I don’t know whom to blame more for the poor image millionaires have in this country: Scrooge McDuck or Rich Uncle Pennybags. Maybe both are to blame in equal measure. Either way, when Americans think “millionaire” they think of swimming pools filled with gold bullion or cars racing around Park Avenue with money flying out the window. This is the wrong way to look at wealth. Fortunately, most actual millionaires know this. For many, their wealth is the product of extreme thrift and financial discipline. Any individual aspiring to great wealth needs to ‘get in the mind of a millionaire’ and learn not only how to amass a great fortune but also how to keep it.
Did you know Sam Walton, the founder of Wal-mart, drove the same old pickup truck his entire life? Or that Warren Buffett still lives in the same house he purchased in 1958 for $31,500? Most wealthy people exercise extraordinary thrift, which is the principle behind Thomas Stanley’s “The Millionaire Next Door.” You could not identify most millionaires by their appearance or profligate spending habits because, if they behaved in such a way, they would not be millionaires for long! Wealthy people do not just earn money but save it, which is why the aphorism “a penny saved is a penny earned” is wisdom of the highest order.
Most wealthy people have mastered the art of having their money work for them. They abhor wasteful spending—on fancy clothes, large mansions, and other frivolities—but they are not opposed to debt, either. They abhor useless debt, such as credit card or student loan debt, but many will use debt to make more money, with the idea being that they can use a given amount of money to earn more from it than the lender charges in interest.
Sam Walton, for example, used his highly efficient supply chain to make debt work for him. He could turn over his entire inventory in three days, but would only have to pay his vendors every 30 days. He used this fact to grow his inventory exponentially, earning his return on several generations of inventory before he had to pay his vendor for even one!
Similarly, many wealthy people will leverage their homes or other assets, even though they could purchase those homes outright for cash. Instead of owning a home free-and-clear, they will take out a mortgage on it for, say, $250,000. They can then invest that $250,000 to make 8-10% returns or more on some other investment, while the mortgage debt only costs 3-4% per year in interest. This is a smart application of debt. Of course, most people should start on a smaller scale and resist the temptation to cash-out their entire house and shove the proceeds into the stock market.
Images of Scrooge McDuck diving into a pool of gold coins gives people the wrong impression of wealth. It is not a fun and frivolous enterprise. Wealth demands extraordinary discipline and a dedication to thrift, both to earn it and to keep it. Short of winning the lottery, you cannot hope to become a millionaire without first thinking like one. This will be a continuing theme of this show, so be sure to stay tuned for tips and examples of the lost art of thrift.
2-14-15 Get in the Mind of a Millionaire