In 1998, Thomas Stanley and William Danko, wrote The Millionaire Next Door, after 20 years of research into the habits, attitudes, and behaviours of millionaires.
It turns out that most millionaires reach that level of wealth not by selling a business or cashing out from a corporate stock plan, but instead through a systematic approach to building financial wealth.
They found multiple examples of people making $70,000 per year who, through using the techniques below, managed to amass over $1M in net worth prior to retirement.
Here’s a summary of the key habits:
- Be frugal – live below your means and always be on the lookout for deals (eBay, Craigslist, sales, never paying full price). That means putting together a spending and savings plan that works within your current income, not the income you hope to have in the future. Think about how much it cost to “keep up with the Jones.” If you live in a less expensive neighbourhood the reality of keeping up with the average is significantly easier (less expensive car, less expensive clothes, less expensive jewelry, etc.).
- Budget and track – create a budget for every dollar you spend each month and then compare to the actual. A great example I heard from Ward Hodsman at London Life, is to put money in different envelopes for what you plan to spend on. When the money’s gone, you’re done spending in that category for the month.
- Spend time on financial planning – millionaires spent significant time each month (quadruple the time of non-millionaires) planning their spending habits.
- Savings and RRSPs – decide how much money you want to put into savings and RRSPs each month and have that amount automatically withdrawn and transferred into those accounts.
- Future wealth – don’t spend money you don’t have yet. That includes not spending a pending bonus. Only spend from the money you currently have.