The Third Pig

source: amisable quintero

One financial tenet I try to follow on my personal quest to become wealthy is to “do what money does.” What that means to me is to follow and mimic the behaviors, as best as I can decipher them, of people who have become wealthy themselves. Overwhelmingly, the research shows people who are wealthy or likely to become wealthy to be very economical with the dollars they’ve earned – read frugal.

According to Thomas Stanley, in his book Stop Acting Rich, the wealthy and those who are likely to become so spend very few of their dollars on “the impediments to building wealth: income taxes, homes, clothing and accessories, motor vehicles, interest or personal loans, club dues and vacations”, wine and spirits, and entertainment. They also do not practice what Stanley calls “economic outpatient care” which is financially supporting other able bodied adults which includes, children, parents, girlfriends, long lost cousins and war buddies down on their luck. In other words, they make junior get his own place after college on his own dime.

The wealthy and those that are likely to be do however allocate a large portion of their money to the “foundation stones of accumulating wealth, including investments, pension or annuity contributions, and fees for professional advice and asset-management services.” Millionaires are also typically generous with allocating money to their grandchildren’s education, charities meaningful to them and on events that enhance the time they spend with loved ones. It is not until after they’ve put themselves on stable financial ground that they begin to spend on “the frivolities of life.”

The above shopping lists of items of where the wealthy do and do not spend their money puts in perspective the “wealth mindset”. The wealthy are not penny-pinchers or Scrooges. They are not penny wise and pound foolish. They are not risk averse but know how to take prudent risks. In fact, millionaires spend heavily on things that return monetary value to them and avoid spending on things that do not.

This includes investments. Two years ago, when the economic sky was falling, most of America took whatever money they had in the stock market and put it into cash. Or worse, they spent their money on personal items – “the frivolities of life”. In other words, most people put their money under the proverbial mattress. However, this is not what people who possess this wealth mindset did. In fact one of the wealthiest in the world, Warren Buffet, told us what we should do with our investments in a New York Times Op-Ed piece in October 2008: (Continue reading more)