I have long interested in discerning the contradictions between how the wealthy are portrayed in the popular culture and the mass media at large compared to their actual behaviors. This discrepancy has been most widely documented in the 1996 work of Dr. Thomas Stanley’s “The Millionaire Next Door”, who pointed the portrait of the typical American millionaire as a member of a two-member nuclear family that owns a small business or participates in a high-earning profession that drives a Toyota.
In my own observations of the behaviors of the wealthy, I have noticed the following behaviors:
The wealthy and fast-becoming wealthy have a ridiculously low spending to post-tax earnings ratio.
Most finance articles encourage Americans to save 10% to 20% of their annual income to retirement, speaking of the effort in an infantilizing manner as though you were telling a child to gin up and eat their spinach. The wealthy and fast-becoming wealthy flip that figure on its head–spending dramatically less than they earn–even in the early days when they are earning less than six figures.
Most online finance articles are aimed at curbing the appetites of certain people in the world who are incapable of letting two nickels sit still and rub together (if they see an extra $1,500 show up in their bank account in a given month, they feel an irresistible pull to spend it as quickly as possible).
The wealthy, and aspiring wealthy, change their consumption behavior much, much slower than the rate at which their earnings grow. Each 5x increase in earnings might only lead to an x increase in spending.
For those who are not born into a wealthy family or who do not research the cultural behaviors of the affluent, it is not at all readily apparent due to the prevalence of stealth wealth as the richest members in your community exercise great restraint in both how they spend and how they present themselves to others (they might have stock portfolios worth $5 million or rental properties churning out $10,000 per month, but you wouldn’t be able to guess it based on their consumption patterns. And often, if they do purchase high-end consumer goods or large homes, their annual earnings power greatly exceeds this).
The behavioral norm of only gradually increasing the household spending compared to the percentage increase in the gains of household income is the critical component that distinguishes those who build wealth from those who merely have incomes that can support their lifestyles in direct proportion to the hours of their labor.
What enables some individuals to develop the psychological motivation to perpetually underspend their capacity?
For some, the gift of restraint comes naturally. If they are religious, they have a natural love for submission under God and wisely stewarding their assets is the mechanism by which the spiritual prevails over the material. If they are secular, they have a natural affinity for choosing Order at the expense of Chaos, and dramatic underspending is one mechanism through which they achieve it.
Then, there are the folks who adopt the behaviors of a low-spending, high-earning lifestyle even if they are missing the St. Benedict or Benjamin Franklin DNA by thinking through what their earnings represent.
If they are a small business owner, they know how brutal the marketplace can be, and regard any retained earnings as the seed corn that will supply future harvests. Tending to the business, which is often a labor of love, becomes an extension of the self and expanding the business brings a greater dopamine hit than any purchase of a material good.
If they earn a high salary from their wages, they know that the time spent toiling in the workplace is time not spent with their family or doing other things that they would like to do. Each hour of labor represents an hour of your life exchanged for a sum of dollars–how you steward your dollars is literally how you trade away your life. Do you want to trade away your life making the shareholders of credit companies rich by paying high-interest on credit card debt or purchasing ephemeral goods that will be trashed by the next turn of the season? Of course not. Thinking of each hour of work as a portion of your life traded away, and the dollar as the mechanism that converts the hour of your life into a consumption-able format, is how you rationally reach the point of those who adopt these behaviors naturally.
I think most financial writers know, intuitively, that it takes more than a 20% savings rate over a lifetime to build real wealth (absent sky-high earnings) but choose to not disclose this reality to their audience out of fear that it will be discouraging and lead to giving up. I’d rather learn the truth as it is, both for the value of truth in and of itself and for the avoidance of avoiding the byproduct of living your life according to the “rules” and still coming up short. At a minimum, getting to where you dream of getting will require saving 40% of your annual income each year.