Building Wealth: The First Step Toward Gaining Your Financial Independence
by Alexander Green, Chief Investment Strategist
Monday, March 1, 2010: Issue #1206
My staff often forwards me letters from readers with the same general complaint about building wealth:
“You give me all these great investment ideas, but where do I get the money to invest in them?”
Ah, there’s the rub. It reminds me of the time a television interviewer asked Chinese billionaire Li Ka-shing to share “the secret of great wealth.”
“Great wealth, very easy,” he said in broken English with a toothy grin. Then frowning and shaking his head he added, “Little wealth, very difficult.”
How true. As Americans are fond of saying, “It takes money to make money.”
So how do you get started?
Most of us know the first two prerequisites:
- Get educated (or learn a specialized skill).
- Bust your butt.
But then what? How do you turn this generality into building real independent wealth?
The Seven Common Characteristics of Great Wealth-Builders
That’s where Dr. Thomas Stanley comes in.
As America’s foremost authority on the affluent, he’s conducted decades of research on the habits and characteristics of America’s wealthy.
He’s written several bestsellers including, Marketing to the Affluent and The Millionaire Next Door: The Surprising Secrets of America’s Wealth.
Dr. Stanley points out that the vast majority of millionaires do not have exceptional skills. Most of them do not have hit records. They do not play third base for the Yankees. They did not found a software company in their garage. Instead, they’re people who have worked and saved and invested their money prudently.
In The Millionaire Next Door, Stanley details seven common denominators among those who build wealth successfully:
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They chose the right occupation.
In short, your net worth is essentially a result of the choices you make…
Building Wealth: The Difference Between Acting Wealthy and Being Wealthy
To generate significant savings to invest, you need to make the right career decisions, the right lifestyle decisions and the right spending decisions. Building wealth takes forethought. It takes discipline. And it means making hard choices.
Dr. Stanley hammers this message home in his latest book. It’s called Stop Acting Rich… and Start Living Like a Real Millionaire. It’s not a book for debtors and spenders who want compassion and understanding. Rather, it’s a wake-up call for the millions of consumers out there who are living far beyond their means.
Most millionaires – folks with liquid assets of one million dollars or more – are not big spenders. Quite the opposite, in fact.
According to Stanley, the most productive accumulators of wealth spend far less than can afford on homes, cars, clothing, taxes, vacations, food, beverages and entertainment.
On the other hand, the wanna-be’s – (people with higher-than-average incomes, but not much net worth) are merely “aspirational.” They buy expensive clothes, top-shelf wines and liquors, luxury cars, powerboats, all kinds of bling and more house than they can comfortably afford.
Their problem, in essence, is that they’re trying to look wealthy. And this prevents them from ever becoming wealthy.
Building Wealth With The “Millionaire Mindset”
The real irony is that most rich people don’t spend this way themselves. Sure, the “glittering rich” do, households with a net worth of $10 million or more, because they can comfortably afford it.
But the vast majority of millionaires in the United States:
- Live in a house that cost less than $400,000.
- Are more likely to wear a Timex than a Rolex.
- Generally pay less than $15 for a bottle of wine.
- Have never paid more than $400 for a suit.
- Are more likely to drive a Nissan than a BMW.
- Spend very little on prestige brands and luxury items.
Yes, they’re frugal. But they’re also happy, not to mention financially free. They’re not dependent on their families, employers, or the government. That’s a great feeling.
And they built wealth the old-fashioned way. They maximized their income, minimized their expenditure and religiously saved the difference.
In short, the first step toward building wealth and gaining financial independence is clear: Live beneath your means.
Or, as Dr. Stanley says, “Stop acting rich… and start living like a real millionaire.”
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
12 Responses to “Building Wealth: The First Step Toward Gaining Your Financial Independence”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Awesome article, and certainly down to earth. You know this “mini-recession” that we’ve been in has really educated people to stop spending beyond their means. I mean, get real, do you really need that 60″ HDTV that has a buy now, pay later. Jerry
P.S. Love your input, and read your books, Gone Fishin’ was eye opening!!
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This is very very true! I have seen poor people spend like a king, drive an expensive car and pay dearly to wax or polish it, throw away food or drink like dirt, and buy expensive brands or showy things to just “act rich” even at the cost of borrowing money. Being frugal is like a shame to them. They don’t know how to invest wisely and what good result and feeling can bring them. On the other hand, I saw many millionaires, particularly rich landlords and real estate investors, drive cheap cars, wear like a jobless, spend frugally and save money ready to buy next income property. We all can see, with the help of mere elementary math calculation, who will most likely be financially free in the end.
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I would like to add a little more comments, to my earlier message, which I forgot to mention earlier.
Somehow, people have been allured or taught into “acting rich” and not encouraged to save. When they need money, they automatically think of borrowing first rather than cutting spending and saving money. In the much grander scale, our federal government is leading the nation by this example, spending and borrowing, period! Not much is on the table about how to save and invest. A good long time investment for a government is to help its businesses grow, such as cutting taxes and costs of running a business, simplifying red tapes, etc. How often do we hear our leaders talking about these subjects? I haven’t heard much unfortunately.
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Liked the article about get rich and acting rich,but disagree w/the 7 steps because in reality there are 10!(8)Don’t get divorced(9)Don’t get divorced a second time(10)Think long and hard about marrying a third time.Now the article is complete!Thank you.
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Well said. A society that measures a person by how much they consume will always be unsatisfied and unfulfilled.
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Rule zero is: Spend significantly less than income. This eliminates half the working population who have zero or less assets.
Save significant amounts from each payday before it is spent on trivial goodies.
Invest a significant fraction of this amount.. First call is emergency fund. Then build investments for the long haul.
Prepare for retirement by having zero debt early on and invest the rest. Invest, NOT trade is the operative mode.
It worked for our family.
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Dear Mr. Green,
Thank you for your insightful comments about my books. Millions of best regards,
Tom Stanley
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A fool and his money are soon parted!
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Great Article!
However, I think I will save my money instead of spending…
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Your insightful teachings to build wealth come only by faithfully following “GOOD VALUES” explained by “Lord Krishna” in “Bhagvat- Gita”.Result is pleasure & satisfaction.
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Great article. Here is a PDF I found on
personal wealth building.
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Mr Green – Absolutely true. I think one of the biggest issues facing our society today in America, and all over the world really, is that we do not practice delayed gratification. We live in a society that wants everything better and faster. When we search for something on the internet, if the page takes longer than a few seconds to upload we get upset and call the cable company for faster internet. When the latest gadgets and gizmo’s are released, we want to be the first to have them. Not practicing Delayed gratification and ease of credit coupled with no financial education is a recipe for economic disaster. I believe this to be largely in part why the world is in a debt crisis. The faster we start educating ourselves about how money really works, the faster we can build wealth in this new economy. Here is an article I wrote on
Building Wealth with the Right System.
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