As a prelude to writing The Millionaire Next Door, I published an article in Medical Economics entitled “Why You’re Not as Wealthy as You Should Be.”
Simply put doctors could and should accumulate much more and at a much younger age.
In the same article, I pointed out that for every one high income producing doctor who is in the balance sheet affluent category, there are two in the income statement affluent category. It’s just the opposite for self employed business owners. Similar results were detailed most recently in Stop Acting Rich.
Attitude is the greatest difference between millionaires and the rest of us. I’ve also learned that the rich follow certain rules.
And one of these rules is especially important given the current political climate surrounding income tax issues.
Rule #2: Emphasize net worth; de-emphasize income. Most millionaires measure success by net worth, not income. Instead of taking their money home, they plow as much as they can into their businesses, stock portfolios and other assets. Why? Because the government doesn’t tax wealth; it taxes income. And the more income you bring home for consumption, the more the government takes.
The typical millionaire next door has a total annual realized income that is only about 8% [median] of his total net worth; the average is less than 7%. This is a rather consistent finding across all the nationwide surveys that I have conducted except for those in The Millionaire Mind. Actually these people are living on significantly less than 8% of their wealth because they save over 15% of their income plus they pay more than their fair share of income tax.
6 thoughts on “Emphasize Net Worth-Part I”
that is correct! the government taxes the income you bring home to spend! if you invest it, your money will work for you and won’t be taxed.
My partners and I decided to build offices for our practice. A lot of risk is involved in building as opposed to leasing. Half of my salary goes to the mortgage payment. In 12 years the main building will have no mortgage. I will double my income and own 10 times my income of real estate. The depreciation helps to reduce my income taxes. The return on investing in your business is greater than investing in stocks or bonds and you have control of it.
I think a person can feel rich if he uses much less than he can accumulate. If you need a private jet to feel rich but spend a sizable portion of your income to obtain it, you may not feel as rich as the person who just needs a reliable car but spends maybe 5% of his net worth to obtain and run it.
sadly, i think it’s only a matter of time before the government institutes a wealth tax. unfortunately, i don’t think it will replace the income tax, but will be in addition to it. i love the idea of a flat/fair tax that imposes the same tax percentage across all people. by doing this the government would be forced to be accountable to all people vs just a few.
I own a real estate rental company that is an offshoot of my main business. The Goverment just changed the tax laws on Passive income, example income from rental real estate. I did not need the extra income so I changed the rents to a lower level that covered the monthly payment. This saved me tax dollars and I am still building Net worth each month. The true Millionaire (The Millionaire next door) will always be able to roll with the punches, because he or she is not over leveraged and living under their means.
Your article makes sense. In some years my income is tremendous. In other years (partly due to legal tax shelters at the time) my income is plain “higher than average for my profession.” A traveling contract engineer whose jobs last a year or two from company to company has far less job security than a lower-paid salaried person in that same field. I knew this, going into this semi-independent lifestyle, so I figured a long time ago to save far more money every year in various asset classes. I also rebalance. It’s very tough discipline. And yes I drive a ten year old Toyota economy car and do not own much material things! It does not make me the most sought single guy by single women. But that could be a good thing.