Author of The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, Stanley has studied the wealthy in the USA for more than three decades.
A fancy address means a fancy house, a fancy car, a fancy garage, fancy neighbours, fancy dinners in your fancy dining room – and so on, he says. Ultimately, you spend more and save less.
“Society expects people with a high level of qualification to maintain a certain status in life,” explains Paul Leonard, an executive director of Consolidated Financial Planning.
Ego is the biggest obstacle, he insists; pressure to “keep up with the Joneses” is the root cause of a host of poor financial decisions.
“My experience is that non-professionals are less arrogant and more open to advice. They are far more comfortable driving a bakkie or modest sedan and living in a middle-class rather than upper-middle class area,” Leonard said.
Interestingly, the Alexander Forbes Benefits Barometer, which surveyed hundreds of thousands of retirement fund members, found “professionals” were among the most educated and financially literate, but saved the least.
How wealthy should you be?
Leonard draws a distinction between people who are income affluent and those who are balance-sheet affluent.
“Earning a good few million rand a year does not necessarily mean that your investment assets are substantial,” he said.
Stanley calls people with balance-sheet affluence Prodigious Accumulators of Wealth (PAW).
An Average Accumulator of Wealth’s (AAW) investment assets are equal to their gross annual income divided by 10, multiplied by their age.
The investment assets of PAWs would be equal to double or more that number, while the assets of Under Accumulators of Wealth (UAW) are equal to half or less.
PAWs do four things well:
1. Earn enough income. They manage their careers to maximise income-generating capacity. “A qualification doesn’t guarantee success, it’s a ticket into the game;” he said.
2. Spend less than you earn. According to Leonard, only 30% of your ability to accumulate wealth is attributable to what you earn. The rest is dependent on your ability to save. “If people say they can’t save, they are spending too much on their lifestyle.
3. Put your money to work. A good example would be maximising pre-tax benefits, such as contributions to a retirement annuity. Ensure that what you save grows at a good margin above inflation.
4. Protect your current financial position. Take out an income protection policy, disability insurance, critical illness cover and medical aid. “Life insurance closes the gap between what you’ve managed to save and what you would need in order to fulfill your financial responsibility to your dependents,” noted Leonard.
Your lifestyle should balance what you need to save to maintain that lifestyle, as well as what you need to spend to protect that lifestyle, he stressed.
“If you earn R100 a month, your lifestyle cannot cost R100,” Leonard said.