The Millionaire Next Door

Building Wealth Revisited

When I wrote The Millionaire Next Door I had several purposes in mind.  One was to educate those who make good to great incomes but who have accumulated low levels of net worth.  I first wrote about this topic in a 1992 article entitled, “Why You’re Not as Wealthy as You Should Be.”  Often what happens in this country is that people think that as along as they generate high incomes wealth will surely follow.  Nothing could be further from the truth. 

It so happens, in fact, that for purposes of building wealth . . . once you are in a high income bracket [$100,000 or more] it matters less how much more you make than what you do with what you already have.  

My studies have shown that some people build wealth much more quickly than others.  I’ve come to call those who pile up net worth the fastest “balance sheet affluent” or BAs.  For every age/income category there is an expected level of net worth.  The BAs by definition are in the top 25% of the net worth distribution.  BAs tend to put every dollar they can into investments, not into consumption.  BAs spend an average of 100 hours a year researching and planning their investments.  Their counterparts, the “income statement affluent” or IAs, who are in the bottom 25% of the wealth distribution spend about 50 hours a year in such activities.  What is interesting is the significant correlation between time spent in studying/planning and net worth.  My studies show that BAs have six to ten times more net worth than do the IAs! 

BAs also use that time more effectively by seeking professional advice in order to help them make important decisions themselves.  They usually assemble a team of advisors from lawyers and accountants to brokers and bankers (trust officers) and are willing to pay handsomely for good advice. 

It’s a startling irony that there’s an inverse relationship between the willingness to pay for luxury items and the willingness to buy investment advice.  The IAs spend heavily on cars, boats, and houses and tend to skimp on investment advice.  The BAs however skimp on the luxuries and are usually more willing to pay top dollar for good legal and financial advice.

4 thoughts on “Building Wealth Revisited”

  1. We are BA heavy. 13 year old car, 4 year old car I plan to drive for 15 years. Our house was paid off 7 years early and we are saving about 45% of our income since we plan to retire in our early 50’s.

  2. IMHO, your thinking is too far skewed to the ultra-high worth individual. I personally avoid lawyers, accountants, brokers and bankers; I consider them bloodsuckers – robbing me of my money and my time. I prefer to save my money and invest in the knowledge to replace any dependency on these professions.

  3. Financial experts are an unneeded expense. Kind of like medical doctors. Invest, index, be frugal. Start this early enough in life (20s 30s) and you’ll be fine. Eat well (e.g. whole grains plant based diet) and exercise regularly and you’ll rarely need those doctors and hospitals. We only need these kind of experts when we are doing unwise things.

  4. Pingback: Planning & Monitoring: The Obvious Wealth Factor We Love to Ignore - DataPoints

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