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Forty-Nine percent of the Self-Made Millionaires in my Rich Habits Study were what I call Saver-Investors. These are mostly middle-class individuals who do not earn a lot of money but who, despite their limited earnings, consistently save and prudently invest 20% or more of those limited earnings. The average Saver-Investor accumulated $3,260,000 in wealth over an average of 32 years.
How were these Saver-Investor Millionaires able to set aside 20% or more of their earnings?
In short, they were frugal and created a Standard of Living that they could fund with 80% or less of the W-2 Net Earnings.
Frugal does not mean being cheap. Frugal means spending money wisely. It means buying high-quality products or services at bargain prices. Looking for value and quality at the lowest possible price makes you frugal.
In creating that Frugal Standard of Living, they did certain things to keep their living expenses down. Here is a sampling of those things from my research and my Rich Habits Books:
- 8% shopped for clothing and baby needs at Goodwill-Type stores
- 37% used coupons regularly
- 64% lived in a modest, middle-class home
- 28% mowed their own lawn to save money
- 44% only purchased high-quality used cars. Typically, these were cars coming off two or three year leases. According to Kelly Blue Book, new cars lose as much as 25-30% of their value in the first two years. That’s a big discount for a quality vehicle purchase.
- 19% managed their investments themselves – they did not use financial advisors in order to save money
- 41% never spent more than $3,000 on a vacation
- 16%,chose credit unions over traditional banks. Why? They were frugal and credit unions, to them, offered superior personalized service at a bargain price. They liked the fact that the banking personnel seemed more committed to helping them with their banking needs, that there was little turnover and this meant they were able to develop long-term relationships with the tellers and bankers. Seeing the same faces, year after year, was comforting. Relationships, after all, are the currency of the wealthy.
- Be Frugal, not cheap – 66% of the poor in my Rich Habits Study admitted to being cheap. Cheap to the poor meant spending their money on the cheapest product or service available. Being cheap is a Poor Habit because quality is very rarely given any consideration at all. They need X, so they look for the cheapest X they can find. Being cheap is one of those taxes the poor pay that the rich don’t. Cheap products break or deteriorate at a much quicker rate than quality products. Quality products can last for a lifetime or more. Those offering cheap services are often inexperienced or not very good at what they do. If they were good, they would be able to command higher prices. Cheap service providers can get you in a lot of trouble, especially when it comes to taxes, legal representation or even just getting your car fixed. Cheap service providers are able to keep their fees down by paying their staff lower wages. This means they are not getting the best staff or are settling for inexperienced staff. Being frugal will not make you rich, but it does mean you will keep more of your money as your purchases are driven by quality and secondarily by price. Being cheap will not make your poor, but it does mean you will keep less of your money due to the low quality you receive in exchange for your money.
- Don’t spend more than 25% of your monthly net pay on housing. It doesn’t matter if you own or rent. Stick to this 25% rule.
- Don’t spend more than 15% of your net monthly pay on food.
- Don’t spend more than 10% of your monthly net pay on entertainment. This includes bars, movies, restaurants and gambling.
- Don’t spend more than 5% of your monthly net pay on auto loans and never lease. Leasing is a Poor Habit. Buy your cars and take good care of them.
- Don’t spend more than 5% of your net annual pay on vacations.
- Never gamble. If you’re going to gamble on the lottery, it comes out of your entertainment budget.
- Stay away from accumulating credit card debt. If you are using credit cards to survive, it means you are living beyond your means and you need to cut back on something.
- Max out your contributions to company retirement plans. If the company matches your contributions, great. That’s free money. Always take free money when you can get it.
- Know what you spend every month. Create a monthly budget and track what you spend.
How to maintain your Standard of Living?
- Avoid Want Spending – Want Spenders spend more money than they make to fund their Wants, Want spenders incur debt in order to finance a Standard of Living they cannot afford
- Avoid Lifestyle Creep – Definition of Lifestyle Creep – Increasing your standard of living in order to match your increased income. It’s a common Poor Habit among many who suddenly find themselves making more money. The Rich Habit is to forgo the desire to spend your money today, and instead, sock it away into savings and investments that grow in value and provide financial resources that can be used in the future to maintain your standard of living. Once you spend your money, it’s gone. When you hit a bump in the road, such as a job loss, you are then forced to sell your stuff. If the stuff you purchased depreciated in value, you get pennies on the dollar. One of my older CPA friends explained to me his rule for financial success – “Same house, same spouse, same car.” There’s a lot of wisdom in these words. What they really mean is that no matter what good fortune visits you in life, do not change your standard of living. Don’t supersize your life by buying things you really do not need. Live a modest life and forge the Rich Habit of Delayed Gratification – putting off what you want today so that you can have something to fall back on in the future.
- Make Your Money Invisible – Open up a savings account. Every time you get paid, immediately move a specific amount of your net pay into the savings account. Then, consistently and immediately invest those savings. This will force you to spend only what you have in your main checking account.
- Engage in Smart Spending – Buying in bulk can be enormously less expensive. Plan your meals in advance for the week. Reduce energy costs. CFLs or LED lights can save you money on your utility bills plus LEDs last roughly 25 times longer than incandescent bulbs. Even while they’re turned off, plugged in electronics continue to pull energy. To stop the drain, plug your TVs, computers, and other devices into power strips that can be easily unplugged when not in use. Cut back on water usage by taking shorter showers, washing only full loads of laundry, and using your dishwasher if you have one — doing dishes the old-fashioned way can use 6 to 12 gallons of water.
- Avoid Spendthrift Friends – One of the hallmarks of the Saver-Investor millionaires in my Rich Habits Study was the conscious effort they made to associate with like-minded individuals. If a close relationship was a spendthrift, they avoided them like the plague. If a close relationship was conscientious with their money, they increased the amount of time they spent with them. If you want to adopt good money habits, you need to associate with individuals who possess those smart money habits and you need to disassociate yourself from those who have poor spending habits. If all of the close associations you make in life share your desire to live below your means, it is highly probable their smart money habits will become your smart money habits.
- Marry Well – Find a spouse who shares your money mindset and smart money habits. When both spouses are on the same page when it comes to money, you function as a very efficient team when it comes to saving money, spending money and investing money.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
