Personal Finance Musing 13: How to Become First Generation Millionaire?

PERSONAL FINANCE MUSING 13

 HOW TO BECOME A FIRST GENERATION MILLIONAIRE?

I will begin this post with my impassioned plea - please keep sharing these posts with your near and dear ones especially young adults, for these are a run up to my book, “Musings of a (financially) illiterate father”, likely to be in your hands next month. The book has been specially written to teach the alchemy of wealth creation and retention to our children. They deserve to learn it.

Is it a must that one has to be born with a silver spoon in order to become a millionaire (we are talking of U.S. dollar millionaires here) or this feat can be achieved by an average middle-class investor also within one generation? This question has been answered very succinctly in the brilliant book, ”The Millionaire Next Door” written by Thomas J. Stanley and William D. Danko, in 1996. The authors wrote this book after their extensive research on American millionaires spanning many years. The research brought out many surprising conclusions which we, as common middle-class persons, would do well to emulate, if we too wish to become a millionaire in one generation. Let me summarize the main points from the book to you- so, here we go.

1.      How does a Millionaire look?

“These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires—they don’t even have millionaire names. Where are the millionaires who look like millionaires?”

Whenever we think of millionaires, images of Vijay Mallya and Lalit Modi flashes before our eyes. The flashy, globetrotting, media and celebrity surrounded cool dudes who own Private Jets and go on vacations to exotic Caribbean Islands, with their extended family in tow, are to us, the quintessential millionaires. The nondescript middle-class person, who lives in our neighbourhood, minds his own business, drives a five-year-old Wagon R or such like car, dresses up in decent but tasteful clothes and goes on annual vacations in “India only”, can’t be a millionaire. Is that so? As per the authors, most of the American millionaires were actually found to be like our routine middle-class neighbours.

But then, how come they amassed such humungous amounts of wealth, that too within one generation i.e. without inheritance? Mostly, by living well within their means and minding their own business. Let’s elaborate.

2.      Common Traits of Millionaires

The buzzword in investing today is “equity investing” be it in individual stocks, equity mutual funds, index funds, ETF et al. It is considered as the sure and only road to riches. But what the authors discovered was contrary to this belief.

“Not at any time during the past thirty years have I found that the typical millionaire had more than 30 percent of his wealth invested in publicly traded stocks. More often it is in the low-to-mid-20-percent range.”

There is no contradiction in this finding though- all it means is that no matter what is your asset allocation, you have to stick with it through thick and thin. Over time, the magic of compounding will reward a disciplined investor. Secondly, these millionaires very rarely indulge in direct stock picking, investing in stocks via the mutual fund route was the preferred method.

Most of the millionaires (around two third) were self-employed though they consisted of only 20% of the population. Risk and Reward paradigm holds true here as well as in other aspects of life. Technology offers today the tools to become self-employed despite holding a regular job. People are earning handsomely through royalties of their intellectual property (books, songs etc.), blogging, and YouTube/Instagram activities. Think out of the box- the sky is the limit.

Nearly 97% of millionaires had their own homes and all lived well below their means. Nearly all wore inexpensive suits and drove old model cars. I have highlighted these points in detail earlier, please revisit the posts on Spending Investing (SI) balance and budgeting, posted on 08 and 14 Apr respectively. I am providing the links below.

https://andysfinancial.blogspot.com/2018/04/musing-6-si-balance-in-real-life.html

https://andysfinancial.blogspot.com/2018/04/musing-7-only-way-to-budget.html

In this book, authors have provided real-life examples of common middle-class persons who became millionaires following these basic tenets. To put a figure to their SI balance, all saved (read invested) between 15% and 20% of their earned income.

Nearly all had accumulated enough money to live without working for at least ten years. If we recall the posts on “Rich dad Poor dad”, it aligns well with the definition of “wealthy” as given by Robert Kiyosaki. Tongues firmly in cheek, the authors refer to this fund as “Go to Hell fund”. Wouldn’t it be liberating for us also to get this fund fastest so that we can pursue our passions in life without bothering about next paycheck?

All were very particular about the education of their children and grandchildren on which they spent heavily. However, please be notified that this expenditure was always well planned and catered for by prudent investing and was not met through education loans etc.

3.      What is being Wealthy?

"We do not define wealthy, affluent, or rich in terms of material possessions. Many people who display a high-consumption lifestyle have little or no investments, appreciable assets, income-producing assets, common stocks, bonds, private businesses, oil/gas rights, or timberland. Conversely, those people whom we define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle."

This startlingly obvious and yet ignored precept is worth its weight in gold. Our ancient saying of “Tete paon pasariye jeti lambi saur” or “cut your coat according to your cloth” seems to have been forgotten in our high consumption and showy lifestyle. If we have to accumulate our “go to hell fund” faster, we need to start with a “breathing fund” as a first step (we will cover this concept in later posts). We also need to eschew ostentatious lifestyles. What our neighbour drives, eats or wears should be none of our concern. We should have our own clear worldview and take all our actions accordingly.

The authors have defined wealth as one’s “net worth” which is the current value of one’s assets less liabilities (to clarify these terms you can go back to the post of “Rich dad Poor dad”, posted on 13 May. The link is provided below).

https://andysfinancial.blogspot.com/2018/05/personal-finance-musing-10-seven-key.html

 For this book, the authors studied the people with a net worth more than $ 1 million (approximately Rs 6.6-6.7 crore). Mind you, these people were millionaires more than twenty years back, when the purchasing power or value of Dollar was much greater. Their percentage was very small- only about 3.5% of the total American population and mostly all were first generation rich with modest backgrounds. The tenets to accumulate wealth which they followed must be scrupulously followed by us to achieve their financial outcomes, right? 

A very obvious question would be- is there a yardstick of wealth that one can derive from this wonderful research? Having such a yardstick will concretize the nebulous goal of “being wealthy”. Fortunately, there is one and will be covered in my very next post on 10 Jun 2018. Till then, enjoy your Sunday, you have earned it.