What are you imagining?
Exuberant amounts of cash flying through the air in the club or money covered champagne bottles being passed around a yacht?
It may shock you to find that the modern-day millionaire are the most frugal. Lebron James, a multi-millionaire athlete and businessman, regularly gets jabs thrown his way by his friends for being so frugally minded despite having a net worth of $400 million dollars.
While it may be extreme to some, I find the discipline admirable. And, discipline coupled with strong habits are what have built up a large number of millionaires.
Through a 5-year study conducted by Thomas Corley on millionaires and their daily habits, we now have insight into the inner day-to-day workings of what it takes to reach financial independence and habits we can incorporate ourselves to build up and create wealth.
In this study, Corley identified two separate paths that have been taken by people who became millionaires.
- Risk Takers
The risk takers took more calculated gambles, either through stocks and/or businesses that elevated their net worth into the 7-figures. Risk-takers are, as their name indicates, stomach a higher level of risk and pursue faster aggressive growth through business ventures. Their intense work ethic helps shoulder their load to build up their capital.
Savers have taken a relatively more risk-free wealth building approach by establishing strong habits. Their habits are typically more risk-averse and within their control. They live below their means and know exactly where their money is going and the proportional allocation.
There’s something to be learned from either parties.
Millionaires Establish Savings Habits Early
Ninety-four percent of self-made millionaires develop strong savings habits early on in life. It didn’t matter if they were making 40k or 100k+, they had a set percentage of their net pay saved to build up their nest egg. A majority of these millionaires averaged saving 20% or more of their net pay.
This nest egg allowed them to take more calculated risks in life, furthering their own wealth creation. And, as their nest egg compounds through interest, their net worth continues to grow from the initial seeding.
Millionaires Make Efforts To Be Frugal
Many of the wealthy studied in Corley’s studies came from poor or middle-class parents. For someone like myself, who came from a refugee family, I find this study highly encouraging. You should find encouragement from this, as well! It shows that anyone in life can become wealthy through consistency and discipline.
Sixty-seven percent of the millionaires studied labeled themselves as frugal, placing enormous value on the items that they did purchase. Any consumer items bought were given a strong amount of consideration prior to the purchase. (This also makes me feel better about spending a week contemplating before buying my $200 bean bag. Of which, now I can’t be without!)
There’s not a limit on the amount of money you can make, but there is a limit on the amount of money you can save. Your net savings rate is completely within your control and your money burn rate is directly correlated with that.
Millionaires Are Careful About Lifestyle Elevation
It would be very easy to elevate your lifestyle as your nest egg and overall net worth grows. But, millionaires are extremely cognizant about their lifestyle habits.
The wealthy have built and fallen in love with the process of delayed gratification. It’s easy to fall into the lifestyle of trap of elevating your burn rate with your income, but the wealthy understand the value of furthering their financial assets, incase of emergency events such as job loss.
These financial hedges serve two functions: to continue the process of wealth creation and to further the ability to take more future calculated risks.
Once you spend your money, it is gone forever. That dollar will not return to your bank account. Worse, that dollar won’t be going out to work for you to find more of its friends to bring back.
Delayed gratification is your friend. Learn to love it.
Millionaires Automate Their Savings
Millionaires don’t even see a large part of their money as it wouldn’t even touch their checking account. It requires much less discipline and mental energy if you simply automate your savings to be automatically taken out of your paycheck BEFORE it touches your bank.
It takes a few minutes to set up your direct deposit and force yourself to grow your wealth. Automating your savings will provide another stream of income as it grows in the future to provide growing stocks and returning dividends.
Millionaires Live Below Their Means
Who is richer?
The man who makes 100k and spends 95k or the man who makes 50k and spends 30k?
The common theme through millionaire wealth creation is a building a habit of awareness. If lifestyle creep elevates too quickly, the rate of overall net worth growth slows down.
Millionaires understand the value of not super-sizing their life in the immediate moment to increase their future financial assets. There is value in living within your means. You find more joy out of the things you do buy and invest in for yourself. The monthly budget is constantly under scrutiny and revision.
Here are some overall take-aways from millionaire habits:
- Housing should not be more than 25% of your net pay, whether you own or rent. Admittedly, I break this rule as the Bay Area has some of the most expensive housing in the world.
- Food should not take more than 15% of your net pay.
- Aim to save 20% or more to push yourself. If it doesn’t hurt, you can afford to save more.
- Entertainment should take no more than 10% of your net pay, at most. This includes bars, movies, going out, etc. Vacations don’t typically take more than 5% of their annual pay.
- Consumer debt is to be avoided at all costs. If you can’t afford it, don’t buy it. The new purse can wait until you further your wealth even more.
- Separate savings and investments into two different categories. Your savings shouldn’t be touched unless absolutely necessary.
Millionaires Give Thought To Their Spending
Everyone spends money and feeds the economy. The differentiation with millionaires is that they know how to spend their dollars more efficiently and make it work for them.
Buy in Bulk – Millionaires, and future millionaires, know what they need and buy in bulk to decrease overall costs. Toilet paper, Q-tips, paper towels, nonperishable items, and the like all decrease in cost per unit when bought in bulk
Meal Planning – Personally, I meal prep for the week, but the food never lasts. I need to do a better job of cooking more and planning more efficiently. Millionaires plan their meals in advance, as we all know food is one of our biggest expenses apart from housing. If you plan your meals out for the week, you can make your grocery trips more efficient. We all love to eat out, but the more meals you can control during the week, the better off you will be in the long run.
Essentially, there is much to be gained from preparation.
Give me six hour to cut down a tree and I will spend the first four sharpening the axe.” – Abraham Lincoln
The more energy given to initial planning and proper preparation, the more efficient and valuable your spending will be.
Millionaires Associate With Like-Minded Individuals
Millionaires place great thought into their peers and put conscious effort into avoiding very spend-thrift friends. As many people will argue, you are the average of the 5 people you spend your time with. If the company you keep constantly pressure you to spend, that will have a continual impact on your net worth and your financial goals.
If you associate yourself with other like-minded individuals, you have a support group for your habits. And, you may learn more positive actions that you can incorporate into your everyday life.
Millionaires Take Marriage Seriously
It would be a shame to have half of your hard-earned net worth taken out either through divorce or a spouse’s horrible spending habits.
Millionaires tend to place great thought into their partners and marry someone with similar financial goals and saving habits.