Facts and Fallacies About Creating Wealth

Many commonly accepted “facts” about wealth building are, in fact, fallacies.

Take these six as examples:

1. “Risk and reward are inversely correlated. If you want to acquire great wealth, you have to be willing to take great risk.”
2. “Wealthy people are stingy for a reason. Pinching pennies is a necessary part of building wealth.”
3. “The most important factor in building wealth is ROI — the rate of return you get on your investments. When investing in stocks and bonds, therefore, look for high ROIs.”
4. “A well-balanced investment portfolio is comprised primarily (80% to 90%) of stocks and bonds, with the rest (10% to 20%) in cash or cash equivalents.”
5. “The surest way to acquire enough money to retire is to buy the most expensive house you can afford and gradually pay off the mortgage.”
6. “Asset allocation is the single most important factor in building wealth.”

Those are the fallacies. Here are the facts:

Fact No. 1:

The intelligent wealth builder takes advantage of safe bets and avoids risky ones. He does this as an employee, a business owner, and an investor. He understands that smart financial decisions are cautious decisions. When he must take a risk, he does so with some sort of loss limit in place. He never loses more than he is comfortable losing.

Fact No. 2:

Spending money prudently is an economic virtue, but being stingy — i.e., paying less than market value for goods or services simply because you can — is a flaw. The rich man who undertips does so not because he has learned the value of money, but because he is simply a cheapskate. It’s as simple as that.

Fact No. 3:

The most important factor in wealth building is not ROI but the accumulation of net investible assets, the amount of money you’re able to devote to investing after you’ve paid for all your regular expenses — your car, home, debts, and loans. Plus, individual investors, chasing yield, typically get ROIs that are less than half those of market averages. This is why the intelligent wealth builder devotes the lion’s share of his wealth-building time to increasing his income and setting realistic goals for his stock and bond portfolios. By “reasonable,” I mean market averages plus or minus 10%.

Fact No. 4:

The typical portfolio of stocks, bonds, and cash — however allocated — is an inadequate approach to building and safeguarding wealth. The intelligent wealth builder will also include other assets, such as income-producing real estate, tangible assets, alternative fixed-income investments, and direct investments in cash-generating private businesses.

Fact No. 5:

Buying a more expensive home every time you get a big raise is a great way to ensure that you will never get rich. What you want to do is find the least expensive house you can “love long time” and keep it. The longer you keep it, the more net investible income you will have to invest in income-producing assets that will eventually make you rich.

Fact No. 6:

Asset allocation is indeed very important, but it is only one-third of a larger strategy that truly is most important. I’m talking about risk management. Risk management has three parts: asset allocation, position sizing, and loss limitation. The intelligent investor pays equal attention to all three.

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Four More Facts

Okay, those are six facts that dispel the common fallacies. Got a few minutes more? Here are four more facts, some of which are very basic but often ignored.

Bonus Fact No. 1:

The biggest mistake retirees make is giving up their active income.

Yes, I know that’s exactly what you hope to do. But to keep your wealth for a lifetime, you need multiple streams of passive income. Your goal should be to build each stream of income to a level where you can live on that and that alone.

Bonus Fact No. 2:

The “miracle of compound interest” applies not just to money but also to skill and to knowledge. If you want to get rich and stay rich, you need to invest as much of your spare time as possible in acquiring financially valuable skills and learning about your business.

As a general rule, buying makes you poorer, whereas selling makes you richer. If you want to develop a wealth builder’s mindset, develop the habit of asking yourself every time you buy or sell anything: Is this making me richer or poorer?

Bonus Fact No. 3:

Every type of financial asset has its own unique characteristics in terms of growth potential, income potential, and risk. Expecting more growth or less risk than “normal” from any investment is a bad idea. And that is why 90% of ordinary investors have results that are far poorer than market averages.

Bonus Fact No. 4:

There are two ways investments can build wealth. One is by generating income. The other is through appreciation — an increase in the value of the underlying asset. Asset classes are inherently structured to increase value, preserve value, or do both. Investments that provide both income and appreciation are generally superior to investments that provide only income or only appreciation. But in developing an overall strategy of wealth building, the prudent investor will incorporate all three types of investments.

You may find some of these facts instantly sensible. Others you may disagree with, be confused by, or see as unimportant. But don’t just read them and dismiss them, please. Give yourself a bit of time to think about them. For me, they are useful and important because they worked for me and for people I mentored — and they worked over and over again. Which means, of course, that they might work for you.$

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A Lesson From Martha Stewart

““Productive work is the process by which man’s mind sustains his life, the process that sets man free of the necessity to adjust himself to his background, as all animals do, and gives him the power to adjust his background to himself. Productive work is the road of man’'s unlimited achievement and calls upon the highest attributes of his character: his creative ability, his ambitiousness, his self-assertiveness.”” -Ayn Rand, The Virtue of Selfishness

Martha Stewart has had an amazing career, one that might inspire you.

A one-time stockbroker and caterer, she got her start in the early 1980s by publishing how-to guides on home-making and entertaining. At that time, she was an editorial contributor, making maybe $50,000 a year. Today, she heads up a huge business enterprise and is worth more than a three-hundred million.

Martha is not brilliant (if I can judge from her TV appearances), but she was ambitious and willing to do what it took to succeed. She has been described as “zealous” or “pushy,” depending on the source. She works nonstop and claims to love what she does. And when it comes to promoting herself, she takes a back seat to no one.

In short, Martha Stewart does a lot of what I've been saying you should do.

Success Can Happen So Fast And So Dramatically If You Keep Pushing

Back to Martha’s career . . .

She began as an editorial lackey, but she worked so hard at developing a commercially appealing style and selling it that by 1991, a unit of Time-Warner Inc. was promoting a Martha Stewart Living magazine.

Not content with what to most would be great success, Stewart contracted to do a daily television program, a newspaper column, and a mail-order catalog — all within a 24-month period!

In 1997, the industrious style guru bought her business from Time-Warner for $53 million. That same year, she started a syndicated radio show called Ask Martha. Today, she has her own line of home and garden goods at Kmart that produces over a billion dollars a year in merchandise sales. Recently, she brought her company (Martha Stewart Living) public, increasing her already considerable fortune.

It’s amazing to think that it all began over 30 years ago as an ordinary publishing job. The difference between Martha Stewart and the hundreds of others who were working at her level in publishing in 1980 is her ambition and determination. Sure, Martha Stewart has style. But so did (and do) thousands of others.

Just think of it . . . 30 years ago, she was making a salary – about 50 grand a year. Today, she is worth more than a 300 hundred million dollars.

What are you doing now? What would you like to be doing in 30 years?

What are you going to do about it?

[Do you know how Facebook and Google became the most powerful companies in the world?

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It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

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10 Silly and Dangerous Things People Say About Stocks

“Nature never deceives us; it is we who deceive ourselves.” – Rousseau (Émile, 1762)

Peter Lynch was the most successful fund manager in the world from 1977 to 1990, when he ran the Fidelity Magellan Fund. The fund grew from $20 million to $14 billion in assets under his leadership, and he walked out on top. Just before he retired, he wrote a best-selling book titled “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market.”

And he has probably bought and sold more stocks than anyone else on the planet. I can’t think of anyone more qualified to make a list of the 10 silliest (and most dangerous) things people say to justify their bad stock-market decisions.

So, without further ado, here’s a quick look at Peter’s list — along with my comments on each one:

1. “If it’s gone down this much already, it can’t go much lower.”

I know that you’ve said this to yourself during the last two major downturns. You said it on Lucent. On Cisco. Sun. AOL. Enron. WorldCom, etc. How many times does an investor have to say this before he learns that it makes no sense? Outside of zero, there is no rule for how low a stock can go. The best advice I can give here: If you catch yourself saying this, it’s time to get out.

2. “You can always tell when a stock’s hit bottom.”

Nobody knows when a stock will bottom — so don’t try to guess it. Instead of trying to catch a falling knife, it’s much safer to let the knife hit the ground … and let it wiggle around a bit to be sure … and then pick it up.

3. “If it’s gone this high already, how can it possibly go higher?”

If you want to make 10 times your money, you can’t sell before the stock goes up 10 times. But nearly all investors do sell the big winners early because of this faulty logic. The only way to make real money in stocks is by letting them go higher — by not taking a profit early. It’s hard to do. But you’ve got to let your profits ride.

4. “It’s only $3 a share; what can I lose?”

What can you lose? You can lose 100%. Whether a stock is $3 or $50, if it falls to zero, it’s a 100% loss. If it falls to 50 cents, it’s not much better. Three bucks is no guarantee of a bargain. Resist the urge; it’s dangerous. You can still lose it all.

5. “Eventually, they always come back.”

I’m heard that a lot during the dotcom bust. It’s as if WorldCom, Enron, Global Crossing, and all the dot-coms were some kind of fluke. Fact is, they don’t always come back. If you catch yourself saying this about one of your stocks, it may well be time to get rid of it. Make sure you’re using your trailing-stop-loss strategy here. 

6. “It’s always darkest before the dawn.”

For the past several years, gold has done nothing but fall in price. But every year, somebody is saying “It’s always darkest before the dawn.” As Peter Lynch says, “Sometimes it’s darkest before the dawn, but then again, other times it’s always darkest before it’s pitch-black.” If you’re saying this — and you really believe it — please be absolutely certain that you’re not just rationalizing a bad decision.

7. “When it rebounds, I’ll sell.”

I’ve heard this phrase hundreds of times. Yet, I’ve never seen anyone follow his own advice here. When the stock rebounds, they decide there’s nothing wrong with it and they keep it. If it never rebounds, they keep it. The reason people do this is that they don’t like to admit they’re wrong. So, somehow, by holding a losing stock instead of selling it, there’s still a chance that they’ll be right on this loser. Usually, they’re not. If you find yourself in this boat, your best bet is most likely to sell immediately.

8. “What, me worry? Conservative stocks don’t fluctuate much.”

There isn’t a stock on the planet that you can afford to ignore. And as we’ve learned during the stock-market shellacking of 2008-09, even blue chips can get clobbered. This phrase justifies the decision to not pay attention to your investments. That’s a bad idea. It’s your money. It’s worth a little attention.

9. “It’s taking too long for anything to ever happen.”

I hear this phrase all the time. Investors want action. But think about this: A 12% annual return is about 1% a month. That’s a great return, but there’s no action. You don’t need action. Be patient. Lynch says it takes remarkable patience to hold on to a stock that everyone else seems to ignore. Most of the money he makes on a stock, he says, is in the third or fourth year of owning it.

10. “Look at all the money I lost because I didn’t buy it!”

Lynch says this thinking “leads people to try to play catch-up by buying stocks they shouldn’t buy, if only to protect themselves from ‘losing’ more than they’ve already ‘lost.’ This usually results in real losses.” Have you made any of these statements — or statements like these — in the past year?

Always remember: In the long run, it is much easier — and ultimately less painful — to correct a bad decision quickly than it is to continue searching for emotional justification as your portfolio continues to shrink.

[Do you know how Facebook and Google became the most powerful companies in the world?

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It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

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They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

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Wealth Building Secret #2: Earn More Than You Spend

“I didn’t want to be rich, I just wanted enough to get the couch reupholstered.” – Kate (Mrs. Zero) Mostel

If you continue to get up early and read Ray's Wealth Wisdom, your income will climb. How do I know that? Because the world is starved for ambitious, hardworking, and focused people. Waking (and getting to work) early gives you a head start day after day, month after month, year after year. That adds up. By charging your batteries with Ray's Wealth Wisdom (Seven Years to Seven Figures), your energy will always be high and your efforts razor-sharp — focused toward achieving your goals.

Even a modicum of extra effort will give you enough extra income to become wealthy eventually. The best-selling book “The Millionaire Next Door” (by Thomas Stanley and William Danko) documented that. If you are satisfied being among the “lumpen capitalists” (see “How Rich Do You Want to Be?” below), the secret is to spend less than you earn, invest those extra savings over a long period of time, and let the miracle of compound interest do the rest.

But you probably don’t want to wait 30 or 40 years. And you may not be satisfied with a mere $500,000 to $1,000,000 in net worth. If so, you are going to have to do the following:

* Learn (and eventually master) a financially valuable skill.

* Use it to position yourself as a profit maker.

* Secure for yourself a fair cut of the success you create.

This will give you — almost from the start — an above-average income. And that income will increase as you get better at what you do. But no matter how high you boost your income, you won’t acquire wealth unless you learn to spend less than you make. For it is the money we save, not the money we make, that determines our wealth.

That’s what I’d like to talk about today: how to avoid the very natural and deceptively powerful impulse to spend more as you make more.

If you have enjoyed a growing income, you already understand (all too well) what I’m talking about. Make more money and things get better: your car, your clothes, even (and most expensively) your home address. That’s fine so long as there is a limit. But for many (if not most) income builders, the desire to spend is always two steps ahead of the ability to earn. If you fall into that trap, you will have the accoutrements of wealth but never its most valuable benefits: financial peace of mind and the freedom to stop working.

Fat people consume more calories than they burn. Poor people spend more money than they earn. Getting thin and getting wealthy are the two easiest things you can do — at least in theory. The hard part is the mental discipline.

We’ll talk about dieting some other time. Today, I want to give you one powerful trick that will give you a wealth builder’s mind-set.

It’s a technique I stumbled upon many years ago that has been a great help in my financial success. It has allowed me to get richer in good times and bad, when my ideas were working and when they were not, when the economy boomed and when it stalled. It’s something you can do for yourself. Something that will change you in a subtle but powerful way so that you will never have to worry about being poor again. It’s the financial equivalent of a diet pill that would make it impossible to ever gain back a pound of lost weight Wouldn’t that be nice!

This came to me about 20 years ago, when I first was introduced to the teachings of Jim Rohn. Jim was big on "the numbers tell the story". He explained that Las Vegas casinos complete a profit and loss statement hourly! Why? Because of all the activity, even a little neglect could spell disaster. So I decided to really focus on my numbers.  Every day after my business opened, I’d count the money that came in. Then, I started doing something that I’ve continued to do to this day.

I took out a sheet of paper and tallied up the value of everything I owned and everything I owed. There was an 8-year-old car that was worth about $1,500, some cheap jewelry I had bought for my wife that I could hock for maybe $200, and a couple of inexpensive (but actually good-quality) oil paintings I’d bought that might get me $50 each in a garage sale. That was about it. Except, of course, for the sweet green cash that was piling up in my mind each day as my fledgling business paid back its start-up capital and went on to earn thousands and then tens of thousands of dollars.

When I started this little scribbled list, my financial assets were overshadowed by my debts and liabilities (credit-card debt, some old student debt, a car loan on that piece of junk vehicle, etc.). The bottom line was bright red. But since I had a cash-positive business, things were getting better every day. The hole I had dug for myself was getting less and less deep. In a matter of months, I could poke my head above ground level and see a future for myself. A year later, I was among the lumpen lot!

It wasn’t a straight march up. A year later, I was a partner in about a dozen operating businesses and suddenly found myself — for several scary months — more than a million dollars in the hole. If things hadn’t turned around, it would have been very bad for my family.

Those two experiences — making that good, fast money and then almost losing it — inspired me to adjust my habit of adding up my wealth. The twist was this: I promised myself that I would do whatever it took to make sure that each new total — each new bottom-line number — was larger than the one before. Since I’d gotten into the habit of running my numbers on a monthly basis, my vow meant that I was committing to becoming wealthier every month.

That may seem like a simple promise, but it had a profound impact on the way I thought about myself, my job, my business relationships, and wealth building itself. It made me see — almost instantly — that many of my habits (including some of my spending habits) were financially unhealthy. It also gave me, at times, the panicked energy I needed to do something drastic — to start something new or end something that had gone wrong . Plus, it gave me an underlying determination to get a little bit richer every day — and this, as Robert Frost said, has made all the difference.

You might want to do the same thing:

* Make it a habit to recalculate your net worth on a monthly basis.

* Then promise yourself you’ll do what it takes to make that bottom line always bigger than it was before.

You’ll have to be scrupulously honest. The temptation to meet your goal by overvaluing a particular asset may be strong, so be aware of it and resist it.

Counting your money is an unseemly activity. You probably don’t want to do it in front of anyone else. And you certainly don’t want to talk about it. But it will remind you of the progress you’re making — and that will give you the mental strength to continue. Ultimately, it will make spending less than you earn automatic. And that means your future wealth will be guaranteed.

Don’t dismiss this little technique because it’s simple. All the best and most powerful things in life are simple. This WILL make a difference. Do it.$

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…
 

Click here to watch the video and start your own premium traffic business today!]

The Greatest Financial Gift You Can Give to Your Children

I wrote this essay for your children and grandchildren.

You’ve probably heard about America’s huge debt load. The U.S. government’s financial obligations now exceed $663,000 per American family. This burden will fall on the youngest Americans.

It’s unethical. It’s unfortunate. But it’s the reality.

With this giant financial obligation bearing down on them, it’s critical that now – right now – your children and grandchildren learn about money and finance. They need to know the basic principles… like how to be independent, why debt is dangerous, and how to grow money.

They don’t teach finance in schools. If you don’t teach them this knowledge, no one will. They call this financial illiteracy.

If our children are financially illiterate, they have as much chance of survival as a swordsman in a gunfight. There will be no mercy for the financially illiterate in the future. It’s likely these people will live as indentured servants to the government and its creditors.

But if our kids have a grasp of finance and its basics – and they obey its laws – they will grow up rich. They will be in a position to help other Americans, too.

Below, you’ll find the three vital financial concepts all children need to understand. Please pass them on to your children and grandchildren as soon as you can. I have three children… And these three concepts are my starting point for their financial education.

First of all, our kids must know that they are not entitled to money or wealth… or anything for that matter, even Christmas presents. They must earn money. I want my children to learn that they shouldn’t expect anything to be handed to them. I don’t want them to rely on the government for their livelihood, like many people do right now.

So many people treat money and prosperity as an entitlement. The government even calls its welfare programs “entitlements.” This word – and what it represents – gets stamped into young people’s brains. Kids act as if they are somehow entitled to toys, video games, and cars. But why should they be? Just because they have parents, it doesn’t mean they should get everything they want.

It's good to regularly remind your children of this when they are old enough to understand it. Not paying kids an allowance is a great start. An allowance would reinforce the sense of entitlement. They can make money by earning it: doing the dishes, making their beds, mowing the lawn… there are a million things. It's better to pay them for doing those things. But I’m not going to just give them money.

The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. Like the entitlement mentality, debt is an enslaver. It robs you of your independence. I avoid debt in my personal life… and when I’m choosing investments.

The best way to illustrate the cost of debt is to calculate the total amount of interest the debt generates in dollars over the lifetime of the loan, instead of looking at the interest rate (like most people do). Once you look at it like that, you can see how expensive borrowing money really is.

For example, say you borrow $100,000 with a 30-year mortgage at 7%. Over 30 years, you’ll end up paying $140,000 in interest to the bank. In the end, you’re out $240,000 for a house that cost less than half that. Not a good deal.

The third thing our kids need to learn is the power of compound interest and the best way to harness it.

Compound interest is the most powerful force in finance. It is the force behind almost every fortune. The brilliant Richard Russell calls compound interest “The Royal Road to Riches.” And it’s mathematically guaranteed.

Let’s say, for example, you have $100 earning 10% annual interest. At the end of a year, you’ll have $110. During the second year, you’ll earn interest on $110 instead of $100. In the third year, you’ll earn interest on $121… and so on. This is the power of compound interest. The numbers get enormous over time, simply because you’re earning interest on your interest.

Because time is the most important element in compounding, it’s an incredibly powerful idea for children to understand. They have the ultimate edge in the market: the time to compound over decades.

The stock market is the best place to earn compound interest. You buy companies that have 50 years or more of rising dividend payments ahead of them. Then you let the mathematics work.

As soon as your kids are old enough to understand some arithmetic, you can sit down with the classic compounding tables and show them which stocks they have to buy. I’ll use Coca-Cola, Johnson & Johnson, and Philip Morris as examples.

Another very safe place to save and compound your money is our “Income for Life” strategy. 

After that, assuming they have the discipline to follow through, they will get rich. There’s no doubt about it.

In sum, you have the responsibility to educate your family about finance. If you don’t, no one else will, and they will suffer for it.

Encourage them to work hard and avoid the entitlement mentality. Teach them the power of compound interest and explain the dangers of debt.

If you do this, you will equip your kids and grandkids to survive financially in the difficult circumstances ahead. You’ll provide them with something that nobody can place a price on: the power of independence.$

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…
 

Click here to watch the video and start your own premium traffic business today!]

How to Create Personal Wealth

Donald and Mildred Othmer were ordinary Americans. Don was a chemical engineering professor in Brooklyn. Mildred was a teacher. They never did anything extraordinary and never had great luck at anything, yet they did amass a $750 million fortune before they died.

They did it by following two principles that we talk about constantly:

1. Have a second income. Both Don and Mildred developed secondary sources of cash. Don wrote and filed patents. Mildred worked as a buyer for her mother’s dress shop. This extra income wasn’’t ever phenomenal, but it was, for many years, significant (in the range of $15,000 to $50,000 per year).

2. Invest it wisely. The Othmers put all of that secondary income into “value” investments. Since they understood that they did not and would never understand other people’s businesses well enough to predict how they would perform, they invested their extra income in businesses that had good “fundamentals.” The stocks they invested in represented companies with a steady history of growth and earnings. They favored businesses they could understand.

Luckily for them, they found one company with a growth plan that reflected their conservative investment philosophy: Berkshire Hathaway Inc., Warren Buffet’’s company. The Othmers were so impressed with Berkshire and with Buffet’s analysis that they bought $50,000 worth of the company’s stock. How good an investment did that turn out to be? They saw their $42 shares go up to $77,250. You don’’t need to be lucky enough to pick Warren Buffet as your stock adviser to become wealthy. Had the Othmers invested in any ordinary index fund (or even municipal bonds), their net worth would have been in excess of $100 million. That’’s plenty enough for a comfortable retirement, don’’t you think?

The Othmer formula — having a second income and investing it wisely — applies to folks who have regular jobs and don’’t have the nerve to give them up. If you have your own business, you should not find something additional to do but instead do more in your business. Treat that “more” as a second job and take all the money you make from that and treat it exactly as the Othmers did. The important thing is to develop a comfortable lifestyle that allows for all your needs to be met on your “regular” income and then create — for your personal wealth fund — an additional $5,000 to $50,000 a year (or more if you can) that can grow steadily, taking advantage of the miracle of compound interest.

Here’’s what you can do today: Figure out how to make an extra $5,000 to $50,000 in the next 12 months and promise yourself that you will invest every penny of it.$

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…
 

Click here to watch the video and start your own premium traffic business today!]

Are the Rich Smarter Than You?

“Well if you’re so damn smart, why aren’t you rich?”

I heard this question asked when I was young, and it ingrained in me the notion that the rich must have a little something extra going on upstairs, otherwise, we’d all be rolling in it. Right?

There is, in fact, some evidence to support this. According to a recent report from the U.S. Census Bureau, there is a strong positive correlation between income and education. Over an adult’s working life, on average…

• High school graduates should expect to earn $1.2 million.
• Those with a bachelor’s degree, $2.1 million.
• Those with a master’s degree, $2.5 million.
• Those with doctoral degrees, $3.4 million.
• Those with professional degrees, $4.4 million.

But here’s the rub. Studies show that those who earn the most aren’t necessarily the richest…

How to Determine Real Wealth

To determine real wealth, you need to look at a balance sheet – assets minus liabilities – not an income statement. According to the late Dr. Thomas J. Stanley, the bestselling author of The Millionaire Next Door and perhaps at the time the country’s foremost authority on the habits and characteristics of America’s wealthy. Many of his findings are just the opposite of what you’d expect.

For example, we generally envision millionaires as Bentley-driving, mansion-owning, Tiffany-shopping members of exclusive country clubs. And indeed, Stanley’s research reveals that the “glittering rich” – those with a net worth of $10 million or more – often meet this description.

But most millionaires – individuals with a net worth of $1 million or more – live an entirely different lifestyle. Stanley found that the vast majority:

• Live in a house that cost less than $400,000.
• Do not own a second home.
• Have never owned a boat.
• Are more likely to wear a Timex than a Rolex.
• Do not collect wine and generally pay less than $15 for a bottle.
• Are more likely to drive a Toyota than a Beemer.
• Have never paid more than $400 for a suit.
• Spend very little on prestige brands and luxury items.

This is certainly not the traditional image of millionaires. And it makes you wonder, who the heck is buying all those Mercedes convertibles, Louis Vuitton purses, and $70 bottles of Grey Goose vodka? The answer, according to Dr. Stanley, is “aspirationals.” People who act rich and want to be rich, but really aren’t rich.

Many are good people, well educated, and perhaps earning a six-figure income. But they aren’t balance-sheet rich because it’s almost impossible for most workers – even those who are well paid – to hyper-spend on consumer goods and save a lot of money. (And saving is the key prerequisite for investing.)

This notion shocks many Americans. During an Oprah appearance, Dr. Stanley was asked the following question from a member of the audience, one he’d heard hundreds of times before:

“What good does it do to have all this money if you don’t spend it?”

She was angry, indignant even. “These people couldn’t possibly be happy.”

Keeping Up With the Joneses and Smiths

Like so many others, this woman genuinely believed that the more you spend, the better life is. Understand, we’re not talking about people who live below the poverty line. (Clearly, their lives would be better if they were able to spend more.) We’re talking about middle-class consumers and up, those who often live beyond their means and then find themselves under enormous pressure, especially in a weak economy.

Some were overly optimistic about their earning prospects. Others didn’t realize that they are up against an army of the best and most creative marketers in the world, whose job it is to convince you that “you are what you buy,” that you need to outspend – to out-display – others.

The unspoken message behind the constant barrage of TV and billboard ads featuring all those impossibly good-looking men and women is that you are special, you are deserving, and you need to look and act successful now.

According to Dr. Stanley, “The pseudo-affluent are insecure about how they rank among the Joneses and the Smiths. Often their self-esteem rests on quicksand. In their minds, it is closely tied to how long they can continue to purchase the trappings of wealth. They strongly believe all economically successful people display their success through prestige products. The flip side of this has them believing that people who do not own prestige brands are not successful.”

Yet “everyday” millionaires see things differently. Most of them achieved their wealth not by hitting the lottery or gaining an inheritance, but by patiently and persistently maximizing their income, minimizing their outgoing, and religiously saving and investing the difference.

You Aren’t the Car You Drive or the Watch You Wear…

They aren’t big spenders. They just recognize that real pleasure and satisfaction doesn’t come from the car you drive or the watch you wear, but time spent on activities with family, friends, and associates.

They aren’t misers, however, especially when it comes to educating their children and grandchildren – or donating to worthy causes. Although they are disciplined savers, the affluent are among the most generous Americans in charitable giving.

Just how prevalent are American millionaires? According to the Spectrum Group, there were 8.39 million U.S. households with a net worth between $1 million and $5 million at the end of 2014. Very few of them won a Grammy, played in the NBA, or started a computer company in their garage. Clearly, thrift and modesty – however unfashionable – are still alive in some parts of the country.

So while millions of consumers chase a blinkered image of success – busting their humps for stuff that ends up in landfills, yard sales, and thrift shops – disciplined savers and investors are enjoying the freedom, satisfaction, and peace of mind that comes from living beneath their means.

These folks are turned on not by consumerism but by personal achievement, industry awards, and recognition. They know that success is not about flaunting your wealth. It’s about a sense of accomplishment… and the independence that comes with it. They are able to do what they want, where they want, with whom they want.

They may not be smarter than you, but they do know something priceless: It is how we spend ourselves – not our money – that makes us rich.$

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