What Does it Take to Become Wealthy?
The word “wealth” may throw off the average Canadian. Sure, many Canadians want to become rich, by which they mean, they want to have a lot of money. However, I think that most Canadians have more modest expectations. Something like, “I want to afford a decent roof over my head, eat healthy food, have the occasional night out with my spouse or a friend, take a vacation once or twice a year, and know that I have saved enough to retire at a reasonable age before my body gives out on me.” I would define that as wealth. To be satisfied with your financial circumstances, to have reached the stage of what Brian Portnoy* calls “funded contentment,” doesn’t necessarily require multiple millions of dollars; it requires sufficient income and assets to support a contented lifestyle. While it is true that a comfortable life does require meeting a certain minimum income level, there is a wide range of money that can be considered “enough.”
There is an anecdote cited by the author Kurt Vonnegut in a poem he published in the New Yorker in 2005 in honour of his recently deceased friend, Joseph Heller. Heller is most famous for his book, Catch-22. The two of them were at a party given by a billionaire hedge fund manager and Vonnegut had observed that the fund manager had earned in one day more than Joseph Heller had earned from Catch-22 during the entire period of its publication, which came out in 1961. Heller had replied that he had something that the hedge fund manager could never have… “The knowledge that I’ve got enough.”
That is wealth. When you know you have enough.
Current Financial Stress
Unfortunately, many Canadians do not have enough. According to the National Payroll Institute, Canadians living paycheque-to-paycheque have increased 26% compared to last year. The Financial Wellness Lab, which analyzed the data, found that of the three financial wellness clusters – comfortable, coping, and stressed – the comfortable group fell 10% in 2022 versus a year earlier, those in the coping category increased 8%, and the stressed cluster increased 2%. Fascinatingly, 41% of those in the stressed cluster report household income greater than $100,000. The financial habits related to saving, spending, and debt are going in the wrong direction. See Financial Stress Rains Down on Working Canadians for more information.
The Millionaire Next Door
Fortunately, habits are changeable, which means that financially stressed or coping Canadians may have the opportunity to move toward a more comfortable situation.
Again, while recognizing that there is a threshold of income necessary, a significant factor in financial well-being is the formation of habits that move households in the right direction.
Back in 1996, Thomas Stanley and William Danko published The Millionaire Next Door.† A study of millionaires in the United States, the authors’ research led them to conclude that those who live in expensive homes or drive luxury cars do not usually have much wealth. Quite the contrary. Many of the wealthy live in modest homes and drive cars that are several years old. Most importantly, the authors “determined how ordinary people can become wealthy.”
In 2018, a successor volume was published, The Next Millionaire Next Door, written by Thomas Stanley and his daughter Sarah Stanley Fallaw. Sadly, the elder Stanley did not get to see this book published as he had died in a collision with a drunk driver in 2015. It fell to his daughter to complete the publication. While the data and particular components of the research were updated, the fundamental lessons remained the same. There are certain kinds of behaviour that are the biggest factors in accumulating wealth.
Stanley and Danko identified seven such factors.
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They chose the right occupation.
Let’s look at these factors in more detail.
Live Well Below Your Means
At one level, this is basic math. The only way to accumulate wealth is to save some of your income, and the only way to accomplish that is to spend less than you earn. “Conspicuous consumption” is not the goal for millionaires. Rather, they wear inexpensive but durable clothing and drive modestly priced vehicles (like the Toyota Corolla pictured at the top) that they hold onto for years. Few lease their cars.
When we moved to London, ON nearly 22 years ago, we began to discover neighbourhoods near us where the houses were large and custom-designed. These were the homes of the wealthy, or so I thought. But, if Stanley and Danko are to be believed, many more millionaires live in neighbourhoods where three-quarters of their neighbours are not millionaires. In other words, the wealthy do not display their wealth using their postal code. Rather, they live in middle-income neighbourhoods.
Allocate Your Time, Energy, and Money Efficiently
This sounds like “budgeting.” I will admit to not being a super fan of budgets. However, I am a big fan of tracking your spending. To understand what you need to do, you need to diagnose the source of the pain. If, as indicated elsewhere, the problem is less often income than spending, understanding where your money is going is the first step to a solution.
Efficient use of time, energy and money can mean a few things. First, there is the idea of spending money on clothing, vehicles, housing, etc., for their functional value rather than for display. Despite the examples of dropout billionaires like Bill Gates or Mark Zuckerberg, of Microsoft and Facebook fame, respectively, millionaires tend to value education for themselves and their children.
Another efficient use of money, and especially important to building wealth, is to invest part of your income. The authors found that, on average, millionaires invest nearly 20% of their “household realized income each year,” with most investing at least 15%.
Setting aside that much money for investing when house prices and/or mortgage payments are so high may seem impossible these days. However, efficient use of your money may have you weighing the pros and cons of buying versus renting your residence. Renting also gives you greater mobility to go where the cost of living is more affordable. Not all of us live in Toronto or Vancouver.
Millionaires engage in another kind of behaviour that serves them well in accumulating assets. They are penny pinchers. Or to put it the way the authors do, they are “tightwads.” To counter the argument that such attitudes are not realistic today, I offer the example of Shireen, a 30-year-old project manager in Toronto, recently profiled in The Toronto Star, who thinks that, “Spending money on coffee out of the house is ridiculous.” In another blog post, I projected that saving money on coffee could result in an extra $50,000 over 20 years.
Coffee alone is not going to make a sufficient difference. Grocery costs have gone up dramatically with inflation, but one way to hold back that cost is to buy things like bread or yogurt that is discounted because the expiry date is approaching, or fruit that is discounted because it’s a bit bruised. These are the things that your millionaire neighbours are doing.
Financial Independence is More Important than Displaying High Social Status
The Millionaire Next Door came out years before Peter Adeney retired from his software engineering job, launched his Mr. Money Mustache website, and popularized the FIRE (Financial Independence, Retire Early) movement. He is, however, among the most well-known of those who live out this factor. You may be able to live a rich lifestyle, but the millionaires next door will tell you that a modest lifestyle is one of the most important keys to financial wealth.
Parents Did Not Provide Economic Outpatient Care/Their Adult Children are Economically Self-Sufficient
“Economic outpatient care” (EOC) refers to the practice of parents providing financial gifts to their adult children. To be clear, this is not about spending money to enhance their education; it is money that is given to supplement a higher-consumption lifestyle than the children could otherwise afford. The authors found that, in general, millionaires next door were not recipients of this kind of care. They also were less likely to provide EOC to their children.
Why is this an important factor in wealth-building? After all, many Canadians of financial means are gifting down payments to their children so that they can purchase a house. It would seem that this would result in a foundation of wealth that could only serve adult children well. However, the outcome of this practice is frequently negative on two counts. First, the adult children grow dependent on this steady flow of money. The authors cite a letter from a frustrated son-in-law whose mother-in-law is not providing her daughter, his wife, with access to the substantial wealth in a trust fund that he believes is past due to have been distributed. The fact is that this couple, in their 50s at the time of writing the letter in question, had been receiving annual subsidies of about $25,000 in today’s dollars throughout their married life. They lived in a relatively affluent neighbourhood that they could not afford without this continuing assistance.
The second negative is that the parents providing EOC may do so to their detriment. A 2019 poll by the Royal Bank of Canada found that 48% of parents felt that they were “subsidizing their 30-to-35-year-olds’ lives, and more than a third of parents were worried about the impact this spending could have on their retirement.
Stanley and Danko, for their part, found that “in general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.” In other words, financial subsidies undermine the discipline necessary to become financially independent.
I feel conflicted over this finding. Just three weeks ago, I wrote a blog post suggesting that parents consider providing an advance on their inheritance. I did, however, suggest such advances only be provided if the parents’ financial needs are fully taken care of and if the adult children have demonstrated maturity with their finances. However, my blog was more about estate planning, while Stanley and Danko wrote about financial management. This reveals once again the integrated nature of financial planning.
Proficient in Targeting Market Opportunities/Choosing the Right Occupation
These last two categories can also be tied together. What can you do well that has promising opportunities for a career? In other words, what is the right occupation for you? This is an area I don’t think I can venture into, unfortunately, despite the suggestions of Stanley and Danko. However, their analysis from the 1990s seems wildly out-of-date, even though they included perennial favourites like law and medicine. Lists of high-paying jobs in Canada also tend to include those in the technology sector.
If you are looking to get into a career or make a career change, you may wish to look at the trend analysis at the Job Bank for more ideas about occupations that pay well and interest you.
Not everything about building wealth will be under our control. However, there are behaviours we can adopt for ourselves that will help us to live with more financial security and contentment and maybe even help us to become like those millionaires next door.
*Portnoy, Brian. The Geometry of Wealth: How to shape a life of money and meaning. Harriman House, 2018.
†Stanley, Thomas J. and William D. Danko. The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. Electronic Edition: Rosetta Books LLC, 2010.
This is the 171st blog post for Russ Writes, first published on 2022-11-07.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.