical and explore something new. If you always dreamed of archeology, take an archeology holiday where you are digging famous sights. If you have always regretted not going to uni, go and do it now, etc etc.
Explore, learn and find some new enjoyment.
A very nice, inspirational advice. Wish I had the courage to follow it.
My grandfather was a ‘Millionaire Next Door’… he owned 15 properties and yet he shopped at Cheap As Chips and when his glasses broke, he’d mend them himself with sticky-tape! This is obviously a bit extreme but I think the younger people today, who’ve been raised on a diet of reality TV bling / celebrity culture, tend to want ‘immediate’, ‘obvious’ wealth. The thought of waiting 30 years for anything just doesn’t compute. I think society has started greatly lacking long-term vision in everything, from the way we view our money (as illustrated above) to things like the environment as well.
My grandfather was also the ‘Millionaire Next Door’. He was the person who originally sold coal to the Chinese and Japanese. He lived with my grandmother in a middle class north shore suburb, however refused to change the carpets,kitchen and if the crystal glasses chipped he would file them back. He drove the same car for nearly 20 years and held a lot of blue chip shares and two investment properties. One of my brothers and I absolutely idolised him and try and live our life this way (except we don’t have crystal glasses).
We are paying of our modest properties and can indulge in a family overseas holiday to see my wife’s family in the UK.
I personally feel that it’s the best way to live and can be done on any income.
Exactly our situation and where we are. working class suburb, owned own business now retired at 62 and enough assets and investments to live and travel as we want and still drive a good 2001 car! No pretence with us, few people know.
Thanks Scott. I was just chatting to a friend about this very thing. We both had the realisation that our “very wealthy, very successful” associate was not all that. He borrows big, takes big risks and moves in the circles of big business. He has been bankrupt twice since we’ve known him and in the process has brought wreck and ruin to the lives of business partners, employees and friends like us.
We both decided that we’d rather live our modest lives, keep our debt minimal, take less risks and be able to sleep at night!! We are both on low incomes but know how to live within our means, and that is wealth to me!
Cheers
I heard from my wife today about one of her friends who has joined a “religious cult” that promises them they can be a millionaire in 5 years! “Great”, i replied, “what happens when they die in 4?”. While a secure finacial future is what we are all geared to strive towards in this materialistic society, just remember faith, family and friends are the things most imporatant at the end of each day! We are already rich…we won the lotto being born in this country!
So true…..the reason why most people find this strategy difficult to follow is because its not risky or glamorous. Its actually a little dull and nothing to brag about at dinner parties. Thanks for the reminder and for keeping it real.
Regarding this article to put away $100 a week in shares to generate a healthy nest egg.
I have done this by investing $400 per month and an initial investment of $2000 since 2000 by using a Colonial Mutual managed fund with Australian Imputation & International shares as well as a Perpetual Mutual managed fund with Industrial and Technology shares.
I set up an automatic regular investment for each of these classes.
What I have found after 11 years is that I would have made greater gains by just investing into a regular bank savings account even allowing for tax losses. The gain in each class although not identical was virtually nil and this includes re-investing all gain dividends.
My initial plan was to achieve good long term gains and I chose shares to do this early on.
I am still investing $400 per month and hoping shares do actually reach their potential although I have my doubts.
I am now trying to decide to either withdraw my entire investment funds from shares and deposit into a savings account or continue investing in shares. Given the historical perfomance of my funds in the past decade, a savings account would be the wiser choice and I believe many people hoping for a good experience from long term share investments will be sadly disappointed
My friend bought your book for me from London, it was the greatest gift. Your book and articles sent a wake up call for many people, thank you.
I read this book well over a decade ago & thought way back then that the advice contained within it was sound.
The principles, if followed, provide for a life where you can sleep soundly at night without the added stress of life’s other problems you have to deal with.
It was a good read then & is still relevant now.
It’s amazing how if you try to save money by resisting to buy something like a Ferrari, people praise you for your frugality. But if you tell them you are trying to save money by not having a baby, people criticize you for not living life to its fullest. Even though the Ferrari and the baby cost about the same and could give just as much satisfaction and pleasure, people somehow have a prejudice against the car.
Mate, if you think you can get the same amount of satisfaction and pleasure from a tarted up Fiat as you can from having kids then you should not be reproducing anyway.
Maybe most people who waste their money on expensive stuff that they dont need, have more deep psychological self esteem/confidence issues? If they sorted that out, they would be alot richer. Also, nearly every comment on here has been a great one! Best topic in ages.
As a financial adviser who sees the financial position of many different people (from those that earn $1m+ pa to those that earn the average wage) I 100% agree with Scott & the research he writes about. The good news for most of us is that ‘financial independence’ & ‘wealth’ has more to do with what we spend than what we earn. Cool article.
Seems sensible ideas to me!
Listed Investment Companies (LICs) are a great way to own shares. They typically have a wide spread of ASX 200 companies and pay fully franked dividends for fraction of the cost and exposure to loading up on to the individual stock yourself. If you (carefully) borrow to invest the interest is tax deductible as well. A lot of Nect Door Millionaires re invest their dividend income over many years and build up huge nest eggs. All without having to call up a real estate agent and rent a house out!
Wealth is the assumption,what is the key.I went from zero to so called hero,children so called loving wife,I hold no anymosity ,trying to understand the outcome.Is wealth monertary or within.