Month: July 2018

Millionaire Behavior
(Guest Post by Adam Kirdzik)

In the pursuit to become wealthy and financially independent, education plays a key role. Education can take many different forms, from schooling to participating in a new industry to just reading a book. I recently read The Millionaire Next Door by Tom Stanley and William Danko, and thoroughly enjoyed it. Stanley and Danko offer a more scientific approach to the ‘get wealthy’ discussion by writing a book around their 20-year study of the characteristics and behaviors of America’s wealthy and non-wealthy. Even though the book was published over 20 years ago, the advice derived from the results of their study still hold true.

The authors provide hope to us all by using anecdotes of moderate earners who, through frugal living and wise decision making, ended up as millionaires, despite never earning a large sum of money or becoming corporation owners. Although a large proportion of millionaires are business owners, the message is still clear: there is more than one path to success. Conversely, the book contains a warning to those who are more fortunate to begin with: a high income does not guarantee wealth if you refuse to follow the rules of responsible spending and saving habits.

The key takeaways from this book that really resonated with me can be summarized in the following four points:

Be Efficient
This applies to your time, energy, and money. The affluent population spends a larger amount of time planning so that they may be prepared to use their resources efficiently when needed. If your money is being used inefficiently, it will only delay the results you are striving to achieve. Being prepared, planning your actions and investments, and taking control of how you use your limited resources are all things that most wealthy individuals realize to be important. Take the time to find the most efficient use of your money based on your own goals and risk tolerances.

Track Your Cash Flows
A big emphasis is put on the ability to answer the question: How much did you spend on food last month? The point the authors are demonstrating is that wealthy people know where their money is going. I am a strong believer in tracking cash inflows and outflows, and it is something I have done for years now. Making a habit of this sort of tracking has helped me reflect on where my money went, and then decide if it was a worthwhile purchase. Creating a sense of accountability, even if it’s just to yourself, is a quick way to cut out the frivolous spending. The first step towards improvement is understanding your current status. Management greats, such as Peter Drucker, have stated the importance that measurement plays in the ability to manage – if you don’t measure it, you can’t manage it.

Don’t Try to Act Rich
Status symbols only exist to those who can’t afford them. Whenever you have the opportunity to purchase something beyond the bare essentials of what you need, ask yourself these questions: Are you trying to impress someone? Are you buying this item because you truly want it, or because you believe someone in your position is ‘supposed’ to have it? Is this the best use of your money? Buying nice things is not out of the question, but you must first fulfill your savings obligations and you must buy it for your own reasons, not to impress other people or satisfy some arbitrary social standard. Many high income professionals spend all their money on luxuries in anticipation of receiving large paychecks, because that’s how someone in their position is ‘supposed’ to live. These are the people who only appear wealthy, but don’t actually have any wealth built up. They rely solely on their paychecks to sustain their lifestyle, instead of working towards financial independence. This can be a stressful position, due to the complete dependence on one source of income. The act of continuously ‘trading up’ to nicer, better things can be extremely dangerous to your bottom line. Instead, be careful and deliberate with your purchases and then stick with them for the long haul.

Offensive vs Defensive Saving
There are two ways to increase the amount of money available to put towards investing – increasing your cash inflows or decreasing your cash outflows. The first method, offensive saving, suggests choosing the right job/opportunity to increase the income you are generating. This path typically means career advancement and specialization to improve upon your value as an employee, or owning your own business. The second method, defensive saving, suggests cutting expenses and living below your means to provide extra savings by keeping more of your money from being spent. While defensive saving has a limit, I believe both of these strategies to be important in the journey towards financial freedom and wealth.

In addition to abiding by the points outlined above, I choose to grow my wealth mostly through investments in the stock market. You can visit my website, adamkirdzik.com, to read more of my posts regarding investment strategy and wealth building information.

Developing good habits and behaviors does not guarantee success and wealth on its own, but it does set you on the right path. I view the characteristics and behaviors studied in The Millionaire Next Door as a foundation to building wealth. It is very difficult, although still possible, to build upon a poor foundation. However, a good foundation makes financial freedom and wealth much more attainable. Once the foundation is set, you will be in a good position to then put forth the extra effort needed to take advantage of opportunities when they present themselves and become truly wealthy.

Adam Kirdzik
adam@adamkirdzik.com
adamkirdzik.com