Dr. Thomas J. Stanley wrote a great book called “The Millionaire Next Door” where he surveyed a bunch of folks and discovered millionaires for the most part are pretty simple, everyday people.  The next door millionaires drove second hand cars, shopped at Walmart, and lived in sub $500,000 houses which were of course, all paid off.  Part of the reason why Dr. Stanley’s book is such a big hit is because he appeals to a mass audience and shows us we can all be millionaires because there’s nothing really special about them!

Hence, like getting your college degree, is becoming a millionaire by the time you retire fast becoming a rule rather than the exception?  The answer is “yes” if you ask Dr. Stanley and all the next door millionaires.  In fact, they are probably all shaking their heads at those who can’t get there because it’s so easy for them.  Success skews reality proclaims Roger at The Amateur Financier.  So true.  If you’re rich, you think everybody is rich or should be rich.

SO EASY, EVEN A KNUCKLEHEAD CAN DO IT!

People are fooling themselves if they think only 6%-9% of all households have a net worth of more than $1 million in America.  The data only tracks what is reported and plenty of wealthy people do not report the full extent of their assets.  As such, I’d venture to guess the percentage of households with at least a net worth of $1 million is more than double the stated levels.

Someone who makes $60,000 a year on average for 30 years earns $1.8 million in gross income in his or her lifetime.  Save just 20% of $1.8 million, or $360,000, and let that money compound at 4% leads to well over a million dollars.  Look at the lower right hand side of this site and you can see the income breakdown of 400 submissions.  It’s clear more than 6-9% make over $85,000/year.  In fact, over 40% of the participants make over $85,000 a year, which means after 30 years, the individual has raked in at least $2,550,000!  It would take a big time knucklehead to not be able to accumulate over a million dollars by age 60.

CONCLUSION

There is more wealth out there than you can ever imagine.  Right here in San Francisco, 450 workers make over $100,000 a year just from their pensions! That’s just the public sector.  If you look at those working at Apple, Google, Yahoo, Facebook, eBay, you can pretty much guarantee that a large majority of them will retire millionaires if they aren’t millionaires already.  Let’s not even mention all the doctors, lawyers, venture capitalists, bankers, consultants, firefighters, policemen, and trust fund babies who make tremendous sums of money.  There is plenty of money running around so why shouldn’t we all have at least a million bucks by the time we are 50, 60, 65 or whenever we want to retire?  We all should!

As someone once said, “Don’t share the wealth.  Go out and get your own!”

Readers, what do you think?  Is becoming a millionaire the default setting for all of us?  Should we scratch our heads and scoff at those who do not achieve this once lofty goal?  Are people who make over $85,000 a year knuckleheads for thinking a $1 million net worth is unachievable?

Regards,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

Follow on Twitter @FinancialSamura and subscribe to our RSS or E-mail feed.

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It continues to perplex me why there should be a distinction between an emergency fund and your general savings.  If you have $100,000 in the bank, what is the difference between calling it $100,000 in savings, and splicing the funds into $10,000 emergency money and $90,000 savings?  The answer lies in the fact that people who need to create an emergency fund likely always have “emergencies” and are weak with their spending and savings!

Let’s say your name is Mr. Benjamin aka a $100 dollar bill.  You’re relaxing with your fellow Benjamins in the bank, hopefully earning at least a 4% interest rate using the “DVD Method To CD Investing” and having a grand old yield maximizing time.  A Benjamin’s purpose is to provide a solid source of liquidity and risk free interest income for the owner upon his or her retirement.

Some Benjamins are lucky.  Their owners don’t discriminate between one bill or another.  They treat each bill with vital respect i.e. they don’t touch it!  Some owners are just nutty, always disturbing their party and separating one Benjamin from another.  “Listen up Benjamins!  100 of you are to relocate to this side of the tracks, and the other 900 Benjamins get to kick back and relax!”

YOUR CRUTCH WHEN YOU CAN WALK JUST FINE

As soon as you start identifying some of your savings as emergency fund money, that portion becomes “at risk.”  Your emergency fund becomes a slush fund that tempts you to spend because you don’t have the discipline enough to lock away your retirement money.  You bring your savings to the front lines, allowing you to justify your desires because you’ve earmarked other monies for retirement.

Having an emergency fund is a crutch.  You start thinking in emergency fund type increments.  That’s a lovely iPad my emergency fund can cover no problem!  Or, let’s buy a brand new car and take out a loan since our emergency fund can take care of the payments!  1/10th rule for car buying?  What’s that!  The list of stuff you start wanting gets longer and longer until you no longer can control your temptation.

Worse yet, some of you might treat your emergency fund money like gold and never spend it!  What does that mean?  It gives you a green light to spend all your other money at will because you feel artificially complacent that no matter what, you’ll still have your piddily emergency fund to depend on.  This could be the more dangerous result, since an emergency fund is generally only a small fraction of your overall savings.

CONCLUSION

As soon as you identify the weakness of the emergency fund concept, you’ll realize that you’re just making excuses for your spending and savings habits.  Instead of creating an emergency fund, go broke to win big and lock your money away.  If you have to create an emergency fund, you are scraping at the bottom of the barrel with regards to your personal finances.

Do you think multi-millionaires have emergency funds?  Nope.  They have tax efficient muni bonds, private equity investments, and liquidity.   Stop thinking so small and start thinking bigger, holistically if you will!  A dollar here is the same dollar there.  Focus on fixing what’s most important, your money habits.

Readers, do you agree or disagree with the emergency fund concept and why?  Do you agree with me that creating an emergency fund is a way to shimmy around one’s mental weakness in finance?

PS For those with emergency funds, I still commend you.  Because if it’s a difference between having no savings, and having an emergency fund, then having an emergency fund wins all the time!  Just be careful not to get complacent and stop there.  Keep on building the nut!

Keigu,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

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The following is a guest post by long time reader and entrepreneur, Investor Junkie!  IJ writes about how we should stop our complaining, and realize we are wealthier than the large majority of the world.

If you live in the United States, you are wealthy beyond what most others dream of. Your salary is 99% higher than of the world population.  Visit areas like India, and Africa, and you’ll see what real poverty looks like. If you moved there, you could live like a king! Don’t believe me?  Visit Global Rich List and plug in your yearly salary.

So what exactly does it mean to be wealthy anyways?  It’s all relative to the environment you live in. What might be considered below the poverty level in the USA ($22,050 for a family of four), might be considered well off when living in say Uganda.  According to the Global Rich List even at the US poverty level, you still make more money than 89% of the world.

If you look at the Wikipedia chart, you will see the USA has the most wealth compared to any other country (including Japan). No other country comes close to the USA.  So while you may not feel wealthy comparative to what you see in the media, you still are better off than 99% of the world population.  In terms of average income,  the USA is only 13^th in the world, but we still have more stored wealth than any other country.

Stop complaining that you can’t afford that new Lexus you lust for. Many people around the world don’t even own a car! They get from place to place by bicycle. It’s true you may not live like a rock star, famous actor, or business titan, but you live better than most.

Most people in the United States have:

• Enough food to feed themselves daily
• A dry, heated and enclosed shelter
• Enough clothing to wear for one week
• Reasonably affordable health care and this is before ObamaCare
• Even if you can’t afford health care, you still will be treated by Medicaid
• What was once considered luxury items only 10 – 20 years ago, most people own multiple luxury items

How many “poor” people in the United States have items like a TV, computer or a cell phone? These luxury items most people in our country now have and are commonplace. It’s not so bad being poor.   One time in history flying the friendly skies was considered only available for the elite few.  Today, because air flight is so common, it’s one step above bus travel. This once luxury item is now available to most of the population, and with capitalism, at a low price.

With all of this talk about comparing yourself to the world, I’m not saying you shouldn’t strive to better yourself. Instead, be thankful for what you have, compared to the world population.

MORE, MORE, MORE

It’s part of human nature to want more, and unfortunately in some circles it is frowned upon. It is known as the evil G word, greed. Gordon Gekko said it best:

“The point is, ladies and gentleman, that greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.”

You see greed will always exist regardless of the “ism”. If you live under Socialism, Communism, and especially Capitalism – greed is still there. The thing is with Capitalism, despite its flaws, still appears to be the best economic system to work with human nature.

Milton Friedman said it best:

“What kind of society isn’t structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system”

So why are we better off than 99% of the world population? Why are we economically better off? The only logical conclusion is because of capitalism and the free market system we have. Even with our recent setbacks questioning capitalism, no better system exists. Capitalism is still the best method to raise people out of poverty.

CONCLUSION

Be thankful you live in a society that allows you to exploit greed. In the process, you not only improve your living conditions, but also helped your neighbors in the process. That’s the magic of capitalism. History has shown the United States has raised its living standards to be better than 99% of the world population. We have capitalism and free markets to blame for our success. It has been shown, the more freedom people have in society the more wealth is created. The USA may have creeping Socialism, but we still have much more freedom than many other countries.

If you want to decrease your living standards, continue to approve the path the US government is heading towards.  As history has shown, more government intervention and less free market solutions will lead to a overall poorer nation.

Readers, do you agree with Investor Junkie’s view that we are already wealthy?  If everybody is a millionaire, are we wealthy or just average? Why is it so difficult to realize how good we have it in America?

Investor Junkie - His blog discusses all things related to investing and being an entrepreneur. It’s about making money work for you by passive and active investments; stocks, bonds, real estate, businesses, and other investments.  You can follow him via Twitter @InvestorJunkie.

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Young or Old?

Unless your house is fully paid for, and unless you can access your retirement accounts today, your net worth is an illusion.  Although we’ve recovered quite a long way over the past 18 months, I don’t think we can really count on property, stocks, and private equity investments to be there when we need them.  The recent 14% decline in the stock markets from 2010 peak levels reminds us to get realistic!

The only thing we can really count on is cold, hard cash.  I find it very misleading, as well as a little disingenuous that some say they are millionaires, when 70% of their net worth is tied up in an illiquid asset called “home equity.” Your home is only worth as much as someone is willing to pay for it.  Even your 401K and IRA are suspect because those accounts can easily collapse.

A TYPICAL ASSET SIDE OF A NET WORTH CALCULATION:

Cash

Stocks

401K

IRA

Private Investments

Primary Residence

Rental Property

Valuables (Jewelry, Collectibles)

Pet Bunny

For retirement purposes, your assets should equate to CASH + liquid securities you can sell today + MORE CASH.  The way to look at net worth is consistent with my “Going Broke To Win Big” methodology.  Essentially, you want to operate life as if none of your assets except for your cash is dependable. Your retirement goal shouldn’t be a net worth goal, it should be a cash goal.  If your home equity, 401k, IRA, private equity investments so happen to be there when you retire, great!  If not, no big deal because you never counted on it anyway.

As you age, feel free to regularly convert your investments into cash for that bankable guaranteed interest income.  At a steady return of 4%, there is absolutely zero fear once you build that nut.  Can you imagine the pain people felt over the past 24 months for those who had the majority of their retirement savings in stocks?

The liability side of the equation on the other hand is very straight forward.  Only a crook would embellish what they owe.  And since nobody reading here is a crook, we don’t have to discuss the obvious things which should all be included in liabilities!

CONCLUSION

How Many Do You See?

By risking all your retirement savings in the stock market, you’re doing yourself a disservice.  I’m not saying don’t continue maxing out your 401K and IRA accounts every year.  That is a given.  I’m just saying one should think twice before adding MORE of your cash into the stock market.  One of the easiest allocation rules can simply be your age.  A 40 year old should think about allocating 40% of their liquid assets into cash or stable bond funds, a 50 year old should allocate 50% to cash and so forth.

If you insist on including the value of your illiquid investments into your net worth calculation, then take at least a 50% haircut to the value. Have a cash retirement goal and not a net worth goal. You’ll be happy you did.

Readers, what are your thoughts on net worth calculation?  Is there a sense of false security going around in the community?

Keigu,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

Follow on Twitter @FinancialSamura and subscribe to our RSS feed.

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