How To Be One Of The Frugal Rich.

I just read an interesting interview with Thomas J. Stanley, Ph.D from bankrate.com, and I thought I share some of the highlights with you.

The interview is based around Dr. Stanley’s new book Stop Acting Rich: …And Start Living Like A Real Millionaire, and he discusses some more commonalities between the rich and how it sets them apart from the rest of the population.

Here are some of the interesting points Dr. Stanley raised in the interview.

1. The rich are very frugal.

Many of “the rich” had parents that were not only frugal, but well disciplined. This makes a lot of sense since discipline is required to succeed in anything at life, aside from simply getting lucky like winning the lottery.

2. Most millionaires today came from middle-class backgrounds.

They don’t come from affluent families, and they didn’t inherit their wealth. In fact, Dr. Stanley’s research shows that most came from comfortable, middle class families. They say they never felt embarrassed by their home or where they lived growing up. But they did have that uniquely American socioeconomic mobility that allows not only opportunity to become wealthy, but the siren call to hyper consume.

3. Resisting the call.

The nut of the interview, if not the book itself, is that the rich eschew conspicuous consumption. While they grew up in an environment that lends itself to consumption of luxury goods and “prestige products”, the rich simply didn’t partake. Instead, they simple live below their income.

4. Occupation matters.

What you do apparently matters more than simply determining your income. Many of today’s rich spend their time pursuing careers that have little to do with accumulating wealth. Contrary to populist screeds in much of the media today, the rich are not wall street bankers, investors or lawyers, but rather educators, engineers, business owners and retail store managers who “have a tendency to live below their means and to be quite efficient in transforming their income into wealth.”

5. Home is where you hang your hat, not an investment.

Most of the rich today don’t live in million dollar homes. In fact, there are 1,138,070 millionaire households who live in homes valued at less than $300,000, while only 403,211 who live in homes valued at $1 million or more.

6. Just who are “The top 1%”

The top 1% makes for a nice sound byte during political campaigns, but just who does that include? Stanley refers to the top 1% as “The glittering rich.” This demographic has an income of at least 7 figures and a net worth of 8 figures or more. They are extremely rich, and as Dr Stanley’s name for them suggests, they spend like it too.

Interestingly, even the “glittering rich” spend below their means. Of course, this might be because their means are so ridiculously large they have a hard time living outside those means. But, that doesn’t stop suddenly rich celebrities and lottery winners who blow through 7 figures in a matter of months, so I guess the moral is that if you earn it, you’re more likely to keep it.

7. Meet the income statement affluent.

Beside the glittering rich, Stanley profiles what he calls the “income statement affluent.” This demographic is made up of people with high incomes, but relatively low level net worth. They’re not as effective at transforming their income into wealth. This category includes a lot of physicians, attorneys and executives. The income statement affluent tend to be driven toward hyper consumption and the need to show off their high social status.

8. Meet the balance sheet affluent.

The balance sheet affluent have more modest incomes, but relatively large net worth. Stanley found that farmers are in large concentration in the balance sheet affluent. Other members of this group include educators, engineers, and small businesses owners. The balance sheet affluent are very effective at transforming their incomes into wealth – they accumulate assets while others accumulate liabilities.

9. Meet the aspirationals.

I couldn’t say it better myself, so here’s a direct quote from the interview regarding “aspirationals”:

“in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other.”

They take their cues from Hollywood and the advertising industry. The problem is that most aspirationals know few, if any, really wealthy to emulate.”

10. How to become the frugal rich.

It should come as no surprise, certainly at this point, that the single biggest factor to becoming rich in America is to live below your means. Here is the minimal target savings rate for a typical family by age, According to Dr. Stanley:

30’s – 5% of their annual income
40’s – 10% of their annual income
50’s – 20% of their annual income

Sadly, most Americans are far below these figures. Probably because most are aspirationals?

Part of living below your means is owning a home you can afford. Beside the monetary reward to doing so, there’s a psychological benefit to owning an affordable home – “a highly significant correlation between satisfaction in life and living in a home and neighborhood which are easily affordable.”

Stanley’s rule of thumb for house price is that it should be less than 3 times your total household realized income, also never take a mortgage that’s more than 2 times your total household annual income.

Those would have seemed like laughable rules a few years ago, but they’re sounding much more sensible these days even if you aren’t trying to become a millionaire.

You can read the full interview with Thomas J. Stanley here.

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