Monday, September 12, 2011

Stop Acting Rich…

And start living like a real millionaire. That is the title of yet another book from 'The Millionaire Next Door' author Thomas J. Stanley… PhD. It is one of those books where you get its message in the first 10 pages and the rest of the book is a never ending rehash of that theme. It is terrible reading, but aside from getting to the point, it presents the true reason that people become rich.

'The Wealthy Barber Returns' is David Chilton's sequel to Canada's most successful personal investing book: 'The Wealthy Barber'. Its main theme is exactly the same as that of Thomas Stanley's books and it is a lot more fun to read. Here is the premise of David's book that is supported by Thomas Stanley's research: High Income Earners tend to be high spenders, desperate to keep up with the Joneses and typically have the hardest time to convert their earning's power into net worth. Millionaires, on the other hand, are often persons of moderate income such as teachers and down-to-earth engineers who live below their means, do not keep up with the Joneses, drive normal cars and don't live in million dollar plus homes located in trendy neighbourhoods.

According to David Chilton it all is in our genetic make-up. It is in our brain architecture and neurology. Strange how this theme of new scientific ideas from the world of neurology seems to permeate today's personal finance theory. There are whole books dedicated to reprogramming your brain. First to my mind comes "The Answer" a book loaded in my playbook's Kobo module along with 'This Time us Different' by Reinhart and Rogoff (more about that in later posts). 'The Answer' is written by John Assaraf and Murray Smith, highly successful entrepreneurs with a Canadian twist. Their book is a programming manual… for your brain written in semi-scientific fashion with some entertainment value. For some subconscious reason I am not able to finish it. Maybe I am reading too many books at once. But in spite of that, the first 30% of the book (that is where I am now) is definitely interesting reading.

So all this points into the same direction! We have little control of our spending habits; we have urges to display our wealth and status [real or aspired]. We crave for status, for 'keeping up with the Joneses'. It all goes back to the primitive urges of the reptilian part of the brain as these books state; that component of the brain that is geared to an earlier, more primitive stage of our evolution requiring instant reactions and instant gratification, i.e. survival response. The 'How can you plan for the future when you're dead?' mechanism. The latest evolved portion of our brain, called 'the executive', is the part that reasons and plans. Problem is that plans are often not implemented and behaviour engrained in our reptile brain portion is what ultimately keeps us from realizing our plans. It is a matter of not only planning but also of programming the behavior needed to execute our plans in our reptile neural pathways.

Stanley's high income earners are often people such as lawyers and doctors who live in trendy neighbourhoods, drive luxury cars, have wine collections and eat out in fancy restaurants with annual vacations in the finest resorts. Most of them spend their income rather than save it. The majority of million dollar home owners are… not millionaires but high income earning big spenders. They keep up with the Joneses and have this need to display their 'wealth' which they don't really have.

The real millionaires live below their means, don't care about Harry Rosen suites and prefer Tip Top Tailors or T-shirts from Wal-Mart. They live frugal without excess. They aim for quality and long lasting assets without debt. They don't need approval from their neighbours or society. Many are family oriented people that build their own business or are people that are good at converting their often modest earnings into assets – net worth! Assets make money; liabilities costs money! A boat is a liability; a rental property is an asset. So are savings accounts; a stock and bond portfolio, etc.

A residence can be an asset as long as you don't live in one that is more than you need! Larger houses are money pits! High energy consumption, insurance, property taxes, and excessive maintenance. Everyone NEEDS to live somewhere with a certain amount of comfort; but who needs two Jacuzzis; three car garages; 5000 sqft living space and marble topped kitchen islands the size of New York stadium?

So here is my little reprogramming exercise: rather than keeping up with the Joneses and derive pleasure from your latest leased BMW, derive pleasure from your latest investment and gloat about how much richer you are than your fast spending, near broke neighbours who recently bought a lot besides your own place for 5 times the price that you paid for your entire house 20 years ago and who are spending another cool million to break the square footage record. Now program that into your reptilian brain to become rich! Do like Warren Buffet, every time you pull out your wallet, fret about how much that dollar you spend will be worth 20 or 30 years from now. Ouch, I just spend $50 on a candy bar!

Thomas J. Stanley's title of his latest book says it all: Stop Acting Rich… And start living like a real millionaire.

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