In Defense of Frugal: Your Wealth Ratio
In this second installment of the “In Defense of Frugal” series or the IDF series I will tackle what I said was the first measure of wealth. In the first post, “Are You A Millionaire?”, I tried to illustrate how frugality lent itself to wealth getting. In other words I tried to show success in building wealth is in large part due to how efficient one is at converting earned dollars into wealth dollars. Further, I said someone who earns a modest income may be much better at income-to-wealth conversion than someone who makes a handsome income. In fact, as I mentioned in the previous post, folks of moderate income tend to become wealthier than high income earners over the long haul. Of course it doesn’t have to be that way. High income earners have an advantage in that they have more funds available to invest. But that’s on a “gross” level. They “net” less of their funds because the majority instead spend those funds on items of little or no lasting value.
The concept that moderate income earners may be better at income-to-wealth converting than high-income earners is hard for most of us to wrap our minds around. Considering the high-income earners are driving luxury autos, live in large homes and spend lavishly on clothing, entertainment and travel. Most of us think, if these folks can buy all that stuff, how are they not rich? Well, they aren’t rich because they buy all that stuff. It is true, you cannot have your cake and eat it too. They’ve traded their potential wealth (and independence) for trinkets. Here are the facts as culled together by Dr. Thomas Stanley and American Express Publishing /Harrison Group:
- 87% of luxury motor vehicles are driven by non-millionaires. The most popular vehicles among high-income non-millionaires are Mercedes Benz and BMW. Most are leased. The most popular vehicle among millionaires is Toyota followed closely by Ford. Millionaires tend to purchase their cars.
- 73% of homes valued at over $1,000,000 are occupied by non-millionaires. They are purchased with jumbo mortgages with very little equity in place. In fact, many are under water right now. Millionaires on the other hand live in much more modest homes. 90% of millionaires live in homes valued at less than $1,000,000 and 28% live in homes valued at less than $300,000. Millionaires understand buying a more expensive home is likely to decrease the odds of becoming financially independent.
- Surveys conducted by Stanley and AmEx/Harrison showed similar results. Each survey focused on millionaires and high income earning non-millionaires on the subject of retailers frequented. Millionaires mentioned Target, Kohl’s, Costco and T.J. Maxx as most frequented. High income non-millionaires most cited stores were Banana Republic, Saks Fifth Ave, Neiman Marcus and Nordstrom.
I hear the boo birds chirping. Many of you reading this are probably saying, "What’s the point in having money if you can’t spend it on the finer things? Can’t I spend on the finer things and still get rich? After all, money is for spending, right?" I have to say I have a hard time arguing against this point. But over the years I’ve come to understand there is a time and a place for everything. Again, it is fine to spend. But not to the point that is sabotages your wealth building. This is where The Brick Wealth Ratio© comes in. It let's us know if our current lifestyle will allow us to become financially independent.
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