I have a distinct memory of sitting on a tractor on my grandfather’s Nebraska farm as an adolescent and telling my father and brother that I was going to be a millionaire someday. My Dad laughed out loud and asked how I was going to manage that? I shrugged and said, “I just will.” I never had a get-rich-quick scheme or a vision to create the next Pay Pal, I just kind of had a gut feeling that I would go to college, get a good job, and save. In fact, I already had a good track record of saving, reaching my parents’ stated threshold of $1,000 before they would allow me to invest in the stock market. Fortunately, my wife is also a good saver and – with advice as clients of Moneywatch Advisors for 25 years – that has resulted in an accumulation of wealth greater than we imagined possible.
But what makes a person a good saver? Is it an innate skill that we have or don’t have? Can it be learned? Can a spender become a good saver?
The book, The Millionaire Next Door illustrated that wealth is what you accumulate, not what you spend. Wealthy people have figured out how to turn their income into wealth – savings – that can be used on their future selves.
So, are there traits that wealth builders – savers – have in common? What makes some people good at turning their income into wealth?
Sarah Fallaw, daughter of the Millionaire Next Door author Thomas Stanley, and an industrial psychologist Ph.D., has researched and discovered six distinct and consistent traits that predict if someone will be good at wealth building. They are:
• Frugality – your willingness and ability to spend below your means;
• Responsibility – do you believe you have control over your financial outcomes or do you believe wealth just happens to people?
• Confidence – do you have the confidence to believe you’re capable of improving your situation?
• Planning and Monitoring – can you set goals and monitor your progress?
• Focus – do you have the discipline to avoid distractions and stay on track to your goals?
• Social Indifference – do you feel a need to spend to display social status or are you socially indifferent to the spending habits of others?
Clearly, most of these traits are either innate or learned behaviors by the time we’re income-earning adults. But, Dr. Fallaw’s research shows that we can improve these traits – sometimes by ourselves and sometimes with help.
In fact, the investment firm Vanguard’s “Advisor’s Alpha” study has researched financial advisors around the country and found advisors add, on average, 3% in incremental return to a client’s investment portfolio annually. This means clients’ annual returns are, on average, 3% better if they use an advisor than if they go it alone. More important to this conversation is that 1.5% of that incremental return is related strictly to helping their clients change and/or improve their financial behaviors. Advisors help them develop and enhance those six traits that are important to building wealth.
Need to be more frugal? Maybe assistance developing a budget will help.
Need help setting goals and monitoring your progress? A good financial planner will make that the first exercise in the engagement.
Do you have a desire to become a “millionaire next door”? If so, really think about those six traits and, as honestly and objectively as you can, ask yourself how good you are at each one. And, then, what areas would benefit from some help?