Have you ever noticed those people whom you see jogging day after day? They are the ones who seem not to need to jog. But that’s why they are fit. Those who are wealthy work at staying financially fit. But those who are not financially fit do little to change their status.
Many confused wealth and income because a high-income earner who is earning more than $300,000 annually but atlas, amass little or close to no fortune.
The foundation of wealth accumulation is quality offence, but more importantly, superior defence and this defence should be anchored by budgeting and planning. Here are four questions to start with to assess how well your defence is.
- Does your household operate on an annual budget?
Out of 100 millionaires who don’t budget, there are about 120 who do. They plan their consumption spending according to a variety of food, clothing, and shelter categories each year. Doesn’t sound like much fun? It is much easier to budget if you visualize the long-term benefits of this task. - Do you know how much your family spends each year for food, clothing and shelter?
About 2/3 millionaires answered yes to this question. Ask high-income, low net-worth respondents about their goals. What they will tell you? To minimize their tax burden using mortgage deduction as a way to accomplish this. High net-worth millionaires see things differently. Their goal is to be financially independent and hence, budgeting and accounting for domestic consumption is directly related to achieving this goal. Budgeting also reduces the probability of allocating expenses on product and services that are not really important by tabulating their expenditures. - Do you have a clearly defined set of daily, weekly, monthly, annual and lifetime goals?
2/3 of millionaires answered yes to this question. Who are the ‘no-es’? Many of the high-income and inherited-wealth types. Financially independent people seems to be better able to visualize the future benefits of defining their goals. Mrs Rule, for instance, visualizes all her grandchildren graduating from college. She visualizes their success after college. She never sees herself being financially dependent on others, even if she is disabled in the future. Her goals are congruent with those of most millionaires in this regard. - Do you spend a lot of time planning your financial future?
Again about 66% of millionaires allocate more hours than do nonmillionaires to become better investors. That is one of the reasons that millionaires remain wealthy. Among those who do have significant knowledge about excellent investment opportunities, many do not leverage this knowledge. Take, for example, a highly productive sales professional, Mr Willis who had Wal-Mart as a client for more than 10 years. During this time, Wal-Mart was exploding in growth and value. How many shares did Mr Willis own? Zero. Yes, zero, even though he had considerable firsthand knowledge of his client’s success and an annual six-figure income.
Playing great defence would help you to accumulate superior wealth, the affluent tend to answer ‘yes’ to three questions below:
1. Were your parents very frugal?
2. Are you frugal?
3. Is your spouse more frugal than you are?
And yes…the last question is highly significant. Consider a typical millionaire household, the male usually contributes 80 percent of income and most also play great defence when it comes to spending for consumer goods and services. A self-made millionaire stated it best when he said:
I can’t get my wife to spend any money!
How did a wife of a millionaire respond when her husband gave her $8 million worth of stock in the company he recently took public? According to her husband of thirty-one years, she said, “I appreciate this, I really do.” Then she smiled, never changing her position at the kitchen table, where she continued to cut out twenty-five and fifty-cents-off food coupons from the newspapers. Nothing is so important as to interrupt her Saturday morning chores. “She just does today like she always has done, even when all we owned was a kitchen table…It’s how come we’re well-off today. Made a lot of trade-offs …sacrifices early in our marriage.”
What are the key principles of becoming wealthy? We have discussed 3 out of 7 in this article, that is:
1. They live well below their means.
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.