Did you know there are six factors, or personality traits, that will make you more likely to build and retain wealth over time? Don’t worry; if you weren’t born with them, you can develop them.
Sarah Stanley Fallaw, daughter of Thomas Stanley, and whom I’ve written about here, has continued her father’s work of surveying millionaires in the book The Next Millionaire Next Door. The idea is to locate individuals or families who have assets of $1 million or above, and survey them about their habits, expenses, and values.
The results of the surveys she and her father have undertaken have led Fallaw to conclude that there are six key factors to assist millionaires in wealth building. Here they are, copied from Business Insider:
- Frugality, or a commitment to saving, spending less, and sticking to a budget
- Confidence in financial management, investing, and household leadership
- Responsibility, which involves accepting your role in financial outcomes and believing that luck plays little role
- Planning, or setting goals for your financial future
- Focus on seeing tasks through to their completion without being distracted
- Social indifference, or not succumbing to social pressure to buy the latest thing
Let’s break these factors down a little more to understand what it takes to build wealth.
“It is great wealth to a soul to live frugally with a contented mind.” Lucretius
Of all the factors that influence your ability to build wealth, frugality may be the most important. As I wrote about here, spending less than you earn and investing the difference is the *key* to building wealth.
While a high income certainly helps, frugality is such a magic tool that there are many stories of low-paid individuals like janitors or parking attendants who squirrel away money over the course of a long career and save substantial amounts over the course of their long frugal lives.
The problem with frugality is that it’s hard. If you’re not frugal, like me or Tanja Hesteror lots of others who have trouble with spending, then you may relate to the fact that continuously not spending money is much more difficult than it sounds.
What many of us have learned, though, is that despite the fact that we’re not particularly good at spending less than we earn, we still have to do it if we want financial independence. So we’ve studied, practiced, and found ways to trick ourselves into spending less.
One of the most successful ways Mr. ThreeYear and I have found is artificial scarcity. We max out Mr. ThreeYear’s 401K and HSA, automatically send money to college savings, bank our raises, pay extra on our mortgage, and dozens of other tricks to give ourselves less money in our checking account to spend.
How about you? On a scale of 1 (Not Frugal at All) to 5 (I can all my own food and haven’t seen the inside of a retail store in years), how would you rate your frugality? ___
“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.” Helen Keller
How confident are you in the second part of building wealth, investing your money? Additionally, how confident are you in managing your household budget, making decisions about your health care plan and insurance, or setting up a will?
Fallaw has shown, time and again, that households with a large net worth generally have one individual who acts as CFO, handling financial decisions, investments, and other money-related decisions. Since the vast majority of the millionaires she surveys are married, this tends to be the spouse with the less-demanding job.
In our house, I manage almost all of the financial decisions. Over the years, as I’ve learned more, I’ve developed a lot of confidence in my ability to make good decisions with our money. In fact, I feel much more confident in my ability to invest than I do a financial planner’s. Why? I have studied so much about investing and care more about our nest egg than any financial planner I’ve met and I don’t have to make a living with someone else’s wealth.
If you’re not very confident with money, and prefer to leave everything to a financial planner, or someone who knows better, may I recommend what I’ve recommended for several family members and friends? Call up Vanguard, a company with uber low fees and great customer service, and ask them about setting up an index fund, either taxable or non-taxable (for retirement).
Sometimes, the first step is the hardest with getting your own accounts set up, so if you can navigate this hurdle (which can be time-consuming, especially if you need to transfer your accounts from a brokerage firm), you’ll feel much more confident in your ability to invest your own money.
Okay, on a scale of 1 (My knees shake when I think about investing) to 5 (I have a three-pronged Vanguard strategy for my four different investment accounts), how would you rate your confidence? ___
“You must take personal responsibility. You cannot change the circumstances, the seasons, or the wind, but you can change yourself.” Jim Rohn
One of the most powerful lessons I’ve ever internalized came from a motivational speaker by the name of Jack Canfield. Of Chicken Soup for the Soul fame, Canfield wrote several self-help books in the 1990s that I devoured.
And his very first lesson was, “Take 100% responsibility for your own life.”
Look, things may happen to you that are spectacularly unfair. You can’t always control what happens to you. But you can control your reaction.
For me, this meant accepting, in a profound way, that I was an idiot with money, as I sat on the floor of the Barnes & Noble on July 4th, 2008, and realized we had to get rid of our debt. It meant facing the fact that my past actions had put us in the spot we were in currently. I didn’t blame Mr. ThreeYear (because it wasn’t his fault); instead, I blamed myself for demanding we live a life we couldn’t afford, for not realizing how detrimental debt was.
The somewhat un-intuitive benefit of taking responsibility for your own life is that you feel empowered in a way that you don’t when you blame others for your circumstances. I remember thinking,”Okay, so I’ve completely messed up and have to get out of debt. I’ve been an idiot in the past, but from now on, I know what to do and I’m going to do it.”
The millionaires that Fallaw have studied seem to have this trait in droves. They know that they, and only they, are responsible for building wealth. They don’t wait for inheritance (most millionaire families she studied have received either a small inheritance or nothing at all), they don’t wait for the perfect job to land in their laps. They systematically go to work setting goals and reaching them. Which leads me to Wealth Factor Number 4…
How’s your Responsibility? Are you closer to 1 (it really is not my fault that my life looks this way) to 5 (I’ve mastered the way I respond to the things that happen to me so they work to my favor), how would you rate your feelings of responsibility? ___
“Begin with the end in mind.” Stephen Covey
If you don’t know where you’re going, how can you get there? Many millionaires that Fallaw studied had a clear vision for where they’d end up at the end of their careers. Even if they didn’t see the specifics of how they’d get there, they understood the importance of setting goals, both long-term and short-term, and systematically achieving them.
Although life will inevitably throw you roadblocks and unexpected twists and turns, having a plan for what you want means you’re able to focus your efforts on those actions that will give you the biggest return on your time.
If your goal is to be a millionaire by the time you’re forty (or thirty, or fifty, or whatever), then you can spend your spare time studying investing, participating in forums or subreddits, asking questions, reading books.
If you know that increasing your salary or owning your own business is important, you can begin to take steps that will eventually lead you to make more money or buy a franchise.
Alternatively, if you have no idea where you’re going, and no real idea where you want, then you might end up where you’d like in life, or you might drift along, responding to the things that happen to you.
Mr. ThreeYear and I made a plan to become location independent almost three years ago, despite the fact that we had no idea how it would happen. Just a year and a half after we set the goal and I began writing about it, we became location independent, moved to North Carolina, and have remote jobs. He’s currently in Santiago, visiting his family, and working remotely. I’m almost certain that without this plan, we wouldn’t be where we are today.
How good are you at planning? Are you more a 1 (just hanging out, seeing where life takes me) to 5 (I have a 1 year, 5, year, 10, year, and 30 year plan), how would you rate your ability to plan? ___
Unfortunately, wealth building is a long game. A long, boring game. Even people who get rich quick are likely to lose their newfound money. Which seems to show that acquiring wealth is partially such a long game because it takes time to learn to manage a lot of money.
Mr. ThreeYear and I still struggle with windfalls. When we sold our house last summer and suddenly had a lot of cash, we spent way too much. We do better when we increase our net worth slowly, over time.
That’s where focus comes in. Because it takes so long to build a large net worth, you have to be focused. If you aren’t, then you’ll lose steam and give up a pursuit of financial independence for another low-hanging fruit that catches your eye.
Alternatively, if you can bring yourself back to your goals, remind yourself of your resolutions, over and over again, and cast off distractions or say no to things that aren’t a part of your goal, like that shiny new patio set you passed in Lowe’s, then you’re going to be able to build wealth much more successfully than someone who doesn’t have as much focus.
How’s your ability to be focused? Are you more a 1 (I already stopped reading this) to 5 (Nothing will distract me from my pursuit of FI, nothing!), how would you rate your focus? ___
Of all the factors of wealth, I am weakest in social indifference. I am socially different, I am. 🙂 I care way too much what others think and I always have. I don’t care what individual others think, mind you. I’m more concerned about society at large. And that’s problematic.
But, just like frugality, I have worked on this quality, because I want to be wealthy more than I want to fit into society.
If you want to build wealth, then there are certain behaviors in which you will have to engage that are sort of weird. You may adopt spending habits that seem at odds with your friends’ and they may question you about them. People may comment on your choice of house and wonder why you don’t live somewhere bigger or nicer (that happened to us several times when we lived in our house in Atlanta).
Friends may encourage you to eat out more than you want. They may wonder why your kids aren’t involved in one or two travel sports teams.
We have neighbors who own a Porsche SUV, a BMW X5, and a Maserati. They give us the weirdest looks all the time, when we’re out washing our beloved Prius or old-school Pilot. When we’re doing our own yard work. They thought we were renters when we moved in the house because I guess we didn’t look like legit home owners.
We laugh in our heads at their reactions, because what they think of our lifestyle doesn’t bother us. I’ve heard my poor neighbor fret to another neighbor because she put a slight scratch on her BMW, and worried that her husband was going to freak out. I’m grateful my husband merely shook his head with resignation when I brought the Prius home with yet another (serious) set of scratches after a run-in with the curb.
One truth I’ve learned over the years is that these loose connections that surround us don’t mean anything. If we move or our neighbors move, we’ll never see them or care about them again. Keeping the long-game in mind (the health and happiness of our family, our financial independence, our love of travel and adventure) has helped us weather weird looks and shocked inquiries.
When I do let what other people think get to my head, I just take a step back and recalibrate with my frugal friends, and they usually set me straight really fast.
How’s your ability to be socially indifferent? Are you more a 1 (I aspire to be the Joneses) to 5 (I live in a trailer, I never cut my hair, and I’m a multi-millionaire), how would you rate your social indifference? ___
Okay, take a second to add up your score. How’d you do? I’m not going to give you crazy scales, but if you scored less than 15, or gave yourself a 2 or less in any category, you may want to bulk up on some training or resolutions in that area of your life.
I ranked myself a 24.5 of 30. Pretty solid, with room for improvement, especially in the areas of Social Indifference (3) and Frugality (2.5).
Let me know how you did in the comments!