In the book The Millionaire Next Door, the authors Thomas Stanley and William Danko surveyed more than a thousand households that had accumulated more than a million dollars in net worth, looking for traits among them that were decidedly different than the mainstream population. What did people who had accumulated wealth do that others do not, and vice versa?
The entire book discusses the results of that study, but very early in the book the authors efficiently boil down the differences in financial behavior between those who are able to accumulate wealth and those who do not down to seven key factors. These seven factors are the key things that people who are effective at building enough wealth to be financially independent do that are different than most people.
While rereading the book, I thought these seven factors were interesting enough to discuss on their own, so let’s walk through them.
Factor #1 – They live well below their means.
Spend less than you earn and do something worthwhile with the difference. It’s at the core of pretty much every personal finance strategy out there – every one that actually works with any level of reliability, anyway. Yet many Americans struggle deeply with this strategy. The average American saves somewhere around 5% of their income (depending on the exact moment in time and the exact survey), and that includes the prodigious savers that put away large portions of their income. To average out at 5%, for every person that saves 50% of their income, there are nine more who are saving nothing.
People who accumulate wealth at a high rate simply save money at a high rate. They choose not to spend a sizable portion of their income and instead invest it for their future, and they achieve that by simply spending a lot less than they earn and not letting their spending keep expanding to gobble up their entire income.
Let’s say a person brings home $100,000 a year. The average American would spend about $95,000 of that and putting aside perhaps $5,000 of it. Someone who is on track to become wealthy is likely spending something more like $60,000 of that and putting aside $40,000 of it. One of those two people is treading water financially, while the other is heading toward building wealth.
How do you do this? Well, it’s the main topic of The Simple Dollar (if there is one), so if you’ve been here for a while, you’re probably familiar with many of the best strategies. Here’s a quick refresher.
Understand your needs versus your wants. There are some things in life that you need – basic food, basic shelter, basic hygiene products, basic clothing, transportation to and from work. Almost everything else is a want – it’s stuff that’s not necessary to continue to enjoy life. That includes better versions of those basic items. Understand what is a want and what is a need.
Be selective about fulfilling wants. People who end up spending everything they earn are often in a cycle of drowning themselves in want fulfillment. They fulfill countless impulses, big and small, and never really say “no” to themselves. The thing is, most impulsive desires are really a waste of money. They fade very quickly if you don’t fulfill them right away. Even if you do fulfill them, they bring only an instant burst of pleasure which immediately fades. Learn how to be selective with your wants.
Look at the big expenses first. The big expenses for most people are things like housing, a car, and insurance, along with any other monthly bills that top the $100 mark (this might include things like a cell phone, a cable or satellite service, and so on). What can you do to cut that cost? You can cut housing costs by living in a smaller place or in a different location. You can cut transportation costs by using mass transit or a bicycle or your own feet to get places. You can cut your insurance costs by thinking about each policy and shopping around for them. You can cut your cell phone costs by shopping around and moving to a plan that matches your use. You can cut your cable and satellite costs by simply ditching cable. Cutting a big expense can make a difference of hundreds of dollars a month.
Try out some basic frugal strategies. I suggest trying frugal strategies as a thirty day challenge and then deciding for yourself whether they work out after thirty days of commitment. Here are a few ideas: buy all of your food and household staples in store brand form; prepare all meals at home without eating out; take leftovers to work every day; don’t spend any money on hobbies and instead enjoy and use the hobby materials you have; and avoid the coffee shop and make your own; don’t watch television and see if you really need cable.
Factor #2 – They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
In other words, people who are efficient at accumulating wealth tend to use their already-available resources in ways that accumulate wealth rather than devour it.
They tend to indulge in hobbies that don’t have much upkeep cost compared to their level of income. They put their money to work by investing it in things that will grow in value or produce more income.
More importantly, they tend to avoid spending their time, money, and energy on things that are going to consistently drain money from their accounts.
This doesn’t mean that they sit around Scrooge-like using their money to count their coins. Rather, it just means that the way they spend their time and energy doesn’t work in strong opposition to their financial progress.
Here are some practical ways to do this.
Get interested in your own financial state and financial planning. Make it your goal to know your budget inside and out and how to stick to it. Also, make an effort to understand where your money is invested, why it’s invested there, and whether it’s making a good return. Make this into a minor hobby – it doesn’t need to be an obsession, but it does take some time to read some books on investing and understand what you’re doing with your money.
Choose hobbies that require active mental or physical involvement and don’t require much financial upkeep and practice those hobbies. There are infinite free or very low cost hobbies out there. Reading is one, as long as it centers around reading and not just buying books to put on your shelf. Hiking or just going on walks is one. Golfing, on the other hand, isn’t one, nor is shopping. Which of your hobbies require active mental and/or physical involvement and don’t require much financial upkeep? Those are the ones to target. I generally aim for hobbies that require less than $1 in expenses per hour of participation.
Avoid media sources and people who mostly just encourage you to buy stuff. A surprising amount of media – television and magazines and social media in particular – is oriented around making you aware of and making you desire the latest stuff and the latest premium (read: expensive) experiences. Dump all of it. Cut your news reading down drastically – breaking news is often inaccurate, so read the news once every few days and stick to well-reported sources. Skip social media unless you’re actively looking to contact someone. You’ll be better off for it.
Factor #3 – They believe that financial independence is more important than displaying high social status.
Often, the millionaires in your community dress pretty casually and drive reliable and non-flashy cars. They aren’t dressed to the nines most of the time. They aren’t driving a new Maserati. Those are things that people who are up to their eyeballs in debt often do.
Why wouldn’t they enjoy the “good things”? They are enjoying the good things. The good things are things that don’t break down along the side of the road. The good things are things that aren’t a target for theft. The good things are things that put a smile on your face without taking money from your wallet. The good things are things that you do to lift yourself up, not to attract or impress others. The good things are deep relationships with good people, not “impressing” people who drive by or who see you on the sidewalk. Not having to go to work each day? That’s a good thing. Being in control of your own destiny? That’s a good thing, too. Independence. Freedom. Not worrying about what others think. Low stress. All good things.
People who accumulate wealth have decided that those good things are more important than things like dressing up or driving nice cars or constantly eating at fancy restaurants or having huge wine cellars or having an Architectural Digest home to impress others.
Here are some strategies to move toward that mindset.
Question your thinking, especially when you’re about to buy something. Why are you buying this? Are you thinking of impressing other people with the item you’re purchasing? This is more and more important as the purchase gets bigger and more expensive and should really matter when it comes to things like cars and homes.
Cultivate friendships with people who appear to be like who you really are inside, rather than the image you want to portray. If you put in the time to build a social circle around you consisting of people who truly share the values you hold inside, you’re going to be much more able to simply not worry about what others think regarding your personal choices. If you’re constantly worrying about what your friends will think of you, reboot your social circle. If you have interests you’d love to explore except you’re worried about what your friends think, reboot your social circle. Don’t live your life based on what your friends might think.
Stop trying to be perfect. This is especially true if you invest significant time trying to create a “perfect” picture of your life to show others on social media. Perfection can never be attained and the journey to try to get there is self-destructive. Rather, just try to be a better person than you were yesterday in the areas you care most about.
Factor #4 – Their parents did not provide economic outpatient care.
In other words, people who tend to accumulate wealth typically did not receive money from their parents once they reached adulthood and had a job. Their parents didn’t slip them money to help them maintain a higher level of affluence beyond what they could afford with their own earnings.
If you’re in a situation where this is currently happening, your parents are financing an unsustainable lifestyle, one that makes you beholden to them. If you’re in a situation where this used to occur, you know quite well how difficult the transition can be when the spigot is turned off.
What can you do if this is your situation?
Spend less than YOU earn. You absolutely must learn to live on less than what you are earning. This does not include what your parents are handing you. You have to learn to live on less than your paycheck, because that extra income is not a reliable one and it leaves you dependent on your parents.
Remember that the money is theirs, not yours. Many people who receive additional money from their parents in adulthood move into the mindset that such gifted money is a right of theirs and not a gift from their parents. A sense of entitlement to that money often appears and it adds a great deal of strain to the situation. You have to completely accept that such money is not yours and that your parents have an independent life of their own and may choose, at any time, to stop giving money. That’s not only their right, it’s probably what they should do for their own financial health, which they are sacrificing so that you can have a few extra bucks in your pocket. This is a gift and should be deeply appreciated. It’s not a right to be demanded.
Use the money that’s being given to you to eliminate debt and supercharge savings. You should be making minimum payments on your debt from your own earnings (and still spending less than you earn overall), but the money from your parents should go to making extra debt payments so that you get out of debt quickly. If you don’t have any debts, this money should go into savings and investment so that you can rapidly move toward financial independence.
Factor #5 – Their adult children are economically self-sufficient.
This is the flip side of the above situation – people who accumulate wealth with ease do everything they can to raise children who are financially and emotionally independent from them and then do not hand them additional money to artificially inflate their lifestyle.
The reason is clear: giving your children money to inflate their lifestyle not only damages your own financial state, it causes the child to be dependent on that financial assistance, which, as noted above, means it’s less likely that your child will be financially successful on their own. Giving your child money means they’re less likely to find independent success.
Following this step is pretty straightforward.
If you have younger children, make it clear as they grow older that you expect them to be fully independent as early as possible. This doesn’t mean that you’ll consign them to homelessness as soon as they’re eighteen. What it does mean is that you expect them to be preparing for a career, actively finding work, or working in a career path as soon as they graduate, and that they should plan to choose a career path that can sustain the lifestyle they want.
If you have children who already have a full time job after school, start weaning them off of any financial assistance you’re providing them. Sit them down, make it clear that you want them to be fully independent of you and have their own life under their own control and destiny, and then start peeling back that money. Don’t make it abrupt, as that can cause financial hardship, but start moving gently in that direction by slowly turning off the spigot.
If you have a child on the verge of independence, don’t start financial support. Even if it appears that the change will be difficult for them, this is a moment where you must let the young bird spread their wings and fly on their own. If you’ve given them any indication that you will continue to give them money once they’ve made the leap, correct that indication right away.
Factor #6 – They are proficient in targeting market opportunities.
What this means is that they frequently look for opportunities to make money with relative ease, usually through investing money they’ve put aside just for this purpose. They look for opportunities to leverage their own knowledge and the money they’ve been able to accumulate to either save a ton on future expenses or to make a very nice return.
This takes a lot of forms, but it boils down to two ingredients: knowledge in a certain area and money on hand. People who accumulate wealth use those things to generate more wealth as often as possible, keeping their eyes constantly open for opportunities.
There are many ways to do this. Here are a few.
Watch Craigslist, estate sales, and yard sales for enormous bargains on items you know you can easily flip. This takes advantage of some particular domain knowledge that you have and uses cash you’ve accumulated from spending less than you earn to turn a quick profit. For example, I do this with older trading cards, old video games, and other such hobby items – I have an idea of what things are worth and will often buy items just to flip them. I go to yard sales and thrift stores and estate sales looking for those kinds of items.
Cultivate a hobby in which you make things that you can use (at a lower cost than buying them), sell, or inexpensively gift. For example, I love home brewing and making fermented foods, and I have given both away as gifts in the recent past, often as items to bring to the host when invited to a party, but sometimes as holiday gifts as well. I make my own sauerkraut (my favorite condiment, where I can make a quart for about $0.30 which is a tiny fraction of the store cost) and my own kombucha (which costs about 10% of the price of buying it in the store). I’ve made many, many other things over the years, too. The key is that I get personal enjoyment and value out of the process of making it, and it just so happens to produce something that I can use or that can serve as an inexpensive gift.
Invest in something that can become your hobby that you can eventually turn around for a profit. I have a close friend that does this with old homes. He’ll buy one, move in for a few years, spend those years renovating it as an evening activity, and then sell the house at a tidy profit and move elsewhere, buying a old house with some of the proceeds. I have a few family members that do this with junk cars – they’ll buy an old junker, renovate it and completely rework the body, then sell it for a tidy profit and buy a junk car with some of the proceeds. In both cases, they’re using their passion to make a little money, but it’s more about their passion on their own terms than making money. It’s a hobby that happens to line their pockets a little.
Factor #7 – They chose the right occupation.
This doesn’t merely mean an occupation that pays well. Rather, it means that they chose an occupation that pays well that also aligns with their natural skills and is something they don’t mind doing. It doesn’t have to be a burning passion, but it needs to not be something they intensely dislike, so that they don’t wind up hating the work.
Finding this career path and finding it early in life seems to be the key for many people in terms of finding financial success. Having a job they don’t hate that earns a reasonably good income and offers opportunity because it happens to match their skills tends to lead to a very solid lifetime of income, and that makes it much easier to follow the other factors on this list.
Here are some strategies for this, even if you’re already on a career path.
Gain some awareness of what your skills and strengths actually are. There are many ways to do this. Some involve tests, while others involve procedures of self-reflection. One element I’ve always found important is to trust the opinions of others who know you well in a professional or academic context, as they often know what you’re good at and not good at in comparison to others on the team. Consider what classes came easy for you when you were in school. These are the things you want to lean into when choosing a career (or rebooting one).
Look for jobs you can reasonably enjoy that match up with those skills and strengths (and, ideally, pay well, too). Once you have a good idea of where your strengths lie, start looking for jobs that utilize those strengths. Filter those jobs through a lens of what you might reasonably enjoy doing – you don’t have to love it, but at the same time, you probably shouldn’t turn your hobby into a job, either. If you’re still finding a lot of things, start filtering those prospects by income level and choose one that pays well.
Always look for career situations that let you lean in to your strengths. If you know what you’re good at and what you’re not good at, it’s a good idea to find positions that really line up well with what you’re good at. It’s never bad to try to work on your shortcomings, but you’ll generally be most highly rewarded when your skills line up with your job, because you’ll be a top performer in that specific field.
Final Thoughts
These seven factors often don’t line up with how the average person makes choices in their life, but at the same time, the average person struggles to build a good financial foundation. Remember, almost four in five Americans live paycheck to paycheck. Those that do not are doing something different with their lives, and the data in The Millionaire Next Door points strongly at these seven factors. It’s very likely that you’ll find it worthwhile to integrate these factors into your life.
Good luck!
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Aviation sports like paragliding, base jumping, and 
Jumping out of planes isn’t the only airborne hobby life insurance companies are generally concerned about. Professional pilots are at risk of higher life insurance rates, but also pilots who fly for fun.
While 
If you love the following water sports, your life insurance provider probably won’t cover you due to these hazardous activities:
If your enthusiasm for rock climbing takes you to your local indoor climbing wall, your life insurance is unlikely to be affected.
Much like scuba diving, taking a family vacation to a ski resort or hitting the slopes on a marked trail with your friends won’t hurt your access to life insurance.
Racing is another high-risk hobby which life insurance companies frown upon. 
