The 7 Factors of Wealth
In their 1996 book The Millionaire Next Door, authors Thomas Stanley and William Danko compile twenty years of research and interviews with "truly" wealthy families of America. Their findings dispel the common perceptions most of us have when we consider how fortunes are amassed in this country. (Don't forget to check out my Millionaire Next Door review for more info.)
The book is quick to differentiate between what most people consider "wealth" and what the authors believe constitutes "true" wealth and affluence. In their minds, wealth has little to do with an individual's level of income. Rather, it is determined by a combination of that person's age and net worth. They refer to this as an expected level of wealth. The "wealthy" threshold begins with individuals whose net worth is $1 million or more; in 1996, this excluded all but 3.5% of America's 100 million households.
According to the research, the truly affluent in America have seven standout characteristics common to all of them. Each factor played an integral part in the means by which these people achieved their enviable financial positions.
Factor #1: They live well below their means.
Contrary to popular belief, frugality is the foundation of wealth. Mundane consumption habits that are void of luxury-car purchases and fabulous yachting sprees may not impress the neighbors or the media, but then, impressing the public isn't the goal of most first-generation millionaires. Financial independence is.
Factor #2: They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
The wealthy know how to budget their money, and they know how to budget their time. They anticipate and plan their incomes and expenses — often as much as a year in advance. They spend significant time researching their investments. They spend time examining ways to increase their unrealized income; i.e., tax-advantaged investment accounts. They do not spend much time researching the purchase of their next luxury automobile.
Factor #3: They believe that financial independence is more important than displaying high social status.
The wealthy understand that conspicuous consumption and high levels of "domestic overhead" will likely impress Joe and Jane America, but these status expenses carry a highly negative correlation with one's true net worth. The wealthy aren't interested in status vehicles or other showy products. After all, it is much easier to appear wealthy than it is to be wealthy.
Factor #4: Their parents did not provide economic outpatient care.
Statistics demonstrate that the more financial assistance an adult child of affluent parents receives, the less likely it is that that adult child will become wealthy. Generally speaking, the more dollars adult children receive, the fewer they will accumulate. These gifts — whether for down payments or for a grandchild's private-school education − will, more often than not, simply generate higher levels of consumption. After all, it's much easier to spend someone else's money than your own.
Factor #5: Their adult children are economically self-sufficient.
"The role of enlightened parents," the authors write, "is to strengthen the weak." They found that cash gifts from affluent parents to their adult children serve dual outcomes: They act to increase the children's dependence upon the parents for continuing financial support, and they continuously deplete the parents' financial position.
Factor #6: They are proficient in targeting market opportunities.
Finding specific niches and exploiting them is often the key to generating an above-average income. In a nation geared toward turbocharged levels of consumption, market opportunities are created constantly for those willing to supply new products or ideas.
Factor #7: They chose the right occupation.
Profitable industries abound. But just because a business is profitable doesn't mean its owners and employees will become wealthy and affluent. Wealth is generated through talent, desire, and discipline. One millionaire, when asked why he thought there are four times as many millionaire entrepreneurs as there are millionaire employees, stated it this way:
There are more people [employees] today working at jobs that they don't like. I'll tell you honestly that the successful man is a guy who works at a job, who likes his work, who can't wait to get up in the morning to get down to the office, and that's my criteria. And I've always been that way. I can't wait to get up and get down to the office and get my job underway.
It's worth considering: How many of these seven "wealth factors" would apply to your life currently? Would an unbiased third-party opinion agree with you?
And what could you do today, or tomorrow, or this week, to possibly improve that?