In the United States today, there are almost 11 million individuals with a net worth of $1,000,000 or more, excluding the value of their primary residence (the figure tops 20 million if you count primary home equity in the calculations). With a population slightly above 300 million, this means that one out of every twenty-five Americans is a millionaire. You might wonder then: Why doesn’t it feel like one out of every 25 people you encounter has that type of wealth?
The short answer is that they don’t want to be noticed, and the media doesn’t want to find them.
Seven out of ten American millionaire households earn less than $200,000 per year. Two out of ten make less than $90,000 per year. You know where the wealth comes from? A high savings rate.
A misleading aspect of the content I publish on my site is that I have spent a lot of time focusing on investments. There is a reason for this, as there are three levers that build wealth: time, amount, and compounding rate. If our analysis leads us to something with a high compounding rate, and we act upon it, the subsequent rewards are extremely lucrative compared to the initial effort.
But this focus can ignore the equal (or perhaps superior) importance of having a high savings rate. You can be a below average investor saving $800 per month and end up with $369,000 at the end of a twenty-year investing period in which you earn 6.5%. Meanwhile, someone saving $400 per month would need to earn 11.5% to end up with the same amount. Finding a couple hundred dollars extra per month deserves a lot more attention in the wealth-building process than I’ve previously given it.
Among the seven out of ten American millionaire households that earn less than $200,000 per year, they have a median savings rate of almost 45%. They drive Toyotas and live in homes valued between $280,000 and $430,000 (the 25/75 distribution).
The glamour spending that you see from athletes and entertainers is not how wealth is typically created. Those celebrities are extremely high earners and can get away with, in the short-term at least, being haphazard with their capital because their annual incomes are so high. But these images portrayed in the media do not show you how it’s done by the vast majority of the millionaire class. The experience of selling paint at the local household goods store and then investing $3,600 of the $8,000 into a collection of stocks, bonds, and real estate is a far more accurate depiction of how wealth is typically built among the United States millionaire class.
As a result, there are two reasons why the fact that one out of every twenty-five American households contains a millionaire gets downplayed:
#1. The wealth-builders choose to have high savings rates because they value financial independence more than the purchase of goods traditionally associated with high-social status.
#2. Those with high savings rates buy Toyotas and live in nice middle-class neighborhoods not only because it facilitates the rapid creation of wealth, but also because they deliberately want to escape notice as they create riches. The number one social concern from these folks who take steps to conceal the extent of their wealth? They don’t want to be hit up for loans.
The behavior also lends itself to strong offense. When you acquire cash-generating assets with your surplus, you can avoid the need for risky bets because decisions made today will still be throwing off cash for your decades from now. This makes it easier to invest in one’s own career or make improvements at the business, leading to a further virtuous cycle.
Whether they do so consciously or not, America’s millionaires take to heart Benjamin Franklin’s 1748 wisdom in “Advice to a Young Tradesman”:
“Remember that money is of the prolific, generating nature. Money can beget money, and its offspring can beget more, and so on. Five shillings turned is six, turned again it is seven and three-pence, and so on till it become an hundred pounds. The more there is of it, the more it produces every turning, so that the profits rise quicker and quicker, he that kills a breeding sow, destroy all her offspring to the thousandth generation. He that murders a crown, destroys all that it might have produced, even scores of pounds.”