What’s Your Financial Mindset
|March 10, 2010||Posted by Roshawn Watson under Uncategorized|
Good Fiscal Management
The habit of prudent fiscal management can have far-reaching implications. Consider that more than one-third of all millionaires obtain their wealth through businesses that they own. Business ownership increases your odds of joining the millionaire ranks by 5 fold. Unfortunately, there are risks as well, which is one reason why managing your money well is so critical. In the same way you look for deals for your household, you can search for good deals on products that you can later resale to consumers for a profit. The behavior of hunting for deals can also influence your investing. For example, if you are a value investor, you routinely are looking for stocks that trade for below their intrinsic value. In other words, you are looking for a deal. Most millionaires invest nearly 20% of their income. Consequently, in addition to living on less than they make, they are constantly building new wealth through investing. Additionally, the principle of good fiscal management would prevent one from over-spending on a home. Millionaires have more than six and one-half times the level of wealth of their non-millionaire neighbors, and these non-millionaire neighbors outnumber them three to one. Note that home equity represents just 10% of millionaires’ total assets according to research firm TNS. In other words, buying big or expensive homes before you can truly afford them is just so middle-class. Most millionaires do not own a Crib’s-worthy house. Moreover, if you are a millionaire and do not understand money management, then your wealth may deteriorate. Consider former rap mogul Suge Knight who has a tax lien of $6,578,696.31 from 1996 but a present income of only $1200 per month.
Millionaires do not feel wealthy
You may be wondering why would millionaires be more cautious with their finances when their net worth dwarfs those of most American families. If you have this question, blame Hollywood.
Hollywood sells glamour and wealth to convince us of its relevance and power. Consider shows devoted to this, such as Selling New York on HGTV, Million Dollar Listings on Bravo, and the now defunct High Net Worth formerly on CNBC. These shows all promote the hypothesis that millionaires are so different from us. However, many pop culture depictions of millionaires are misleading because they ignore the fact that most millionaires are frugal. For instance, the media wouldn’t show a millionaire clipping coupons because that doesn’t typically make for good TV, yet many do. Selling this faux image of how the wealthy live is also about influence. If you buy those designer jeans because you saw them on some celebrity, then you may feel rich even though you are indeed getting poorer.
It is also easy to see how we were sold false premises about wealth. Wealth is relative to your context and environment, and when one is relatively broke (little to no net worth), it is easy to believe that a million is a fortune. When you are broke, it is…to you. It is unsurprising that 46% of millionaires don’t feel rich according to Fidelity. When you are worth a million, you become acutely aware of its limitations. A million is not what it use to be. For example, one would need $2.9 million in today’s dollars to have the same purchasing power as $1 million three decades ago. No wonder India Arie sung a million didn’t make me happy.
Don’t assume that materialism is a common thread amongst most of the wealthy, as there is much evidence showing that most millionaires are rather frugal. What’s is important is knowing how to spot a deal. Just make sure that deals that you are looking for make you wealthy in addition to saving you a couple dollars. Happy shopping.
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Image Credit: Gnerk
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.