When you think of wealthy individuals, do you think of playboy heirs and vapid heiresses? Or perhaps slovenly lottery winners? People who just stumbled or lucked their way into wealth?
Maybe you picture self-indulgent tycoons, with eight cars and four homes spread across three continents?
Tom Corley makes a study of wealthy individuals, and how their habits differ from the average American’s. After five years studying and surveying thousands of millionaires, he compiled his results into a bestselling book, Rich Habits – The Daily Success Habits of Wealthy Individuals. His studies continue, and he regularly releases updated survey data.
While there are a handful of lazy heirs and lucky lottery winners out there, most wealthy people accumulated their own wealth, through hard work, frugality and financial discipline. Don’t believe me?
Nearly two-thirds of America’s billionaires are self-made. As for millionaires, even more are self-made: four-fifths to be exact. No trust fund, no extravagant inheritances, no silver spoon.
And lottery winners? Forget about it. A shocking 70% of major lottery winners go broke within three years.
Why is that? It’s simple: because sustainable wealth requires a state of mind, discipline, and habits to maintain. Here are seven of those habits of millionaires, that you can model to join their ranks!
1. Millionaires Own Real Estate
Well, this is a real estate investing and passive income blog, after all! Of course we started with real estate.
The overwhelming majority of millionaires own real estate, making it by far the most popular alternative asset class. A huge 35% of millionaires take it even further, investing in REITs such as Streitwise and Fundrise to layer on additional real estate classes, beyond their own home and investment properties.
Some estimates place the number even higher, asserting that as much as 90% of millionaires over the last two centuries have achieved their wealth in part due to real estate investments.
And as an industry, real estate has produced the third highest number of billionaires worldwide.
The rich believe in real estate investing. For good reason, too: real estate has delivered for them, in both the US and abroad, in today’s world and over the last several centuries.
2. …But Their Own Homes Are Modest
Throw out your preconceptions about mansions and sprawling estates. Almost two-thirds of US millionaires live in modest, middle-class homes.
Granted, the term “modest, middle-class home” leaves some room for interpretation. But these are generally 1,500-3,500 square-foot homes, in clean, safe neighborhoods with good school systems.
Housing is the highest monthly expense for most of us. Because most millionaires exercise such restraint with their housing costs, buying a much less expensive home than they can afford, they can funnel a higher portion of their income toward investments. Which is, of course, how they stay millionaires.
Some savvy souls even house hack to live for free!
3. They Live on a Firm Budget
The overwhelming majority of millionaires impose a strict budget on themselves.
Fancy dinners out, going to the movies all the time, frequent clothes shopping, monthly massages, weekly pedicures, buying the flashiest car you can and then replacing it every two years? This is what keeps middle class folks middle class, rather than rich. They’re not going anywhere fast, despite that flashy car.
Millionaires put themselves on a budget, with a high savings rate, which they turn around and invest. These investments in turn produce even more income, which they continuously reinvest, creating a virtuous cycle of wealth.
Don’t think of budgets as a restriction. Rather, imagine budgets as a blueprint to build wealth.
4. They Put Their Money to Work for Them
As we touched on above, budgets aren’t about denying yourself, they’re about creating that feedback loop to generate more income and wealth.
Think of each dollar that you invest as a little green worker that goes out and works directly for you, 24 hours/day, 7 days/week. Exhibit A: rental properties. You invest a down payment and closing costs, and then collect rent forever. That money you invested keeps working for you indefinitely, putting passive income in your pocket.
Look no further than Ashley and Kevin Thompson, who aggressively saved money for a few years, then started investing in rental properties. They now earn around $40,000/year in rental cash flow – enough to cover their expenses. They’ve reached financial independence.
A balanced portfolio includes equities as well, ideally with a mix of US and international funds, and a blend of a small-, mid-, and large-cap funds. Where rental properties create instant income, a healthy mix of mutual funds or ETFs balance risk and grow in value over time. The returns can compound, as dividends are reinvested.
Get as many little green workers out there in the world earning money for you as you can!
5. Millionaires Are Frugal (But Not Cheap)
Over two-thirds of millionaires admit to being frugal, per Tom Corley’s research. By contrast, roughly two-thirds of the poor admit to being cheap.
What’s the difference between frugal and cheap?
Being frugal means carefully watching spending, and paying the minimum amount for high-quality goods and services.
Being cheap means buying the cheapest product or service available, regardless of quality.
Here’s a quick personal example: I used to buy cheap flip flips. I’d go through a pair in a summer, then end up spending another $15 the next summer for a new pair.
One day my then-girlfriend (now wife) Katie and I were walking by a surf shop that had a 50%-off sale on Rainbow flip flops. She pulled me into the store and insisted I buy a pair of Rainbows. “Who the &%@$ spends $50 on a pair of flip flops?!” I spluttered. Katie replied calmly that 1) I wasn’t going to spend $50, I was going to spend $25, and 2) these flip flops will last me 8-10 years. I didn’t believe her, but I needed a new pair of flip flops so I bought them.
That was five years ago. I wear these flip flops every day, and they still have many years of life left in them.
The rich buy high-quality items at bargain prices. But they don’t buy for the sake of buying, they don’t shop for fun – they buy what they need.
Would you guess that any millionaires buy clothes at Goodwill? It turns out that nearly one in ten millionaires shop there. Who’d have thunk?
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6. They Buy Used Cars
Nearly half of US millionaires only ever buy used cars. Of the remaining 56%, most buy used or new cars depending on the circumstances, but they recognize the inherent loss when buying a new car.
Depreciation is the largest single cost associated with buying a new car. Within the 60 seconds it takes to drive out of the lot, an average new car loses 11% of its value. After a year, new cars lose 25% of their value on average. That figure rises to 45% by the third year.
Why do people pay such an absurd premium for new cars? Is a new car 25% faster, safer, or more reliable than a one-year-old car? No, of course not. People buy new cars for emotional reasons, not for rational ones. They like the idea of being the only person to have ever sat in the driver’s seat. They like the new car smell. Among the less irrational reasons, buying a new car offers the peace of mind of knowing the car wasn’t abused by some redneck who loved drag racing.
But if the average new car sells for $33,560, are these reasons worth blowing $8,390 to buy the car new versus a one-year-old car?
Many millionaires think not.
7. They Get the Last Laugh with Credit Cards
Credit card companies make their best money on interest. Sure, they make 1.5-3% in transaction fees that they charge retailers, but they make 18-24% interest when cardholders fail to pay in full at the end of each month.
Which is precisely why millionaires always, always pay in full each month.
According to Tom Corley’s research, 81% of millionaires utilize reward-heavy credit cards, and then turn around and pay them in full before the end of each month.
Are you the windshield, or are you the bug? Fiscal discipline helps ensure that you remain the windshield, and nowhere more obviously than with credit card usage.
Millionaires vs. the Rat Race
“What’s the most I can afford?” is a middle-class rat race question. Instead, ask yourself “What’s the least I can budget for this expense and still be happy?”
Do you have to drive Lexus, or will a Toyota suffice? After all, they’re the same manufacturer; Lexus is just the brand that Toyota uses to add some imaginary glamour so they can charge more for cars with the same engine.
You can truly get on track to escape the rat race when you start living on half your income and investing the rest. But if that’s too austere for you, just start by looking at your home, car, and food costs, and asking “What’s the least I can budget for this expense and still be happy?”
You might be surprised at how happy you can be in a slightly smaller house, with less yard to mow. And you’ll certainly reach financial independence faster, which is enough to make anyone pretty happy.
What tactics do you use to slim your spending and boost your investments? What’s your plan for reaching financial independence?