The couple are the face of the self-made millionaire who has the financial security of true wealth, not the fleeting rush of sudden riches. While the popular perception of millionaires is that they are more ostentatious than frugal, recent research shows that single-digit millionaires, at least, are generally far more mindful about how they save, spend and invest their money.Among Stanley's many findings was that millionaires (net assets greater than a million dollars), particularly self made millionaires, were far more common than people perceived. Even relatively modest incomes, when combined with cautious investment decision making and with careful spending, can generate families with net assets greater than a million dollars.
“It’s about paying attention to what makes you happy and not just doing what our society tells us to do,” said Donna Skeels Cygan, a financial adviser in Albuquerque and the author of the book “The Joy of Financial Security.”
“They look upon money as a tool,” she said of couples like Ms. Marchi and Mr. Weidner, with whom she has worked. “It’s an important tool. They don’t neglect it, but they also don’t worship it.”
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I set out to talk to people who had what I considered an attainable level of wealth for people with well-paying jobs and the ability to control their spending and saving through their lifetime. They had wealth starting at several million dollars, but it did not stretch above the $10.86 million estate tax exemption level for couples.
(Once people’s wealth goes substantially past the estate tax exemption, they need tax and legal advisers for planning to minimize the estate tax. It’s a good problem to have, but it changes how they think about money.)
There were common threads in this group. These were people who had all made the money in their own lifetimes and done that as much by saving, investing and making careful choices about spending as by making large salaries.
One of the big choices was what they spent money on. A common thread was frugality about cars. Not only did they buy modestly priced vehicles, they kept them for a long time.
But fancy cars were more of a proxy for unnecessary purchases. Steve Ingram, a real estate and oil and gas lawyer in Albuquerque, said he and his wife simply didn’t care that much about material possessions.
“We have some nice things, but I drive a car for 10 years and then trade it in and get another car for 10 years,” he said. “We like to travel, and we’ll spend the money for that because it’s worth it having a real experience together.”
More explicitly, status as a millionaire is a function of three elements 1) productivity (how much you earn), 2) saving (how much you control your spending) and 3) investment decision making.
For those obsessed with inequality, the tendency is to focus solely on the first issue and to ignore the other two. The fallacy in this blindness is evident when you consider concrete examples. The young single Harvard Law School grad, two or three years out may be earning an extravagant salary of $200,000 which way overshadows that his two friends from college who went straight into the workplace, one becoming a school teacher and the other a low level bank executive. Between them, they only earn $85,000, less than half what their lawyer friend is earning. Just with those three data points, you have evidence of the scope of income inequality.
But that's not the complete picture. The married couple earn a lot less but the have been earning a lot longer. The law school grad deferred income for three years while he completed his education. The average law school student graduates with an accumulated $150,000 in debt. So in the time that they earned $255,000, he went into the hole $150,000.
Even with his high pay since he graduated, he may still be worse off. Many professionals live to the maximum of their income. They spend whatever they earn. So our Harvard Law School grad may have taken a vacation to Europe upon graduation (to reward himself for his significant and hard earned accomplishment). He then leased a top end Mercedes as befitting his professional and social status. He rents a luxury apartment convenient to his work. He buys $1.000 suits and a Rolex as markers of his professional status. He's blowing through his income with no asset accumulation at all.
Meanwhile his friends from college are quietly eating in, vacationing nearby, and minding their pennies, spending no more than they need to. At this early point in their career, before children, they are socking away 50% of their income.
Six years after graduating college, our three friends have dramatically different income and wealth trajectories. Our young lawyer is living high on the hog with lots of consumption but zero savings or asset accumulation. He has high income and zero wealth.
Our married couple with the more mundane careers have (50% X $85,000 X 6) $255,000 already banked in savings as wealth. They are ready to buy a high almost debt free or make other careful investments that will make that money work for them.
The differences in wealth of a quarter of a million dollars are not a function of differing levels of productivity (income) but a product of differing behaviors regarding spending and risk managed investments.
Those seeking to redistribute wealth often fail to understand both how wealth is created and how their proposed redistributions will affect future wealth creation. Given that much of the most routine wealth accumulation occurs through tens of thousands of incremental decisions based on values and behaviors, they tend to be very sensitive to changes in the external circumstances.
For example, you can encourage people to become wealthier by encouraging them to become more productive such as through achieving higher levels of education (recognizing that only some forms of higher education actually lead to higher levels of productivity). You can encourage them to become wealthier by saving more. You can encourage them to become wealthier by investing more.
But one single action will have different degrees of influence given the three mechanisms. For example, some form of redistribution of wealth that takes from those that have and gives to those that have not, might have multiple consequences. If those with wealth have a higher propensity to save, then redistributing wealth to those without a propensity to save will reduce overall savings in the system and temporarily (until the transfer is exhausted) lead higher consumption. Those whose wealth was accumulated by low spending are likely to change their behaviors. If postponing consumption is not allowed to lead to wealth accumulation, then there is no reason to moderate consumption. If people are uncertain about the regulatory regime and the risk of future confiscation, then they are likely to switch their investments from lower risk long term investments to higher risk higher reward shorter term investments.
The upshot of all this is that both productivity and wealth accumulation are functions of complex systems of trade-offs between a variety of values and behaviors. It is fare easier to accidentally kill the goose that lays the golden eggs than it is to deliberately increase the production of golden egg laying.
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