Lessons in Wealth

In the mid-1990’s a book was published which (from my seat inside a Trust group) appeared to challenge the assumptions that advisors generally used to serve clients. The big reveal of The Millionaire Next Door is that the average millionaire does not show his/her wealth, is not on the cover of Fortune or Forbes and may be the ideal client you’d least expect if you’re only looking for extrinsic markers.

The book was authored by two anthropologists, Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D., who were asked to help their client understand and better serve their target, affluent market. I fell in love with the thinking, as I had an undergraduate degree in Anthropology and identified with their approach. The authors focused on two doctor families and compared and contrasted behaviors and mindset that led to successful wealth accumulation vs. under performance. Who better than anthropologists to identify behaviors, values and norms around sustainable, long-term wealth-building?

What they assert is that how you live day to day – which is reflected in everyday decisions on how you spend, save and invest money – when compounded over decades will lead to wealth-building success (or not much wealth at all). The authors clarify this has very little to do with how much money you make during your lifetime. Modest income families can be savvy wealth-builders, while high income families sometimes are not.

The lessons of the book early in my career, coupled with on-the-ground experience and training inside a Trust group, provided rich terrain to navigate and better understand the dynamics, mindsets, habits and values around money that hugely influence financial success.

To illustrate: the first-generation wealth-builders carry a special story which may center on the Founder – the individual who was highly enterprising with a robust work ethic, a knack for investing or growing a business which ultimately led to out-sized value creation. That first generation can often speak to sacrifices, existing without much “reserve” and going without significant luxuries for many years.

Based upon that first generation’s success, future generations usually live well without the sacrifices the founder made to move the family into affluence. The challenge is when people get comfortable living well and forget the lessons of the past. New habits and mindsets can override, and sometimes these are even more productive and sometimes less so.

Anytime you’re spending more money than what is coming in, what you have in motion is the opposite of healthy wealth-building! For the majority of us, prolonged negative cash flows will hurt even the strongest balance sheet and investment pool, leading to wealth decumulation over time.

I’ve seen wealth erosion occur as one-off events (ex., business decline and bankruptcy) or slowly, occurring over a generation or two. Decumulation can be intentional, for example: you may want to spend every last dime during your life and leave nothing to heirs. The heartache is when decumulation is not desired (sometimes attached to trauma or tragedy), not intentional and has advanced to the place where it is hard to reverse.

Even high-income executives, or owners of private companies can face serious and significant financial risks if their lifestyle is “big” and pushing the limit year in and year out. Income/revenue and balance sheets will fluctuate over business cycles; when you live to the max and push the limit relentlessly, you are hugely vulnerable in a down cycle, as our current pandemic will reveal.

From a stress-management perspective, it is most enjoyable to work with people who are consistently focused on accruing appreciating assets (and building their financial base and freedom) and less focused on “upsizing” their life. Warren Buffett has famously managed a life beneath his financial capacity, so when markets fluctuate, he’s not overly concerned about how he’s going to pay the bills.

Living moderately does not mean not having fun, not enjoying experiences, or refraining from buying luxury items. It means not allowing your lifestyle to roll at the expense of long-term wealth accumulation. As with everything, there is a balance!

While most of us focus on incorporating more moderation to free up cash for savings and investment, there is a movement of people who intentionally downsize and minimize consumption in the spirit of living with more freedom and less stress. As an example, check out Wind River Tiny Homes. For people who are interested in minimalist living, there are lots of resources on stretching a dollar and living “on the cheap” while investing more time doing things you enjoy.

The fun, the art and the reward of this work involves marrying several facets of sound strategy:

1. paying attention to income, expenses, assets and debts and identifying how they influence each other,
2. aligning financial decisions that will positively impact your balance sheet over time, and
3. assessing your optimal life – reflecting on and designing the life that allows you thrive.

The Millionaire Next Door early in my career provided not just a paradigm but a beacon of hope as it broadcasted the fact that wealth-building doesn’t just “happen”. We, through everyday actions, can drive results.

In a world that often feels random, chaotic and out of control, this best-seller challenges us to focus on what IS in our control. To reiterate an age-old prayer: If we can accept that which we can’t control, effect (or make happen) the things we can control or influence, and cultivate the wisdom to know the difference, life is good.