“They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence.”
While the highly educated were busy studying, the super wealthy were already earning …
We are all aware that extreme wealth often correlates with a low standard of education. Richard Branson and Walt Disney dropped out of high school at the age of 16, as did Henry Ford; while Steve Jobs attended college for only one semester.
Still more surprising: extreme education seems to correlate with lower wealth levels – something pointed out by Paul Leonard CFP, an Executive Director of Consolidated Financial Planning and Financial Planning Institute Media Award winner, when presenting at a recent Audit Partners Conference.
The key to this disparity, said Leonard, was that while the highly educated were busy studying, others had started earning. The three mantras of wealth creation are: your income-generating capacity; how long you work; and your ability to spend less than you earn.
Each of these three factors leaves one with more capital to save each month: the higher your income the more you can potentially save; the longer you work the more you can save; savings compound through interest.
As professionals, our earnings potential is sometimes envied by others. Such people seldom factor in the years of foregone income while studying and completing articles/traineeships. While we were studying others were earning and – assuming they saved – enjoying the benefits of compounding wealth for longer.
Leonard also highlighted a correlation between savings and stability. In The millionaire next door authors Thomas Stanley and William Danko pointed out that wealthy families don’t move a lot. Half the millionaires have lived in the same house for more than twenty years and do not flash their wealth.
He quoted Thomas Stanley’s book Stop acting rich, which states: “Nothing has a greater impact on your wealth and your consumption than your choices of house and neighbourhood. If you live in a high-price home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised. People who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence.”
Leonard pointed to two benefits of frugality: You can save more; and you ultimately need to save less.
Look at the math: On an income of R500 000 but spending just R400 000, one can invest R100 000 and retire when that nest egg is big enough to generate R400 000 a year. On the other hand someone who spends, say, R480 000 can only invest R20 000 towards a portfolio that must eventually help provide R480 000 a year in retirement benefits. In other words, he or she is saving less yet needs to accumulate more.
Income is not wealth. Wealth is what you accumulate, not what you earn.
Mike Lledo
