Skip the Lottery: Becoming a Self-Made Millionaire
Four steps from the author of The Next Millionaire Next Door.
Posted November 2, 2018
The latest record-breaking Mega Millions Jackpot has generated a lot of talk about wealth. The most popular questions always seem to focus on the fantasy of what to do with all that money. For those who would rather take fate into their own hands, there is a better question to ask yourself: What is the best path to get there on my own?
I recently spoke with Dr. Sarah Stanley Fallaw, author of the newly released book The Next Millionaire Next Door to get her tips on reaching economic freedom without having to win the lottery. Fallaw’s expertise comes from her training as an organizational psychologist coupled with the fact that she is the daughter of the author, Thomas J. Stanley, who arguably started the financial empowerment movement with his 1996 book The Millionaire Next Door.
The simple fact is that building wealth is as much about psychology as it is money. Fallaw points out that 80 percent of millionaires in the US are self-made. Throughout the book, Fallaw uses behavioral science to explain how knowledge, discipline and social influence all play into wealth building. Fallaw asserts that becoming a millionaire isn’t as out of reach as many may think. There are some tried and true disciplines for building wealth, but they are far from glamorous. The reality is that reaching Millionaire status looks a lot different than what you see projected in the media. Here are four basic steps Fallaw shared to get started on your own path to that big jackpot.
Get Literate: Why Income isn’t Wealth
Fallaw makes an important distinction between wealth and income, a distinction that is often misunderstood. She explains that wealth is what you accumulate for tomorrow whereas income is what you bring in today. Her research has found that high-income generators (those with big salaries) may not have a lot of wealth due to the fact they often spend as much as they bring in, if not more. This is often driven by a misconception that if you have a high income, it’s time to start spending.
Fallaw explains that building your literacy starts by finding reputable sources for financial knowledge, and then taking a hard look at your finances and breaking down your income and expenses to get a sense of where you stand. Those who are successful at transforming income into wealth take the time to understand their financial health on a regular basis. All of this information is at your fingertips, it’s a matter of taking the time to dig into it. Fallaw advises those interested in building wealth to practice by making small decisions about your finances and tracking your progress over time to build confidence in your strategy.
Make a Plan and Stick to It
“Millionaires who have built wealth on their own often report setting aside time each week to plan.” Like running any business, managing household finances requires thinking through the long-term goals, and how those goals will be accomplished by each team member. Fallaw recommends sitting down with your spouse to talk through your financial goals and sketch out a path together for getting there. She believes any plan should include a budget, spending limits and assigning critical administrative tasks (i.e., paying your mortgage and filing taxes). If the idea of planning sounds daunting, keep in mind your plan doesn’t have to be elaborate, but it should contain basic financial milestones and timelines for reaching them. Also, be sure to make specific commitments to action. List out what you are going to do each week and/or month to meet your goals and how are you going to do it. The more specificity the easier it is to track progress and hold yourself accountable.
Limit Social Influence
From flashy commercials on TV to tailored pop-up ads on our web browser we are under a constant siege from marketers. Tuning out the noise of social influence is critical to controlling your spending. According to Fallaw, “those who demonstrate high levels of social indifference across all consumption categories have a better opportunity to build wealth.”
She points out that the buyers of luxury brands often do so to make themselves feel wealthy or fit-in with those they believe represent success. They often base their purchasing decisions on their spending power as opposed to their accumulated net worth. In other words, they have the income, but not the savings. It may surprise you to hear that Fallaw’s research has found that the most common car brand driven by millionaires is Toyota. The second most popular is Honda and the third is Ford. Luxury brands can be wealth killers and that unlikely millionaire next door knows this.
Save, Save, Save
We all know the famed mantra for real estate: Location, location, location. For building wealth, it’s save, save, save. Fallaw believes the most effective way to reach millionaire status is to become what her father coined a “prodigious accumulator of wealth.” Saving requires discipline, so once you make your plan you need to tune out the noise and build your routine for saving. Be sure to use your plan as a way of measuring the effectiveness of your weekly and monthly routines and habits for putting money away. Plan it, track it, and keep at it!
“Look, the math works,” explains Fallaw. The key has and always will be about discipline. It’s never too early to start and certainly never too late to make a go at creating your own retirement jackpot.