Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
In his 1996 best seller “The Millionaire Next Door,” Thomas Stanley detailed the traits of the average millionaire. Notice I didn’t say rich person. Millionaires have a net worth of more than seven figures and are also “financially free.” That excludes that guy who makes $50,000 a month but spends $60,000 a month living in Buckhead, driving a Bentley and eating at Chops three times a week.
Not much has changed about this group since 1996. So today in 2011 we’re still talking about good old-fashioned millionaires — couples (and some individuals) who are truly “rich” (see my blog on the Rich Ratio).
I see these people every day of the week. They drive Toyotas, Hondas, Kias — and the occasional Jeep Cherokee. They have saved for a long time and finally find themselves in a position to quit their job and live life on their own terms. Here’s what they have in common.
1. Job stability. They tend to stay with one employer for a very long time — sometimes 30 or 40 years. Being a company man can offer huge rewards, including a nice ending salary, significant pension benefits and hefty 401(k) balances. I know it’s almost unimaginable in this day and age to work for the same employer for a couple of decades, but there are still people who do it, including teachers and other government workers.
2. Steady saving. I’ve rarely met a rich retiree who didn’t start making the maximum contribution to a 401(k) in his 20s or 30s. This year you can save $16,500 in a 401(k) or 403(b), and $22,000 if you are over the age of 50. That doesn’t count your company’s “free match” if it is generous enough to give you one.
3. Saving the raise. One trick I’ve seen these savers use is saving at least half of pay raises. Instead of going toward a new boat or vacation, those added dollars end up in retirement or brokerage accounts.
4. Investing. Millionaires who own stocks tend to hold their investments for decades (not just years). They let their dividends re-invest over time and thus participate in the long-term growth of our economy. This makes them different from “savers,” who only invest in CDs or money markets.
5. Owning. Business owners, partners and other employees who are fully vested in a company tend to end up with substantial savings.
6. Mortgage. One key “rich” person move is to get rid of the mortgage by age 65. This may take two or three extra payments per year. Go to this mortgage payoff calculator to see what a few extra will do.
7. No fancy toys. Very few millionaires own BMWs, Mercedes, $3,000 watches or $5,000 suits. Nearly 40 percent of the “rich” buy their cars used.
8. Credit. The better your FICO score, the lower the interest rates you’ll pay on your mortgage and car loans. The “rich” do this by carrying low debt loads.
9. No lotto. Rich people don’t buy lottery tickets. It’s a fact. I’ve never seen a millionaire buy a lottery ticket, and I’ve never met anyone who won the lottery and still had the money three years later.
10. Real estate. They buy homes that are not overly priced or extravagant in rentable areas. They maintain them appropriately and rent them out consistently. They pay down their mortgages and end up with cash-flowing assets that build their net worth slowly over 30 years.
The lesson: An average income, carefully managed, can generate considerable wealth over a period of time. To borrow a line from radio’s Dave Ramsey, “Live like no one else today, and one day you’ll be able to live like no one else.”
– By Wes Moss, for Atlanta Bargain Hunter