In the book, The Millionaire Next Door, the authors, Thomas Stanley and William Danko, surveyed more than a thousand households that had accumulated more than a million dollars in net worth, looking for traits among them that were decidedly different than the mainstream population. What did people who had accumulated wealth do that others do not, and vice versa?
The entire book discusses the results of that study, but very early in the book the authors efficiently boil down to seven key factors the differences in financial behaviour between those who are able to accumulate wealth and those who do not. These seven factors are the key things that people who are effective at building enough wealth to be financially independent do that are different from most people.
These factors were interesting enough to discuss on their own, so let’s walk through them.
They live well below their means
Spend less than you earn and do something worthwhile with the difference. It’s at the core of pretty much every personal finance strategy out there – every one that actually works with any level of reliability, anyway. Yet many people struggle deeply with this strategy. The average worker saves somewhere around five per cent of their income (depending on the exact moment in time and the exact survey), and that includes the prodigious savers that put away large portions of their income. To average out at 5 per cent, for every person that saves 50 per cent of their income, there are nine more who are saving nothing.
People who accumulate wealth at a high rate simply save money at a high rate
They choose not to spend a sizable portion of their income and instead invest it for their future, and they achieve that by simply spending a lot less than they earn and not letting their spending keep expanding to gobble up their entire income.
Understand your needs versus your wants
There are some things in life that you need – basic food, basic shelter, basic hygiene products, basic clothing, transportation to and from work. Almost everything else is a want – it’s stuff that’s not necessary to continue to enjoy life. That includes better versions of those basic items. Understand what is a want and what is a need.
Be selective about fulfilling wants
People who end up spending everything they earn are often in a cycle of drowning themselves in want fulfillment. They fulfill countless impulses, big and small, and never really say “no” to themselves. The thing is, most impulsive desires are really a waste of money. They fade very quickly if you don’t fulfill them right away. Even if you do fulfill them, they bring only an instant burst of pleasure which immediately fades.
Learn how to be selective with your wants.
Look at the big expenses first. The big expenses for most people are things like housing, a car, and insurance, along with any other monthly bills that top the $100 mark (this might include things like a cell phone, a cable or satellite service, and so on). What can you do to cut that cost? You can cut housing costs by living in a smaller place or in a different location. You can cut transportation costs by using mass transit or a bicycle or your own feet to get places. You can cut your insurance costs by thinking about each policy and shopping around for them. You can cut your cell phone costs by shopping around and moving to a plan that matches your use. You can cut your cable and satellite costs by simply ditching cable. Cutting a big expense can make a difference of hundreds of dollars a month.
Try out some basic frugal strategies. I suggest trying frugal strategies as a 30-day challenge and then deciding for yourself whether they work out after 30 days of commitment.
Here are a few ideas: buy all of your food and household staples in store brand form; prepare all meals at home without eating out; take leftovers to work every day; don’t spend any money on hobbies and instead enjoy and use the hobby materials you have; and avoid the coffee shop and make your own; don’t watch television and see if you really need cable.