Big hat, no cattle?
A Book About That
Have you ever wondered how people become millionaires?
There is a book about that called The Millionaire Next Door, by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D.
They had the simple idea of looking for correlations through interviews with hundreds of millionaires.
Their findings, the correlations, might surprise you. Most of those who were interviewed never made the news or gone viral on social media.
Most of them lived by some simple rules that you and I can follow to give us a chance to be the millionaire next door!
Accumulate Money
Sounds easy. “Affluent people typically follow a lifestyle conducive to accumulating money.”
In their research, Mr. Stanley and Mr. Danko found “seven common denominators” in those that build wealth.
The book explains these in greater detail, but I want to give you a quick view and encourage you to read more about them. So, here are the “seven common denominators”:
- 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.
How many of these seven practices of millionaires do you incorporate into your lifestyle?
Are you accumulating money?
Big Hats and Research
Many people with high incomes never become wealthy because they get caught up in looking rich. Wealthy Texans refer to those people as “Big Hat No Cattle”.
Early in the book, the authors describe those whom they chose to interview. “Wealthy was defined not as material possessions but “owning appreciable assets, income-producing assets, common stocks, bonds, private businesses, oil and gas rights, or timber land.”
Net worth = Assets less Liabilities.
For this study, 95% of this group had a Net Worth of $1 Million to $10 Million, doable in one generation.
Wealth Defense
“The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.”
The message from those they interviewed was to be frugal. Reflecting on their observations, the authors ask these three questions:
- Does your household operate on an annual budget? If so, do you pay yourself first? With 15% going to savings?
- Do you know how much your family spends each year on food, clothing and shelter? Note, 62% of millionaires said “yes”. Only 35% of non-millionaires do.
- Do you have a clearly defined set of daily, weekly, annual, and lifetime goals?
Allocate Time for Wealth
Do you “allocate your time, energy, and money efficiently, in ways conducive to building wealth?”
That is a more defining question than do you manage your time well?
If you want to become wealthy, read about wealth. And this book is about how some people become wealthy.
Plus, there is another aspect to being wealthy. “Financially independent people are happier than those in their same income and age who are not financially secure.” That sounds simple and obvious.
Those who are not secure usually have a poor mindset for money. “One earns to spend. When you need to spend more, you need to earn more.” That sounds like an unhappy circle, much like the rat race many describe as their financial struggle.
My advice is to listen to how millionaires become millionaires. Read all you can about their habits and make some of those habits yours.
Consumption Controls
Budgeting and planning have been mentioned as a wealth defense.
Another term that fits is consumption controls.
Most people who work toward and obtain a high-income job will find they are tempted to spend at a high level, buying things that make them feel good because they can afford the payments. That is a dangerous and short-lived scenario because once that income is spent it can no longer be used to invest. Things bought become garage sale candidates at a fraction of their value. They are not assets.
Folks become wealthy by controlling their consumption. They first look to save and buy assets that will build in value or produce an income.
Do you spend more time planning your vacation than what you might try to invest in as you accumulate savings? Most people do.
Do you declare that “your time is your own?”
The authors added some comparisons of how time is allocated by those who are wealthy and those who are not. The comparisons included such topics as studying and planning, managing investments, and exercising. The wealthy spend much more time addressing these topics than those who are not wealthy.
This reflects the importance they gave for having a secure and healthy future!
Image Is for the Poor
The authors note, “If your goal is to become financially secure, you’ll likely attain it…But if your motive is to make money to spend money on the good life…you’re never going to make it.”
Buy a new luxury car or a big house and you will soon learn that these are big demands for your income. Do you want to live on a “earn to spend treadmill?”
Accumulation Is the Key
By controlling your consumption, after you pay yourself first, you can begin the process of accumulation.
Savings are a tool to build wealth. A pool of available funds will allow you to invest in assets. And assets build wealth.
Assets come in many forms. Assets can appreciate or produce income for more investments.
Assets can be financial investments like stocks and bonds.
Assets can be private businesses with profits that can be invested for more growth.
Assets can include oil and gas and mineral rights on property or timber land.
There are many other asset forms. However, the key point I am trying to make is that assets can help you accumulate wealth, which translates to financial independence.
With financial independence, your job can become optional. However, most of the millionaires interviewed enjoyed what they did. They did not need to work. They wanted to work.
At that point, adding to their assets became part of their daily enjoyment.
The habit of spending what you earn can be enough to prevent you from saving. And saving will allow you to be able to buy assets. The choice is yours. Maybe being a millionaire is of no interest to you. However, being financially independent is appealing to all of us!