In my Rich Habits Study I interviewed 233 wealthy individuals over an almost five-year period. I used a two-part test to help me qualify my wealthy subjects:
- Net Liquid Assets of $3.2 million or more AND
- Gross Income of $160,000 or more.
But, the truth is you can be “wealthy” and not actually meet either of my two tests.
How do you live a wealthy life without actually being wealthy?
Those who are truly “wealthy” are individuals who do not need to work in order to meet their standard of living.
The important point here is that being “wealthy” means the passive income stream from your Net Investable Assets, after you pay your taxes, is more than enough to meet all of the costs that fund your standard of living.
The key to living a wealthy life, therefore, hinges on creating a standard of living that is acceptable to you. Put another way, doing what you want to do and meeting your living expenses represents your acceptable standard of living.
In order for that to happen, you must forge the Smart Money Habit of being frugal in how you spend your money.
People often confuse being frugal with being cheap. There’s a huge difference.
Let me give you an example.
Cornelius Vanderbilt, the richest man in the world in the late 1800’s, controlled much of America’s transportation in two sectors – the steamships and the railroads. He was revered for his ability to minimize costs. His attention to financial details was unsurpassed during his reign. For example, when he took over the New York Central Railroad, one of the first things he did was remove all of the brass from all of the trains. This cost him a lot of money in removing all of the brass from his rail cars. People thought he was crazy.
Why did he do it?
Brass needed to be polished every day. No brass meant no more need to pay people to polish it every day. Eliminating the expense of polishing the brass far and away exceeded the cost of its removal, saving his railroad companies an enormous amount of money in the long run.
Cornelius Vanderbilt was frugal.
Frugal and cheap have nothing in common. Frugal spending means buying the highest quality product or service, at the lowest price. Cheap spending means buying the cheapest product or service, with little to no regard for quality. Cheap spending is a Poor Money Habit because you ignore quality and, instead, wind up purchasing cheap, poor quality products or services.
Cheap products break down after just a few years, forcing you to replace those products over and over again.
Cheap services are typically provided by those who are either inexperienced in their field, or who are not very good at what they do. This lack of experience or lack of competence can result in mistakes that cost you money down the road.
The costs of cheap spending are one of those taxes the non-wealthy pay that the wealthy don’t pay.
On its own, being frugal will not make you rich. It is just one piece to the Rich Habits puzzle, and there are many pieces. Frugal Spending will enable you to increase the amount of money you can save. The more you are able to save, the more you’ll have to invest. Forging the savings Rich Habit gives you the ability to invest those savings.