An Investing Life Tip From Dr. Thomas Stanley

You may have noticed that on the right bar of the site, I have added a link to Dr. Thomas Stanley’s excellent book “The Millionaire Next Door” (full disclosure: if you click on the book and purchase it, I receive a commission). But even if you don’t buy it, it’s cool if you go to the library and check it out, as the important thing is that you read it.

It really becomes apparent that there is a difference between being rich and appearing rich. This whole image that being affluent is about spending money recklessly and only buying high-end ridiculous consumer goods is completely out of line with the reality of those who build a net worth that exceeds the $1,000,000 mark (my side commentary: I find it nuts that being financially independent is often associated with expensive homes, cars, schools, etc. when I see the benefits of financial independence being that you can spend money on the little things without thinking twice about it—you can go to Subway and get whatever sandwich you damn well please, without worrying about whether it’s on the $5 menu).

Dr. Stanley’s research will spin your mind a little bit, with gems like this:

“…wealthy households are much more highly diffused geographically than are high-income producing households. There are nearly three times more millionaire households (1,138,070 or approximately 28.3% of the total, versus 403,211, or about 10% of the total) living in homes valued at $300,000 or less than there are millionaires living in homes valued at $1 million or more.”

He also points out that there are statistically more millionaires in the United States that have never made $80,000 per year than there are that come from households making more than that. Also, teachers are wildly disproportionate millionaires for their salary range, and my guess on that is that they understand compound interest, don’t face social pressure to spend heavily, and generally have better benefits than most.

Think of it like this: if you save $1,000 per month for 24 years and earn 9% on your money, you’ll cross that $1,000,000 threshold. You can do that by being a household making $60,000 and spending $48,000 or making $75,000 and spending $63,000, or whatever your ratio would be to get to that $1,000 savings per month.

By the way, there’s no reason to get discouraged if your savings rate is below this: hopefully your salary will increase as you get more experienced and skilled with time, and that will provide an opportunity to increase your savings rate. And even saving $400-$500 per month can change your life. Heck, someone who bought $500 worth of BP Oil stock every month for the past four years would be sitting on almost 670 shares paying out over $1,500 in annual dividend income, so you can get cash coming your way somewhat quickly.

There is a cultural component to wealth—we see athletes, actors, entertainers, and the obscenely wealthy on the television screen and at the top of websites regularly, and that distorts are perception of how the wealthy behave. And plus, lavish spending will always be more interesting—which TV interview of a lottery winner do you think would get the better ratings: the guy who wins $10,000,000 and talks about buying a car, house, and boat, or the guy who says he will take the money in annual installments and maximize his retirement accounts and build an emergency fund? The important part of your training, though, is recognizing that how the characters we see on TV behave is not how the typical millionaire in the United States behaves.

We all know this intuitively—people that consistently keep costs low rarely run into trouble, and it’s the gap between spending and earning that creates wealth, rather than the presence of a high income. Dr. Stanley’s book reinforces these points, which may provide reassurance if you are not a lone wolf when it comes to doing your own thing, and you desire to seek out confirmation that your “boring” style of building wealth is normal compared to similarly situated peers.

Originally posted 2014-11-14 08:00:17.

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