Frank Newman: A worst best keep secret

It has remained one of those vexed questions for eternity: Why are some people wealthy while others are poor? What is remarkable about the question is that it continues to be asked, when there are many generations of examples that provide the answer. There are also stacks of books that profess to know the answer, and every author has their own refinement of some pretty basic truisms.

Before listing those truisms, let's clear up some misconceptions. There are some who put financial success down to luck, and that may be true for situations like a major Lotto win. But relying on chance is not a strategy, given that a major Lotto win is about as likely as getting run over by a camel in the main street of your town! So let's hope for luck but not plan for it.

The other thing to clear up is the meaning of wealthy. While that is like trying to define the indefinable length of a piece of string, achieving financial independence is a practical benchmark that can be used as a target. It means, accumulating enough money which when invested would provide a passive income equal to one’s pay cheque. Achieving that means you would not need to sell your time to an employer or to clients - it is yours to do as you wish.

Some of the best work done on defining what makes wealthy people different was done by Thomas Stanley and published in 1996 in his book called The Millionaire Next Door.  That book established seven factors that make people wealthy. All seven are important, but the ones that stand out are:

• They live below their means. They save!
• They allocate their time to matters that build wealth, and 
• They believe financial independence is more important than symbols of social status.

Thomas Stanley was killed by a drunk driver in 2015, but his daughter, Sarah Stanley Fallaw, has continued his work, and co-authored a new book called The Next Millionaire Next Door: Enduring Strategies for Building Wealth.

The research updated the work done by her father and included surveying 600 millionaires in America. She found that six behaviours, which she called "wealth factors", are related to net worth potential, regardless of age or income:

1. Frugality and a commitment to saving. Even those on stellar incomes will remain financially poor if they spend above their means. It is recommended that to build significant wealth 20% of one’s income needs to be saved. In other words, living within 80% of your income.
2. Having confidence in your own financial decisions and investments, and taking a leadership role within the household to ensure the financial plans are not derailed by others.
3. Taking responsibility for your own future, rather than blaming others or thinking luck plays a role. They say wealthy people, "don't count on anyone else to make them rich, and they don't blame anyone else if they fall short".
4. They plan for success and set goals. The authors found that 92% of their millionaires had a long-term plan for their money.
5. They focus on the tasks without being distracted by temptations and slick sales people.
6. They are socially indifferent - they do not succumb to social pressure and are not influenced by the lifestyle of others. The authors say "they don't feel pressured 'to keep up with the Joneses'".

These are some pretty simple rules to follow, and actually pretty obvious when you think about it. It's a sure path to growing wealthy, slowly. Getting rich quickly is a whole different story.

However, the sad truth is that most people are not prepared to change their lifestyle habits to achieve wealth. Maybe the gains are too far out in the future to be recognisable, or the peer pressure of the "here and now" is too compelling. Or maybe they lack the confidence to be an individual, and would rather conform to their peer group.

The authors also have a go at dispelling some money myths. They say, "Income continues to be confused with wealth by the media, the government, and in the minds of Americans. Anyone who has amassed a fortune on his or her own is often viewed with suspicion, as if the only pathway to success requires either high level of financial gifts from family members, winning the lottery, or dishonesty. Shiny glittering images fill our social media feeds and continue to confuse us abut the reality of becoming financially successful."

That stigma is especially true in New Zealand. The very worst offenders are our socialist politicians who vilify those with wealth as "rich pricks" for the self serving purpose of gaining a wider public mandate for their plans to impose further wealth redistribution.

It is unfortunate that the social stigma attached to wealth in this country has become so great that the principles of wealth accumulation are rarely discussed in the classroom where the focus is more likely to be on worm farms, recycling and diversity. If the schools aren’t prepared to educate children about wealth skills then surely it must become a matter for discussion around the household dinner table.

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.