Big spenders or big savers: Who would you emulate?
You stand at your window and look across the street. Nice house. Nice landscaping. Nice sports car. New bikes for the kids. Wow, your neighbors must be really well off. If only you had that kind of money.
The plain home down the street with the older model sedan parked out front pales in comparison. A couple in their 70s lives there and the front yard hasn’t been spruced up in a decade. They must struggle just to get by.
If you could somehow look into the financial lives of those two households, you might be surprised. The couple with all the toys might not be as wealthy as you think. Meanwhile, the vanilla exterior on that humble rancher might hide the millionaires next door.
Remember: Affluence doesn’t equal net worth. When you look across the street at the house of that well-to-do family, you aren’t necessarily gazing at a portrait of wealth. You see instead a portrait of their spending habits. What are they spending their money on? Perhaps, quite literally, a facade. Their house might be the best in the neighborhood, but what of kind of mortgage payment must they make?
Are they making payments on that sports car, too? They’ve put their dollars into things their neighbors can see. But they could be engaged in all-too-common financial behavior: thinking of wealth in terms of material items, spending money on their toys instead of their lives.
Real wealth might not be advertised. Perhaps the older couple down the street isn’t interested in the hottest new luxuries. Decades ago, they put extra money toward their mortgage. Even with housing values depressed, their residence is still worth more than they paid for it. Most importantly, it’s paid off. Maybe they’re good savers, always have been. When they were the age of the flashy couple up the street, they directed money into things their neighbors couldn’t see — investments and bank and retirement accounts.
Years ago, they could have lived ostentatiously like that high-earning couple. Instead of living on margin, they chose to live within their means. They saw some of their friends “rent” a luxury lifestyle for a few years, only to lose homes and cars they couldn’t afford. Sometimes the economy or fate had a hand in it. But too often their friends simply made poor decisions.
It could be that it was just more important for them to think about the future rather than the moment. Parenting reinforced that philosophy. Their good financial habits kept their family away from bad debts and helped them build wealth slowly. Indirectly, it also helped their kids, who grew up in a household with less financial stress and an appreciation and understanding of key financial principles. Now, they’re applying those principles to build wealth in their own lives.
Roughly every 40th American is a millionaire. There are nearly 8 million people with a net worth of $1 million or more in the United States, and their financial characteristics might differ from what you expect.
Fidelity’s 2012 Millionaire Outlook Survey — which polled 1,000 households with $1 million or more in investable assets — found that 86 percent of millionaires are self-made. Among self-made millionaires, the top sources of assets were investments and capital appreciation, compensation and employee stock options or profit sharing.
According to the survey, the average U.S. millionaire is 61 years old with $3 million in investable assets. Fidelity also found that with regard to the financial future, more than 30 percent of these millionaires were focused on preserving wealth rather than growing it.
So what will you spend your money on: today or tomorrow?
As Thomas J. Stanley and William D. Danko noted in their classic study “The Millionaire Next Door,” the typical millionaire lives on 7 percent of his or her wealth. That was in 1997. The percentage could be lower today. Call it frugal. Call it boring. But such financial conservation could help promote lifetime wealth. With so many enticements to spend your money as soon as you earn it, this mindset may have a lot of financial merit.
Kim Last is president of Kimberly A. Last Financial Services at 633 24 Road, Suite D, in Grand Junction. Last holds the CFP, CLU and CLTC designations. Her clients include individuals and small businesses. She focuses primarily on retirement planning, including accumulation, tax strategies, distribution, long-term care and wealth transfer planning. Securities and investment advisory services are offered through Brokers International Financial Services, LLC, Panora, IA, Member FINRA/SIPC. Brokers International Financial Services, LLC, and Kimberly A. Last Financial Services are not affiliated companies.
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