How Rich Peoples Behave

If you want to be rich, you need to stop acting like you have money in the bank and start living beneath your means. That's the message in the most recent book from Thomas J. Stanley, author of "The Millionaire Mind" and the "The Millionaire Next Door." 

In your book "Stop Acting Rich ... and Start Living like a Real Millionaire," you say that rich people don't necessarily act the way that the rest of us might think they do. In fact, millionaires are more likely to be extremely frugal. Why is that? 

There are many factors that explain frugality among the rich.

First, their parents tended to be not only frugal, but well-disciplined. Most millionaires today came from middle-class backgrounds. Their parents were not wealthy, but somewhat comfortable. Millionaires tell me that they never felt embarrassed by where they lived or the type of home they had. To a considerable degree, it is the uniquely American upward socio-economic mobility that fuels much of the hyper-consuming engine of the market for luxury goods, prestige products, up-scale brands, expensive homes and so on.

Beyond income, one's vocation has much to do with accumulating wealth. Educators, engineers, business owners and retail store managers have a tendency to live below their means and to be quite efficient in transforming their income into wealth.

It is the home / neighbourhood environment that most explains one's ability to accumulate wealth. It may be useful for people to understand that there are 1,138,070 millionaire households living in homes valued under $300,000. This is far more than the 403,211 who live in homes valued at $1 million or more. 

You describe different levels of wealth in the book. There are the glittering rich, the income (statement) affluent and the balance sheet affluent.

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The glittering rich make up a small fraction of 1 percent of the household population. They have a minimum annual household income of seven figures and a net worth of eight figures and more. They are extremely wealthy people, and they spend accordingly.

But, as I said in "Stop Acting Rich," no matter what they spend their money on, it is just a fraction of their overall net worth. In other words, even the glittering rich spend below their means. There are no more than 80,000 glittering rich households in a nation of more than 115,000,000 households.

The income statement affluent are those with high incomes and relatively low levels of net worth. They are not very productive in transforming their incomes into wealth. Many of the people in this category are highly compensated physicians, attorneys and executives. Many are driven to hyper-consume by their need to display high social status.

Farmers are found in high concentrations among the segment I refer to as balance sheet affluent. The balance sheet affluent are highly productive at transforming their income into wealth.

Among the most productive of this group are educators, engineers, owners of small businesses, and as mentioned, farmers. 

Who is buying most of the top-shelf brand vodkas, extravagant cars and homes and why?

The question of "who" really has two answers.

Status products and homes are more likely purchased by people who have higher incomes. Look at three socioeconomic measures: net worth or wealth, household income and the market value of a home. Which of these variables is best at predicting consumption of the items mentioned? The value of a home ranks first, income ranks second and wealth ranks third.

“America is often referred to as the land of the free. But most people in this country are not really free. They are tied to debt and a treadmill existence.”

Again, while it is true that the people at the upper level of these measures have a higher propensity to consume prestige products, it is not necessarily the most significant market.

For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires. Yes, people with very high incomes, high levels of wealth are more likely to drive status automobiles. But 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.

Why do these people act this way? In large part, they are trying to imitate economically successful people. They take their cues from Hollywood and the advertising industry. The problem is that most aspirationals know few, if any, really wealthy to emulate.

Would they still continue to drive prestige makes of cars if they knew that the No. 1 make of automobile among millionaires is the Toyota? Along these lines, would they still crave living in a $1 million home when they find out that nearly three times more millionaires live in homes valued at under $300,000 than live in those valued at $1 million or more? 

Should financial freedom be everyone's ultimate goal, and where does that leave the people whose life goals are simply to have some of the trappings of wealth, such as the nice house in the tony suburb and a European sports car ? 

America is often referred to as the land of the free. But most people in this country are not really free. They are tied to debt and a treadmill existence in terms of earning a living.

At this moment, our federal government has promised future social benefits in excess of $50 trillion. That figure is approximately the same amount of the total personal wealth held by Americans.

In the future, it is very likely that the government will not be able to provide the promised social benefits to our seniors. The typical household in the United States has a net worth of just over $90,000. That is about the same annual cost of a decent quality nursing home.

Also, if home equity and equity in motor vehicles is netted out of the $90,000, then the typical household's net worth drops down to about $30,000. That is only about 60 percent of the typical household's annual income. Therefore, it should be everyone's goal to provide for their economic future by being fiscally responsible.

Otherwise, what will happen when millions of seniors are no longer able to work and have little or no wealth accumulated? Many of them will become completely dependent upon their adult children or become destitute. The money that they spent on the trappings of wealth yesterday (the house in a tony suburb or a European sports car) will not pay for tomorrow's food, clothing and shelter (possibly a nursing home).

“We encourage our children to major in consumption and minor in frugality!”

How do you recommend that people become prosperous if they would prefer to get off the consumer treadmill?

The simplest way is to live below one's means.

The typical household should be able to put away 5 percent of their annual income while they are in their 30s, 10 percent when they are in their 40s, and 20 percent when they are in their 50s.

This is also related to satisfaction with life overall. There is a highly significant correlation between satisfaction in life and living in a home and neighborhood which are easily affordable.

What is a good rule if you are determined to become wealthy?

The market value of the home you purchase should be less than three times your household's total annual realized income. Also, if you are not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

Do you have a sense that American consumer values are shifting from aspirational luxury purchases that seemed to be heavily marketed in the early 2000's asset bubble days to more frugal ones ? 

No, I don't think that the values are shifting.

The only reason that people aren't spending as much as they did prior to the current economic meltdown is that they don't have as much money to spend right now. We are a nation of hyper-consumers. We encourage our children to major in consumption and minor in frugality!

The smartest people in the world are in the marketing and advertising industries in this country. How else can you explain that 300 different brands of vodka coexist in our domestic market? In 2009, about 2.3 million American seniors will pass away. What did they do with the more than $2 trillion in income that they earned in their lifetimes?

I estimate that only 2.3 percent will leave behind a gross estate (all assets included) of $1 million or more. What did the other 97.7 percent of the decedents do with all of their income? If they did not save their income, invest it or allocate it to things that appreciate, where did the money go?

Beyond the basic necessities, an awful lot of it was spent on things, many things that now reside in landfills and thrift shops. We are and will continue to be a culture of hyper-consumption.

Recently read a post on Tales From a Bar Stool on SA’s brief encounter with a millionaire, Bruce*. The man she explains in her post is too common of what I have  witnessed of many wealthy men in the finance/mining industry of Vancouver – rich, married (or in a relationship), and always on the prowl to find a new female plaything. Both of the men simultaneously hitting on SA were taken, one even with children, but their relationship status surely didn’t stop any of them from sending her “unfavourable innuendos” between rounds at Glowbal and bottle service at Republic. Reading the post made me wonder, do married men act this way because they feel that their financial status entitle them to adultery?

Let’s take this a few steps back to some of my own experiences. Back in the day, I used to work in the event and party promotion business. In my years of working at nightclubs, hosting VIP guests, and mingling with various types of partying Vancouverites, I witnessed a lot of different types of  men.  I’ve seen well-known, established businessmen act like A.D.D. ridden assholes after snorting lines of coke, I’ve seen married men disrespect any sort of monogamous vows after a few drinks, and I’ve  heard millionaires (who were married with children), proposition women with a high-rolling lifestyle if they take up being their side-fling. Out of the different types of men I’ve seen, I have to say, the ones I saw behaving the worst (in Vancouver) were the men who were of the higher income bracket. There is no statistical data to back this up, my observation comes  purely from looking at the kinds of men who behave the worst publically (cheat, abuse substances, objectify and disrespect women, etc). My observations lead me to question, is a man’s income tied to such behaviour?  Do certain income brackets and industries breed certain socially acceptable behaviours and character in men?

Let’s look at the relationship between adultery and income. A recent study conducted by MSNBC showed that among men making more than $300,000 a year, 32% reported cheating, compared to 21% of men making less than $35,000 a year. Similarly, in a blog post on Yahoo Health, Editor-in-Chief David Zinczenko references a study that revealed that men who earned more money had a higher likelihood of cheating than those who earned less. Don’t get me wrong, women cheat as well, however the relationship appears to be reversed. Studies that show that poorer women are more likely to cheat than wealthier women. One professor postulates that women cheat as a way to shop for a better long-term partner or better genes for their children. Men, on the other hand, when selecting their prey, typically choose women of lower status and achievement who willidolize them.

With money, comes power. Toronto-based clinical psychologist, Dr. Oren Amitay, says men (and women) with power tend to have an “overinflated sense of confidence that allows them to think they’ll get away with bad behaviour.”  Amitay also suggests that a sense of entitlement plays a part in why rich and high profile  men like Tiger Woods and Arnold Schwarzenegger risk hurting their families and reputations for their sexual pursuits.  ”They’ve lived their lives being told by everyone around them they’re special, they’re entitled. ‘You deserve whatever you want; you’re that great.’ And if you’re being told that, why wouldn’t you believe it?

Perhaps rich men are just presented with more opportunities to cheat. Seems like Chris Rock was on to something when he joked, “Men are only as faithful as their options.” And the reality is, those options are plentiful. There is always a steady stream of willing females lined up to be a side-fling, reinforcing that such adultery is acceptable and even rewarded. I’m glad that SA didn’t end up continuing the night with those men, and I give kudos to the classy women out there who don’t participate in perpetuating that cycle.