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Misconceptions About Wealth

February 8, 2010 By 6 Comments

How The Marketing Industry Continues to Convince Average Americans They Know What a Millionaire Looks Like

Pinot Grigio White Wine

The average American millionaire owns less than 6 bottles of wine in his or her home, and paid $13.09 to $14.54 or less for each bottle. They shop at stores like Costco, Target, and Wal-Mart.

A few days ago, I quoted something from one of Dr. Thomas J. Stanley’s books: “In the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more.” For the past few days, I’ve been studying more about average household income in the United States and, specifically, the purchasing habits of the wealthiest Americans.  It is exactly what I’ve experienced in my own life, and fits precisely with those I know.  Yet, so many of my friends and family continue, almost obstinately, to attempt to emulate a certain “lifestyle” by building a bigger house or buying a nicer car, without first getting their financial foundation set.

Most Millionaires Never Made More than $80,000 in Annual Income

A perfect example: I see friends in New York order Grey Goose vodka, which Stanley discusses in his book.  Chemically, it is virtually identical to every other vodka brand because almost all vodka companies use a “base” from one of three suppliers (with Archer-Daniels-Midland being the largest), with the base shipped in giant tanker trucks across the highways, or in railroad cars.  So, for all intents and purposes, “the Goose” is identical to Smirnoff.  Put plainly, that $60 bottle you  use to signal that you are wealthy when, in fact, you are broke and have credit card debt?  It wasn’t that long ago it was sitting in the back of a chain-smoking truck drivers’ cab at a dirty rest stop in the middle of Nebraska.

Buying the luxury items does not make you a success.  The success comes from having lots of cash coming in, little debt, and the ability to be financially free so you can take control of your own life and spend time how you want with your family and friends. You are not a success because you wear Chanel glasses.  They actually get you further away from your goal.  You are a success if you have the cash to pay for the Chanel glasses using dividends, interest income, and profits from your investment holdings.  The difference is like a war hero.  It’s against the law to wear medals you didn’t earn in combat (seriously).  In the economic world, however, you can fake it by purchasing the “badges” even if you do it on credit at 30% interest and haven’t earned them.  Prada, Gucci, Montblanc, Grey Goose, Burberry … it doesn’t matter.  If you are financially independent, these are legitimate, wonderful ways to award yourself.  I actually own $200 Burberry ties and $1,200 Montblanc pens.  The point is, those things came long after I had built my first business and was on to my second and third, my retirement accounts were funded, my taxes were paid, and I had money saved for an emergency.

Sometimes, I seriously ask myself why I’ve written more than 10,000 articles on investing, saving, and wealth management over the past 10 years.  Doing so has consumed a huge part of my life and, although I’ve made a nice chunk of change in royalties and advertising revenue sharing, there are better uses for my time.  And then, something like this keeps me up – it’s 5:02 a.m. now – because I can’t stop thinking about how I wish that I knew this stuff when I first started out on my own.  I’m putting this all out there so that someone, somewhere, will see that it is possible and that most of the stuff you see on the news or in magazines about the wealthy is a lie.  I do it for the same reason I plan on someday wrapping my holdings up in a single investment vehicle and letting friends and family buy shares – I know how good it is to wake up in the morning and decide how you’re going to spend your day.  I want you to have that same freedom because it is wonderful and we live in the greatest country in the world, judging by our opportunity to create our own destiny relative to the historical alternatives.

How to Know Someone Is an Idiot (It’s Not About the Money!)

The argument that infuriates me more than any other, and lets me know that I’m dealing with an idiot, is when someone says, “I don’t care about the money.”  You know what?  Neither do I! I care about having control over my life and not being subject to someone else’s arbitrary decisions.  I care about having money to give to charity.  I care about knowing if something happened to my family, I could support them.  I care about knowing that through the operating businesses, we create jobs so that people feed their family and save for retirement.  I love knowing these things.

Whether you are a composer, a computer programmer, a school teacher, or a social worker, if you don’t retire wealthy, it is your fault and your fault alone. Hell, an 18 year old saving $300 per month until he’s Warren Buffett’s age at 10% compounded would end up with more than $12 million. That’s why I started working on this when I was 10 years old!  It’s.  Just.  Not.  That.  Hard.  (Note: There is one notable exception: A health crisis.  More innocent people declare bankruptcy due to health problems than almost any other cause in this country and it’s a shame.  We’re better than that.  Someone who is in that position has done nothing wrong.)

I have a family member who came to me when he or she (I’m going to say “he” because I don’t want to keep repeating that) was 18 years old.  He wanted to do exactly what I had done and began putting aside $850 per month, split between a brokerage account and a Roth IRA account.  On top of this, he saved 10% of his pay through his employer’s 401(k).  He never earned more than $28,000 per year. A few years later, he had nearly $35,000 saved.  He could never save another penny, and at a 10% return, he’d have just over $6 million by the time he’s Buffett’s age. That is what I’m trying to get across to people.  If you get it done right, and early, and spend less than you make, compounding will do all of the heavy lifting.  In fact, educators (public school teachers in general) are disproportionately represented among the ranks of millionaires relative to their population due to the frugality common in the industry!  There’s no pressure to show up to work in a BMW 9 Series.

Wal-Mart Wine

The next time you drop $50 or $100 for a bottle of wine, just remember that statistically, most American millionaires shop at Wal-Mart, Target, and Costco, paying less than $15 for their wine collection (which consists of roughly 12 bottles, on average). Millionaires are, by definition, millionaires because they spend their time focusing on prudently spending less than they earn, generating new sources of income, and earning a good return on their investments. As a group, they would rather own an extra 30 shares of Wal-Mart Stores, Inc. common stock, giving them a bigger share of the retailer's profits and cash dividends, than a case of Dom Perignon. That is why they continue to earn money as they sleep or spend time with friends and family, while most people have to wake up each morning and drag themselves to a job about which they have very little passion.

Related posts:

  1. Common Misconceptions About Dollar Cost Averaging
  2. How One of My Family Members Used Shares of U.S. Bancorp to Build Substantial Wealth
  3. The Importance of Frugality in Building Wealth
  4. The 5 Levels of Building Wealth
  5. How to Measure Your Wealth
  6. How Much Money Does It Take To Be In The Top 1% of Wealth and Net Worth in the United States
  7. The New Elite: A Look In the Top 1% Of Wealth in the United States
  8. Building Wealth Is the Process of Converting Human Capital to Financial Capital
  9. How a Family Holding Company Can Be Used to Transfer Wealth and Bind a Family’s Economic Future Together
  10. Is $650,000 the Magic Tipping Point in Wealth Creation?

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  • Austin H

    Joshua,

    It would make you sick to drive around a military base. Unlike most jobs where salary is a taboo subject, I know exactly how much everyone in uniform is making. (Google: military pay calculator) I see individuals who make roughly half of my 1LT salary driving 50-75K vehicles with another 5-10k in rims and accessories. The usual story for these individuals is to save a year’s worth of tax free income from a deployment and use it as a down payment on one of these cars. The remaining balance is usually financed at 7-30%(!). I’ve been called ‘cheap’ numerous times for driving an 02 Camry while my contemporaries stroll around in their 3 series leases.

    Additionally, you would be equally amazed at how few service members take part in the SDP (Savings Deposit Program). The government provides a guaranteed 10% for up to 10k for service members deployed in hostile environments. Have you ever heard of a better investment? 10% Guaranteed by the US government? As a financial management officer, it was part of my responsibility to promote the program and I was amazed time and again how hard it was to sell.

    Some people just don’t get it- and it seems they never will. You’re articles and books have had a positive impact on my life and I often find myself referring friends, coworkers and subordinates to check them out once my patience has reached its end. Thanks for everything and I look forward to the opening of your fund.

    -Austin

    • http://www.joshuakennon.com Joshua Kennon

      I appreciate you saying that, very much.

      I have family members who are in the military and have told me the same thing. One of my relatives joined the Air Force after graduating high school and saved everything he could – maxed out the TSP plan, Roth IRA, etc. He used to “collect” shares of Berkshire Hathaway Class B back before they split to see how many he could own by the time he was done with his 6-year enlistment. Whenever they’d get a bonus, or combat pay, or anything involving a lump sum or raise, his friends and colleagues would immediately go sign a lease on a new car. He lived in a $300 a month apartment and slept on an air mattress. They said the same thing to him that they said to you – told him he was cheap and that it didn’t make any sense.

      When he left the service, he enrolled in college to take advantage of the GI bill, and continued to put all of his savings into investments because I had sat down with him and showed him that if he could have $100,000 in his accounts by the time he turned 30, he’d be rich even if he never saved another dime. For instance, by the time he was Warren Buffett’s age (79), at 10% compounded, he’d have $10,671,895 in liquid cash and securities even if he had never saved another penny. Of course, no one wants to wait that old to be rich, but this would be in addition to anything else he had amassed in his life – a 401(k) at work, a house, any personal investments, etc. I’ve called this the “reserve fund” or the “stupid fund” because even if he lost his mind completely and utterly failed at everything he ever did (not likely) he’d still retire rich. Thus, it’s “stupid” or “failure” insurance.

      It does give me hope that there are people as intelligent as you out there doing what is necessary. I try to explain to people it doesn’t take a huge income to get rich, just a lot of time and a good savings habit. (A high income is just jet fuel on the fire). Above all, avoid wipe-out risk. If one of your investments were to implode because of a black swan event, always keep yourself in a position where it elicits nothing more than an eyebrow raise until you can finish having your morning coffee and take the time to study what happened so it isn’t repeated in the future. Those things, taken together, have some pretty powerful results. That’s why one of my favorite quotes of all time is from Buffett who says, “It simply isn’t necessary to do extraordinary things to get extraordinary results.”

  • jleigh37

    I just wanted to thank you for writing these articles and blogs. As a 27 year old mother who has to be at work from 7:30am to 7:00pm and doesn’t get to see her fiance and son very much during the week, I am consuming myself with becoming financially independent so when I’m a grandmother (hopefully sooner) I don’t have to worry about going to work and I can decide how I want to spend my day. These articles are the most informative I’ve found to actually understand the foundation of how money works. I have been reading your articles and blogs for about a year now and am truly appreciative for your information. Thank you.

  • http://www.joshuakennon.com Joshua Kennon

    Jleigh37,

    Thank you! It always means a lot when readers write in and let me know what helps them. (Knowing that it helps people is inevitably the reason I start writing again after I go away for a few months because I’m tired don’t ever want to publish another blog!)

    I know exactly what you mean about sacrificing the next years to get where you want. Let me share something with you from experience, though: Figure out how to make money from something you love doing (trust me on this) and that you can turn into a viable business and you will find that suddenly, you don’t “work” anymore. Yes, your net worth grows and there is more cash in the bank if you do it correctly, but you can’t wait to turn the key in the door of your office, or factory, or workshop each morning when you get out of bed. Turning on the lights should be like unwrapping a gift on Christmas morning as a kid. I wrote about this the other day in Business Should Be Fun.

    I know that sounds unattainable but, believe me, I know first hand it can happen and I know many people in my life who are finally at that point. Don’t do a job you hate just to build up your net worth. Warren Buffett says that approach is like, “saving up sex for old age. By the time you get there, you won’t be able to enjoy it.”

    Then, you get to the point where you don’t want to retire because your whole life is structured around doing what you want. I know a grandmother that wanted to help raise her granddaughter. She loved jewelry. So, she opened a charm bracelet store and jewelry store and the baby spends the days with her, putting on jewelry and playing.

    In other words, the BUSINESS exists for HER, not the other way around as so many people let happen.

  • http://www.adamvrobinson.com Adam

    Joshua,

    I just recently discovered your blog via the great “How to Get Rich” series you wrote for about.com. You are an inspiration to me, seems to me we are a lot alike, except you have taken action and had laser like focus on your goal. I, like you, used to sneak investing books while i was in classes, even at college. I have modest goals of just initially making enough income to replace my day job, through real estate, ecommerce, or other. I am 27, working for a real estate developer, learning while getting paid.

    I have dabbled in some online ventures, and am getting more serious in that arena. Like you I studied Joomla and other CMSs, and also ecommerce stuff. Your ability to explain things financially is truly a gift. I appreciate you putting in the hours to explain what it takes (its really not rocket science) to get money to work for you.

    I cam from the mid-west, loved ducktales for similar reasons you do, and was entrepreneurial early on in my life, im excited to stumble across someone so similar that has achieved a very similar life goal as becoming financially independent at as early an age as possible.

    Thanks for the inspiration Joshua.

    • http://www.joshuakennon.com Joshua Kennon

      I appreciate that very much.

      One of the reasons I write so often is because I remember being upset that there weren’t resources out there for me as a kid. One of the literary techniques I use (especially on the articles that generate millions upon millions of annual page views) is this: I write the article as if I were writing a letter to myself, at 10 years old, sitting in the library in Savannah, Missouri reading through Value Line reports trying to figure out what the hell all of the numbers meant. Since there weren’t people in my life that were involved in finance, I had no background in formal GAAP accounting or anything so that means that I often avoid the trap of “assuming” knowledge. I could have saved myself *YEARS* of effort had a lot of this groundwork been explained to me. It also led to some interesting gaps in my education (being able to do pension accounting adjustments before fully understanding stock options, for example, which was completely backwards).

      For example, when you read a financial story, you’ll be surprised how often you see stuff like, “Company XYZ pays a $4 dividend.” Yet, when you read elsewhere that most dividends are paid quarterly, that doesn’t make a lot of sense. The author if assuming the reader knows that the annual dividend is divided into 4 equal parts and shipped every 3 months at most companies, so $1 per quarter in this case, or $4 per year. I try to avoid that as much as possible unless it is an article that builds upon an earlier one.

      By stripping out the built-in assumptions, I found that a lot of people realize that Wall Street and investing isn’t hard, it’s just that the people who are involved in it want to make it seem that way so they can charge ever-increasing fees to handle your money.