So you want to become wealthy? Have you ever wondered how others who have started with nothing, retire with a high net worth (over $1 million in assets).
In continuation of his previous books, Thomas Stanley just released “Stop Acting Rich and Start Living Like a Real Millionaire“. The evidence he presents goes against the grain of what we typically see in the media and what most people assume how the wealthy live. After reading his previous work, I just had to read this latest book. I’ll review and discuss some interesting information I found.
Three Types of Wealthy
In this book Thomas breaks down people into three classifications:
- Glittering Rich – The ones you see and hear about in the press. It is what most think is wealthy. They are hyper-consumers, but no matter how much they spend it’s not going to affect overall net worth.
- Income Affluent (IA) – Typically high income, but low net worth. They try to keep up with the Jones (glittering rich) and fail miserably. They aren’t wealthy as they have very little saved.
- Balance Sheet Affluent (BA) – The more common wealthy that plan to be wealthy by savings and investing. This type of person has been the focus of most of his work.
From reading his previous work, I just know one of our neighbors fits perfectly into the Income Affluent (IA) category – they lease their BMW, are constantly doing construction on their house, and dress in the best clothes. I’m not mocking them, but I know that’s not how my wife and I want to live. After reading his books, it becomes an eye opener of not only what to do with your personal finances, but what NOT to do.
The Best Offense is the Best Defense?
Thomas frames perfectly how to become wealthy either by a great offense (high income), or defense (being frugal and saving a decent amount of income). Most have the chance of becoming wealthy by great defense, and not by a high income. He states:
The only way you will become rich is to play extraordinary defense like those millionaires at the other end of the continuum: by living well below your means, by planning, savings and investing. We need to stop acting rich, and you need to adopt the values and lifestyles of self-made millionaires.
How Wealthy are you?
Comparative to your peers how do you stack up? I’ve always been the type of person who beats his own drum and doesn’t follow the herd. After all, do what everyone does, and you get what everyone has. With that said, and my computer science background, I love stats. I always want to know how my current measurements stack up. Am I on track, or do I need to amp up our savings? Thomas has a great method to help measure becoming BA wealthy.
Use the Wealth Equation to determine how you stack up. Simply stated, your net worth [augmented] should equal 10 percent of your age times your annual realized household income (0.10 x age x income = expected net worth). If your actual net worth is above this expected figure, I consider you’re affluent, given your age and income characteristics.
This was originally in his first book “Marketing to the Affluent“. In his newest book, he adds the wealth index (WX) to differentiate the BA group from the IA group:
The threshold WX for those included in the BA group was 1.84. The median WX for those in this category was 2.49. In other words, the “typical” member of the BA group had an actual net worth that was 2.49 times the expected figure, given this age and income at the time he first reached the seven-figure wealth threshold. The IA, interesting enough, had a much lower net worth respective of their age: The IA millionaires ranked in the bottom quartile along the WX continuum. The highest WX within this group was 0.880; the median WX was only 0.665. This means that the typical IA had an actual net worth that was only 66.5 percent of what was expected, given his age and income at the time of hitting the millionaire threshold.
Tax the Rich
With all of the current rhetoric in government to tax the rich, otherwise known as IA in “Millionaire Mind” speak, they are targeting high-income earners. Currently and shown throughout history, accumulated wealth isn’t usually taxed - it’s income. Thomas confirms that high-income earners are targeted by the government:
The average IA paid more in income tax than the typical BA generated in income during a year: $95,847 versus $89,167. Overall, IAs pay nearly six times more in tax than the BAs. IAs pay the equivalent of about 10 percent of their wealth each year in tax. BAs pay less than 2 percent. The large tax burden associated with being an IA is reflected in their less-than-stellar wealth index.
He then continues:
This situation will worsen given federal and state tax increases that high-income earners now face. The road to becoming rich via the IA method is lined with income tax tolls and consumption-inspired roadblocks and detours.
So going under the radar of what currently is considered rich (the sub $250k threshold) might be a better route to minimize your taxes and lower consumption. This is something I’ve always suspected and the book’s data shows this.
What Motivates the Wealthy?
For me I’m always interested in the psychology aspect of things in life – why do people want to become wealthy. What’s the reason? Thomas states:
Most millionaires are motivated by their need to gain financial independence. For most, consumption is a nice side benefit to becoming wealthy. It is not the most compelling reason why these people become financially successful. When asked, they will tell you that given the choice, they would readily unload their consumer goodies before ever giving up their independence.
I agree, the things don’t matter; it’s having enough money to choose what you want to do in your life. It’s the ultimate freedom that allows you to live your life to the fullest. It’s not about purchasing some fancy car.
Where do Hyper-Consumers Live?
This is something of concern for me since I live on Long Island, NY.
The highest concentration of glittering rich people in America lives in the Tri-State metropolitan area of New York. Understandably, this area also contains the highest concentration of aspirationals. Not only are we what we eat, we are also the product of where we live.
I live only a 1/2 mile away from one of the most frequented malls in the country. During the past two years, I’ve been amazed at the number of cars I see going into that mall. You would never know we are in a severe recession. It’s also amazing that my wife and I don’t frequent the mall that often. Typically it’s get in and get out. Buy what we need and go home. I guess we are fortunate enough to have the discipline of not going on weekly buying sprees. Thomas continues in his book stating:
Trey lives in the South, one of the areas that holds the lowest concentration of glittering rich and aspirationals.
It seems the biggest factor in determining you’re wealth is the choice of where you live.
The bottom line is that your choice of house and neighborhood will have the biggest impact on your balance sheet. Your choice of home, more than anything else, will have the greatest impact on your spending – either a lot or not so much.
While we don’t live in a very rich neighborhood, we see hyper-consumption all around us, and it’s hard not to mimic what others do. It’s part of human nature. Maybe I should move my family to the south, to a low or no income tax state. I love the term Thomas uses in the book; he calls many income affluent (IA) are “Big Hats, No Cattle”. That term could definitely apply to many around the area where I live.
This book is more a compilation of the author’s previous works than it is a completely new effort. Yes, some of the content is repetitive, and it’s possible the book could be summarized into 30 to 40 pages. Even so, it’s a quick read, and I enjoyed reading it. Like his previous books, it is slightly preachy in the conclusions he derives from the data. While I don’t flat out disagree with his conclusions, it is possible alternative conclusions could be drawn. If you have read any of his previous work, there are some new nuggets that might be worth the price of admission. If you never have read any of his previous works, you should definitely pick up this book.