Who are the millionaires?
Is it the people living on the Upper East Side in New York the people living on Strandvägen in Stockholm?
Well, yes, and yes, but the typical millionaire doesn't live there, they live next door.
What can we learn from these peoples so that we also one day, may call ourselves,
millionaires?
Takeaway number 1: The 12 characteristics of a millionaire.
Contrary to many people's beliefs, it's rarely luck or inheritance that decides whether you will be a millionaire or not.
It's much more a result of hard work,
lifestyle decisions, planning and
self-discipline. Let's pretend that we can interview the millionaire population. This is what they would tell us:
We live below our means. About 50% of us have lived in the same house for more than 20 years.
Our time, energy and money are allocated towards wealth.
We spend more than twice the amount of time on financial planning and investing as our non millionaire friends.
We think that freedom and financial security are more important than displaying high social status.
We never received cash gifts from our parents.
We are self-employed. About 2/3 of us have ourselves as our bosses. 75% of us consider ourselves entrepreneurs.
Most of us are in our 50s and are males.
We have a go-to-h**l-fund,
which means that we can keep our lifestyle for 10 years or more, without bringing in additional income.
We are well educated. Only 1/5 of us aren't college graduates.
We invest a lot! On average, about 20 percent of our realized income per year, and we make our own investment decisions.
We invest in the long run. Over 90 percent of us hold our investments for more than a year.
We buy cars by the pound. And screw those environmentalists! Ha ha ha ha! We are cheapskates.
In a good way, we would argue.
Takeaway number 2: Play defense. Let's do a quick quiz. Does your household operate on an annual budget?
Do you know how much your family spends each year on food, clothing and shelter?
Do you have a clearly defined set of daily, weekly, monthly and lifetime goals? Do you spend a lot of time planning your financial future?
Did you answer yes to all the above? Millionaires, to a greater extent than others, do. Now you probably think: Hold on a second!
Why would someone who's a millionaire
need a budget? To that, the answer is: Because they became millionaires that way and they maintain their affluent status the same way. A parallel
could easily be drawn to training. Have you seen all the You Tubers who go to the gym every day?
They are the ones who seems not to need it,
right? But that's why they are fit! Becoming and staying financially independent is not much different from that.
So how do you play great defense then? For starters, you should buy (or rent) a house in a modest neighborhood,
not an upper-class one. The price tag of an apartment or Manhattan for instance
even though, I know, it's stunning, does not factor in all the variables. To live there
it's expected that you have a certain lifestyle.
This lifestyle might be even more expensive in the long run than the apartment itself. Live in a modest
(but safe) area instead and you will find it easy to keep up with, and even stay ahead of, the Joneses and still accumulate wealth
In general, spend as little as possible on consumables and spend smart on possessions that will depreciate in value.
To be honest, most millionaires do both. They have a decent offensive as well as quality defense.
But only a minority plays such good offensive that they can eat their salary and keep it too. If you don't belong to that category,
which only is 0.1% of us do anyway, learn how to play defense.
Takeaway number 3: The true cost of consumption.
Let's disregard all the costs that a certain purchase might result in later, as
explained through the apartment on Manhattan example in our last takeaway. The price tag still does not fully represent what you pay when buying something.
There are two reasons as to why this is not true. 1: The opportunity cost, the monetary one. An
opportunity cost is the loss of other alternatives when one of them is chosen.
Let's pretend that you had an iPhone 6 in November 2017.
Now, if you like most people, you upgrade your phone every second year or so.
So now you're thinking about the new iPhone X. Even though the price tag was hard to swallow to begin with (seriously
999 dollars for a phone?) you haven't yet factored in opportunity costs. If you choose to buy the iPhone X you miss the opportunity to
invest your money, for instance, in the stock market. At an annual 10% in returns,
the price of your new phone is: $2,591 after 10 years.
$6,720 after twenty years. $117,000 after fifty years. Now,
do you still want to buy that new phone?
Cigarettes (yeah, yeah, it's a cliche, I know) are an even greater example. At least your iPhone X doesn't affect your life expectancy negatively. If you,
instead of smoking 3 packages of cigarettes every day, invested the money in the tobacco company Philip Morris, during the time period of 1950 to
1996 you would have been a multimillionaire at the end of the period.
2: The opportunity cost of time. To acquire and maintain large inventories of luxury goods such as fancy cars, expensive
clothing and so on, does not only require money,
but also a lot of time. You don't buy a Ferrari without first studying the market. Neither
can you keep a high profile wardrobe without investing a lot of time in
understanding the latest trends, the greatest brands, and so on.
This is time that could have been used to increase your financial
intelligence, to improve your business or to set up a proper budget for your household instead. Time and energy of finite resources,
even for high-income producers. Or perhaps especially for high-income producers.
Why would you spend 60 to 80 hours a week at a job trying to become wealthy and then spend the remaining few hours of
the week, ruining this same wealth?
It's like trying to build a house during weekdays, but then bringing in the wrecking ball on the weekends.
Do you think that you'll ever be able to raise a house with that strategy?
Takeaway number 4: Cash gifts are bear favors.
A bear favor is a Swedish expression of someone doing another person a service that they think will have a positive impact
but which ends up being a disservice instead.
Well, I guess the English expression for it is just disservice... Takeaway number 4: Cash gifts are disservices?
Nah! Every wealthy parent, or actually every parent, wants their children to be prosperous and successful in life.
How do wealthy parents make sure that their kids get a head start? Well, they provide them with extra money
of course! This proves to be counterproductive though.
In fact, in general, the more dollars adults children receive the fewer they accumulate.
Adults who sit around waiting for the next injection of father and mother's money are much less productive than their counterpart.
Cash gifts teach children to live above their means. Gift receivers have in 80% of the instances a lower net worth than their peers.
Adults who get money from their parents have a hard time to distinguish between their parents wallets and their own. In fact, more often than
not, they think that they belong to the "I did it on my own club".
It's much easier to spend other people's money than dollars that are self generated.
So, in case you're wondering, what can you give your kids that will increase their likelihood of becoming prosperous and successful?
The single most common gift millionaires received from their parents is tuition.
Apart from that try to create an environment where independent thoughts are cherished and where achievements, responsibility and leadership are rewarded.
Yes, the best things in life are often free.
Takeaway number 5: How to decide if you are on the right track. Now, are you on your way to become financially independent,
or are you actually going in the opposite direction, towards a life of credit cards and Spotify Freemium accounts?
Your expected net worth can be estimated using the following formula: Age x realized yearly pre-tax income / 10 = net worth.
Exclude any inherited wealth both on the yearly pre-tax income and your net worth. Let's take a few examples:
The Swedish Prime Minister, Stefan Löfven, earned approximately
$220,000 last year at an age of 61. This means that his net worth should be 61 x
220,000 / 10 which is ... $1,342,000. An
engineer at Volvo who recently was promoted to the rank of middle manager is earning
$70,000 at the age of 30. His net worth should be 30 x
70,000 / 10. $210,000. A
student at Stockholm School of Economics is in his last Bachelor year of study.
He's 23 years of age, but earns nothing. This means that his net worth should be 23 x 0 / 10 ....
Oh, well, I guess that the formula doesn't apply to students, HORAY!
Student's can just keep on partying every night. Now,
this is just your expected net worth. But you guys aren't here to be average. Am I right?
Above the ranks of the "Average
Accumulators of Wealth" are the "Prodigious Accumulates of Wealth" if you want to be a part of that exclusive club you must gather a fortune
that is twice the amount of what the formula suggests.
But it doesn't end here. Above this exclusive group are the "Super Prodigious Accumulators of Wealth" To join this club of glorious elites,
you must have a wealth that is 10 times higher than the formula explained before. Now that requires dedication!
If you are, on the other hand, only worth half of what the formula says that you should be worth, you belong to the "Under
Accumulators of Wealth". Calling out to the competitive person inside you, I have one thing to tell you: Friend
it's time for us to get you on the right track.
Here's a quick recap: First, becoming a millionaire is the result of hard work, lifestyle decisions, planning and self-discipline not inheritance or luck.
The second takeaway is that you must play great defense to accumulate wealth.
Takeaway number 3 is that opportunity costs, both in terms of money and time, should be added to estimate the true cost of a purchase.
Number 4 is that cash gifts are counterproductive to accumulate wealth, and last but not least, number 5 is that you can decide if you
are on the right track towards becoming a millionaire by taking your age x yearly income
/ 10 and then comparing it to your net worth. Guys,
if you've been watching this far, I must first say that I appreciate it a lot!
Also, you are probably on the right track toward financial independence,
no matter what the wealth formula says, as you must have an interest in the subject and a desire to improve.
In takeaway number 2,
I stated that financial planning, and more importantly, financial goals, are key ingredients in succeeding with money. A study from
2015 shows that you are a staggering 42% more likely to achieve your goals,
simply by writing them down at a regular basis. Today,
I want to challenge you to write down your financial goals for the future 5, 10 and 20 years.
Note that it's not about where you are today,
but where you want to be tomorrow. You can write down anything, even things such as expensive cars, as long as it keeps you motivated.
Here's one example of what you could write: In five years
I should have built a stock portfolio, which increased by at least 100%.
The portfolio should be worth at least $30,000. In 10 years. I should own my own apartment,
meaning that I have no mortgages left to pay.
In 20 years, I should have paid off all my college debt and be able to live on the dividend that my portfolio produces.
Just remember that your goals should be reasonable for this exercise to serve its purpose.
I wish all of you out there, good luck!