Don't Act Your Income. How a normal person with an average income can actually accumulate wealth. (#16)

This episode of The Wiser Financial Advisor with host Josh Nelson is about becoming the millionaire next door. Josh explains what the millionaire next door really is—and why trying to convince others that you’re wealthy is how to go into debt instead. So how does a normal person with an average income actually go about accumulating wealth? Listen in and you'll hear why Josh tells you this: "It all comes down to the same principles regardless of the level of income.” 

This podcast offers the key that can open the doors to financial independence and stability regardless of your current financial status.

https://www.amazon.com/Millionaire-Next-Door-Surprising-Americas/dp/1589795474

Instagram: https://www.instagram.com/keystonefin/
Twitter: https://twitter.com/Keystone_Fin?advisorid=33004651
Contact Josh Nelson: https://www.keystonefinancial.com
Contact Jeremy Busch: https//www.keystonefinancial.com
Podcast Editing: Tim Leaman/info.primegen@gmail.com

Transcript

Wiser Financial Advisor - Becoming the Millionaire Next Door

Hi, everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.

This is Josh Nelson, Certified Financial planner and founder and CEO of Keystone Financial Services. We love feedback and we'd love it if you would pass it on to me directly atjosh@keystonefinancial.com . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Spotify, or your favorite podcast service. Let the financial fun begin!

Today’s episode is about becoming the millionaire next door. So hey, 2021 is coming off with a bang here as we have seen. All kinds of crazy news events and so forth. But our job is not to talk about that, because we’re not as concerned about the day-to-day news events as we’re concerned about long-term principles and acquiring wisdom that will stand the test of time regardless of news events and craziness.

So about 20 years ago, a couple professors (Thomas J Stanley and William D Danko) wrote a book called The Millionaire Next Door. About 20 years before that, they started studying millionaires. These guys were college professors who liked to do research on how things work in the world. One of the things they got really curious about was millionaires. And of course, 40 years ago a millionaire was a big deal. There were not nearly as many millionaires as there are now. Millionaires today have given way to billionaires, and eventually that will change to trillionaires. But anyway, the millionaire next door refers to the concept that you might not know who actually has money, since some of the people you think have money do not. In their research, they invited all these people to a hotel meeting room where they could ask them questions and observe them. They put some of their students out in the parking lot to observe what kinds of vehicles these people pulled up in. They also put students around the meeting room to watch what kind of food was being eaten and what drinks were being consumed. They put out a variety of fancy cheeses and things like that alongside normal cheese and crackers, things an average person might enjoy. They had beer available but also fancy wines and cocktails.

At the end of the day, they found out that the millionaires on average were not the people that were fancy. They were not the people that lived in the fanciest houses. They were not the people who drove the luxury cars. They were not even the people with the fancy occupations. A lot of people think that to become a millionaire, you’ve got to be a doctor or an attorney or some kind of high-level executive with a really high income. In fact, what the researchers found was that a lot of these millionaires did not have high incomes. A lot of them did not go out and buy luxury items. And in fact, when they looked at the doctors and attorneys and so forth, they found out that those people really didn’t have a lot to show for it, relative to their high income; they didn’t have a lot of wealth built up.

The researchers came up with a couple of terms for this in their study. The first term was: Under Accumulator of Wealth or UAW. The second was Prodigious Accumulator of Wealth or PAW. What it all came down to was how much wealth did somebody accumulate relative to their income. Many of the UAWs or Under Accumulators of Wealth may have had a high income but they spent it all, and sometimes spent even more than they earned so they ended up borrowing money just to fund a certain lifestyle. Whereas the PAWs, the Prodigious Accumulators of Wealth lived below their means and did not spend everything they earned.

Today I wanted to share with you my own observations along these lines because I have had a front-row seat on people’s finances for almost 22 years as a financial advisor. When I sit down with people, especially for the first time, they share stuff with me that they don’t share with very many people. You know, money is typically a fairly private topic. It isn’t something that most people run around talking about—how much money they make or how much wealth they have. In sitting down with people, I’ve been able to see The Millionaire Next Door research in action.

Some of our people that we work with, if you saw them on the street you would never know that they’ve got the level of wealth they do. And it’s also true that some of the people running around out there who look like they’ve got a lot of money are just taking their income and funding a lifestyle. This is not about judgment. If you fit into either one of these categories or somewhere in between, that’s not to judge anybody. Everyone gets to make their own choices. But a question that’s interesting to me is, “What are the patterns? What are the differences between these two groups in reality? What would cause somebody to become The Millionaire Next Door? What does that actually look like if somebody wanted to emulate what those people are doing? What are some commonalities?” After 22 years, I would be a pretty poor Financial Advisor if I wasn’t able to pick up on some of these patterns of how people go about their lives and spend their money.

So, number one, the people that are The Millionaire Next Door, I would call this “Don’t act your income.” If you’re acting your income, that means you’re spending it all. As the professors were doing the study, they found out that a lot of times physicians or Harvard attorneys felt like they were under pressure to demonstrate that they were very wealthy. There was an expectation because of their peer group and because everybody knewthat they were the such-and-such surgeon or the such-and-such powerful attorney, that they had to live up to that and make themselves look rich. Although they had income, they weren’t putting any of it away. So if you “act your income,” that means you’re spending all of it. And keeping up with the Joneses will always fail, because there will always be Joneses with more money than you. There will always be Joneses with more stuff than you. Dave Ramsey likes to say “If you live like no one else now, later you can live and give like no one else.”

Item number two then, is to spend less than what you make. That was a commonality the researchers found among those who were Prodigious Accumulators of Wealth. These people were spending less than what they made and they were doing something reasonably smart with their money. That’s what I’ve noticed as well: People that live below their means are the ones that end up with wealth over time, regardless of income. In my opinion, you know, this has nothing to do with income, but it has a lot to do with people’s financial habits. It’s a matter of financial character. We build that character over time, as we choose to put away money for the future, as we choose to pay down debt faster than what we are required to do, as we stay disciplined with investment strategies. We can do this individually or we can do it with the help of a coach or a planner if we need that accountability. The whole point is to spend less than what you earn and take that money to do something reasonably smart. What can you do with it? A lot of things. It would be reasonably smart to leave it in the bank. (Maybe not the best choice.) You could invest in real estate. You could put it into the stock market. There are many things you can do to build more wealth for yourself.

The third thing is being money-wise. What I mean by that is spending enough time or hiring the right people to emulate. What we’re trying to do here on the Wiser Financial Advisor is to emulate people that came before us, people that made really good and wise decisions with their money. That was what resulted in Bitcoin wealth. Being money-wise means either investing in the time required to acquire the wisdom to make this happen or hiring a coach. Another piece of this is behaving as if. Some people think, “You know what, I don’t make enough money. I don’t have a lot of wealth. I’ll do this later.” But you can start to behave as if you were money-wise, behave as if you were somebody making good choices with their money. Maybe you haven’t felt like you’ve done that in the past or maybe you wish you would have started earlier, which, let me tell you, everybody wishes they would have started earlier with saving and investing and paying down debt. So don’t feel bad if you’re thinking that way. Now, you are already in a very good place because at least you’re conscious of it. Now, you can start to behave as if you are somebody who’s an investor. Start to behave as if you are somebody who pays off their credit cards every month. Learn from others’ success and others’ failures.

There is a direct correlation between wealth accumulation and time spent on financial planning. Many people hire someone to do this because they say, “I don’t have the time to become a financial expert. I have other priorities. I have other stuff I’d rather do with my time.” So, they hire a Financial Planner, a coach like us. And what we end up doing for people is being kind of a time machine because we’re working for them even when they’re not thinking about their money. There are check-in processes that we have along the way to make sure everybody is on track and on the same page. I think it’s really important to make sure that time is being spent on this. It’s your time or somebody else’s time. Make sure that there is a lot of time going into your financial plan and your financial priorities. Again, this is about building financial character, looking at people that came before us and using them as the example—and also paying attention to some cautionary tales. I can give many of them and we have here on the show before. There are celebrity athletes, people that made hundreds of millions of dollars in many cases, and they spent it all.

You might say, “How in the world could they spend that much money?” Believe me, it can be done and has been done. It all comes down to the same principles regardless of the level of income. The way you build character in anything is in the decisions that are challenging and that might mean putting off expenses that we can’t afford right now. That might be paying down debt. It has a 0% interest rate but it’s good not to have debts. I really encourage you to start now. There isn’t any reason to wait until you get certain information or something else happens. Choosing to forego some of the things we want to do today makes it possible in the future for us to be financially free. And in my estimation as a Financial Planner, that’s really what everybody wants in the end. We might call it different things, like being financially independent or retirement. You can choose your own term for it. But in the end, the ultimate goal for most people is to accumulate enough wealth so they don’t have to work if they don’t want to. Work becomes optional at that point. They’re able to live life on their terms. They might want to work. We have a lot of clients who continue to work because they love it. They love what they do; They’re very passionate about what they do, but they know they could stop at any point in time.

There is so much going on that’s outside of our control, but much of what we talked about today is within our control. And as Financial Planners, we can help you fine-tune and get that money going in the right direction. I do recommend you pick up a copy of that book. It was written a long time ago, but still rings true today, whether you use the word millionaire or some other term. In the end, the people who are millionaires are those you probably wouldn’t guess are truly wealthy. That’s why it’s called The Millionaire Next Door, (by Thomas J Stanley and William D Danko). It shows people living in average houses that drive average cars and  have all their debt paid off. They’ve got a lot of wealth built up because they made good choices.

I hope you have a wonderful day and I hope your year is starting really well. It’s a great time to be thinking about what your financial priorities are for this year. Don’t try to fight all the battles at once. You might be taking one baby step and getting one piece of your financial plan in place. Whatever you do, stay focused. Use us as a resource and God bless.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.