In the book The Millionaire Next Door, the authors, Thomas Stanley and William Danko, share the results of their research and interviews with millionaires. Ultimately, they seek to identify the habits, traits, and characteristics of millionaires. Essentially, the book serves to correct many false assumptions regarding the lifestyle of the rich.
Stanley and Danko ask millionaires if their households operate on an annual budget. They share the following response:
In our last national survey of millionaires, we found that for every 100 millionaires who don’t budget, there are about 120 who do.
The authors go on to explain that out of the 100 who don’t budget, they invest first (a minimum of 15%) and spend the balance of the income.
Why would millionaires budget?
1. Millionaires budget because if they didn’t, they wouldn’t be millionaires.
I’ve often heard people say, “If I had as much money as him, I’d go on cruises, get season tickets, go out to eat every day, and …” you fill in the blank.
There is the celebrity breed of millionaires. They spend hundreds of thousands of dollars on watches, TVs, and jewelry for their pets. They buy houses as often as most people buy the newspaper. But, think about all those high income earners who are broke. Think about the professional athletes who file bankruptcy within a few years of finishing their athletic career.
There is really only one way to build your net worth. You must spend less than you make. Your net worth only grows when there is a distance between what you earn and what you spend.
Interestingly, many people find that their desires can always grow in kind with their income. While increasing your income certainly gives you the opportunity to increase your net worth, until you set some spending boundaries, you’ll never have anything left over. A budget helps establish the necessary spending boundaries.
Simply put, millionaires budget because if they didn’t, they wouldn’t be millionaires.
2. Millionaires budget for financial security.
A recent survey by Fidelity found just 46% of millionaires “do not feel” wealthy. “They’re worried about health care, retirement and how they’ll sustain their lifestyle,” says Gail Graham, executive vice president of Fidelity Investments.
Budgeting provides the foundation for financial margin.
The shorter the distance between what you earn and what you spend, the more room there is for fear and insecurity. Millionaires are not immune to human emotions. They worry about the same things as other people. By keeping a budget, they are able to see that some money is being invested for the future which provides a sense of security.
3. Millionaires budget because budgeting is the best way to reach financial goals.
Danko and Stanley report, “It’s much easier to budget if you visualize the long-term benefits of this task.”
One of the characteristics of those who build wealth is that they “allocate their time, energy, and money efficiently, in ways conducive to building wealth.” This means millionaires focus on financial activities that bring the most return for their effort. Since millionaires do budget, it seems clear that budgeting is an effective way to help in the wealth building endeavor.
The Budgeting Habit Comes First and the Wealth Comes Second
People who know how to budget are in an ideal position to build wealth. Stanley and Danko identify seven factors that people who build wealth share – the first on the list is that they live well below their means.
Do you think a person who makes $100,000 a year can blow that money? Yes. Could a person who makes $1,000,000 waste all that money? Yes.
In order to build true wealth, you need to learn to spend less than you earn. Less might be spending $35,000 on a $40,000 salary or $125,000 on a $145,000 salary, but it must be less.
How you choose to manage your money today (regardless of how much you earn) paves the road for wealth building. Don’t wait until tomorrow to fix your finances. Manage what you have today, and if an increased income comes tomorrow, you’ll be ready to put it to work.
Why do you think millionaires budget?
Craig is authored the eBook, The Secret to a Successful Budget. You can purchase it at his website.