Wisdom in the Management of Money

One of the best books ever written on personal finance, in my opinion, is The Millionaire Next Door, by Dr. Thomas Stanley and Dr. William Danko. It was published more than 20 years ago, making its millionaire of the past worth around $2 million to $3 million today.

The book opens with an intriguing scenario:

These people cannot be millionaires! They don’t look like mil­lionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires–they don’t even have millionaire names. Where are the millionaires who look like millionaires?

The person who said this was a vice president of a trust de­partment. He made these comments following a focus group interview and dinner that we hosted for 10 first-generation mil­lionaires. His view of millionaires is shared by most people who are not wealthy. They think millionaires own expensive clothes, watches and other status artifacts. We have found this not to be the case.

As a matter of fact, our trust officer friend spends signifi­cantly more for his suits than the typical American million­aire. He also wears a $5,000 watch. We know from our surveys that the majority of millionaires never spent even one-tenth of $5,000 for a watch. Our friend also drives a current-model im­ported luxury car. Most millionaires are not driving this year’s model. Only a minority drive a foreign motor vehicle. An even smaller minority drive foreign luxury cars. Our trust officer leases, while only a minority of millionaires ever lease their mo­tor vehicles.

But, ask the typical American adult this question: Who looks more like a millionaire? Would it be our friend, the trust offi­cer, or one of the people who participated in our interview? We would wager that most people by a wide margin would pick the trust officer. But, looks can be deceiving.

Drs. Stanley and Danko spent 20 years studying the lives of the af­fluent before they published their findings. They began by surveying those who lived in upscale neighborhoods throughout the country. Over time, they discovered many of the people who live in expen­sive homes and drive fancy cars do not have much wealth. Even so, many people who do have a great deal of wealth do not live in upscale neighborhoods.

The researchers recognized that people have allowed themselves to be deceived. They have it all wrong about building wealth, as having a big income is not the same as being wealthy. If a family has a large income, but spends it all every year, they are not building wealth. They are living lavishly. People can have a hard time understanding that wealth is what you accumulate, not what you spend.

The most perplexing question in my mind is, “How is it that so many people who make a great deal of money and live lavish lifestyles are flat broke?” They have little or no net worth other than maybe the equity in their homes. What would cause someone to live so foolishly and not make better decisions? Undoubtedly, just about everyone likes nice things and could enjoy a high-end lifestyle, but there is a deeper issue involved that you may not be aware of.

In 1899, economist Thorstein Veblen wrote the book, The Theory of the Leisure Class. Veblen coined a special term describing many upper-income Americans. This is when you buy something, not primarily for its usefulness, but for the way it makes you look in the eyes of others. Veblen shared the following message in 1899:

People above the line of base subsistence, in this age and all ear­lier ages, do not use the surplus, which society has given them, primarily for useful purposes. They do not seek to expand their own lives, to live more wisely, intelligently, understandingly, but to impress other people with the fact that they have a surplus… spending money, time and effort quite uselessly in the pleasur­able business of inflating the ego.

Though we may not realize it, there is a psychological fulfillment which comes from being envied by others. Veblen contended that it is possible to persuade people to buy products that are not particu­larly superior in quality by publicizing widely that the products are expensive.

This is how he came up with the term conspicuous consumption. People buy costly items, not because they are higher quality, but be­cause the possession displays to others how rich the owners are.

Veblen expresses that we often make purchases to make a statement to the world that we are wealthy. Furthermore, in this modern culture of easy credit, men and women accumulate enormous debt just to live lavishly and “keep up with the Joneses.”

It is amazing how we allow the opinions of others to influence the decisions we make and how we choose to live our lives. This illustrates how people with high incomes can become conspicuous consumers and have little to show for it at the end of the day.

Richard E Simmons III is the founder and Executive Director of The Center for Executive Leadership and a best-selling author.


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