Do you want to become a millionaire one day? If so, are you on track to reach your goal?
Would you like to know how you can tell if you are? In the best-selling book The Millionaire Next Door, authors Thomas Stanley and William Danko profiled traits of the wealthy.
Let’s take a look at three of these traits.
How Wealthy Should You Be?
The authors created a way of determining whether a person was wealthy or not based on one’s expected level of net worth. Income and age are the determinants of how much a person should be worth.
The higher one’s income, the higher one’s net worth is supposed to be. And the longer one has been producing income, the higher one’s net worth should be. In other words, higher-income people who are older should have more wealth than lower-income people who are younger.
Here’s the formula for determining your expected level of net worth:
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This is what your net worth should be.
So if John is forty years old, makes $85,000 a year, and has investments that return another $5,000, he’d multiply $90,000 by forty. That’s $3,600,000. Dividing by ten will give you his expected net worth – $360,000.
And if you want to be a prodigious accumulator of wealth, or PAW, your net worth should be twice the level of wealth expected. If John had a net worth of $720,000, he’d be a PAW.
Do You Operate On a Budget?
The authors also found that most people became millionaires by budgeting and controlling their expenses. They also maintained their affluent status the same way.
Do you plan your spending according to various food, clothing, and shelter categories? Over 62 percent of the millionaires surveyed know how much they spend each year on food, clothing, and shelter. By sticking to a budget, you control consumption and reduce the chances of allocating too much money to spending categories that aren’t important to you.
The authors also found that for every 100 millionaires who don’t budget, there are about 120 who do.
So what about those 100 millionaires who don’t budget? How did they become millionaires?
Although these millionaires don’t budget, they still controlled their spending. How? By creating an artificial economic environment of scarcity. Over half of the non-budgeters invest first – only afterwards do they spend they rest of their income.
This is called the “pay yourself first” strategy. These people invest a minimum of 15 percent of their annual income before they pay the sellers of their food, clothes, shelter, and other items.
If you’d like a budget template to help you start building wealth, it’s included – along with other useful resources – in the free Faith and Finance 10-day course on how to reach Financial Freedom. You can get it here.
Do You Own Stocks? Are You an Active or Inactive Trader?
Almost all (95 percent) of the millionaires surveyed own stocks. Most have 20 percent or more of their wealth in publicly-traded stocks.
Most millionaires, however, do not actively trade their stocks. They don’t agonize over the ups and downs of the market on a daily basis. That should bring you comfort!
Fewer than 10 percent of millionaires are active investors, holding their investments for less than a year. About 20 percent of millionaires hold their investments for a year or two.
Nearly 25 percent hold for between two and four years and 13 percent are in the four-to-six-year category. Almost 32 percent of millionaires hold their investments for more than six years.
In other words, buying and holding stocks is a tried-and-true way for you to become a millionaire. For more information on how to invest in order to earn a million dollars, including the specific item to invest in, check out this post here.
Are you on track to become a millionaire?