Mapping Out Your Real Situation
If you want to build true wealth, you have to start at the beginning — by splashing your face with the cold water that is your financial reality. You cannot improve your situation if you don't first assess what you have to work with and what is working against you. It's essential to know exactly how much is coming in and how much is going out.
Money coming in means what you bring home after taxes, not your gross salary. Everyone likes to quote the higher before-tax number as income, but that's not realistic. “Money in” means money that you have to pay for your living expenses, to spend on luxuries, to fund your dreams, and to save.
Once you know what you really have to work with, it's important to create a household budget that will accurately reflect your monthly expenses, making sure that you have covered all of the following:
Fixed expenses
Flexible expenses
Expendable purchases or expenses
Seasonal fluctuations
Hidden costs (mini-vacations, gifts, car licensing)
Then take it a step further and literally keep an expense log. For one month, religiously write down absolutely everything your spend money on, right down a cup of plain coffee at Starbucks, popcorn at the movies, the lollipops you bought for the kids at the mall, and the bottle of nail polish you rushed to buy before your last date. You want to know exactly how much money is flowing out of your pocket so that you can plug up the drains. Here are your goals:
Identify absolute necessities.
Identify disposable excess.
Identify unconscious or reflexive spending.
Write all of this down in cold, hard, unforgiving black and white. Even if the numbers look oppressive, by the time you've worked through this chapter, you'll see opportunities for vast improvement. You can build wealth, and we're going to show you the basic steps that will get your journey underway.
Fact
The majority of American millionaires are self-made. In 2006, of the more than 8.9 million millionaires, around 2 percent inherited their wealth, and fewer than 20 percent inherited only a small portion of their wealth. Holding onto wealth is also a learned skill — studies have shown that 80 percent of people who win the lottery are bankrupt within five years.
Living Within Your Means
First and foremost, you have to live within your means. According to Stacy Johnson, author of Life or Debt, becoming wealthy has nothing whatsoever to do with income or investment knowledge. Accumulating wealth comes from avoiding debt, living below your means, and investing sensibly and consistently. Indeed, says Johnson, “becoming financially independent isn't really a function of how much money you make; it's far more often a function of how little money you spend.”
Contrary to what you might imagine, most millionaires don't live an opulent lifestyle. They don't wear flashy clothes or buy flashy cars. Those who chase the image of status are usually people who try to sell things to rich people but aren't rich themselves.
In fact, consider these interesting, and perhaps eye opening, statistics on American millionaires taken from Richard Paul Evans's book The Five Lessons a Millionaire Taught Me About Life and Wealth:
The median income for American millionaires is $131,000.
97 percent own their own homes.
The average value of their houses is $320,000.
About half have lived in the same house for 20 years or more.
Fewer than one in four millionaires owns a new car.
Fewer than one in five leases a car.
The average price they paid for a car is slightly less than $25,000.
For more than a third, their most recent purchase was a used car.
Only 6.4 percent drove a Mercedes or a Lexus. Less than 3 percent drive a Jaguar.
60 percent drive an American-made car.
50 percent never paid more than $400 for a suit in their lives, for themselves or anyone else.
About half never paid more than $140 for a pair of shoes.
Spending Wisely — Becoming a Smart Consumer
Millionaires have instincts and habits that generate and sustain wealth. Those hoping to accumulate wealth understand that carefully considering all expenditures is one of the fastest ways to save money. They understand that freedom and power are superior to momentary pleasure. They do not equate spending with happiness, and given the opportunity to spend or save, they take the greater pleasure in saving. If you want to join their ranks, ask yourself some basic questions before you buy virtually anything:
Is this item or service I'm buying really necessary? Can I achieve the same effect, take care of the same need, or fulfill the same desire for zero money?
Can I purchase this item or service at a discount? Never be afraid to ask merchants or service providers for discounts — if they are offering you the lowest possible price, and if they match the lowest prices available. Often, merchants, car dealers, computer stores, and even real estate agents will drop the price to make the sale.
Is this expenditure adding to my wealth or detracting from it? Buying houses rather than cars that depreciate is an example of this principle.
Make it a habit to never buy anything without giving serious thought about whether you really, really want it. Then, shop around for the best price, and if you cannot make a deal that fits in with your goals, walk away. If you have enough money, and it's something you really want, just make sure you absolutely love whatever you're buying and make sure that you'll continue to love it, or profit from it, for at least as long as it takes to pay for it.
