By: Mike Earl, CFP®, CPWA®
At The Wealth Group, we talk a lot about mimicking the behaviors of the wealthy. The overwhelming majority of wealthy people in this nation did not inherit their wealth. According to The Millionaire Next Door, 80% of America’s millionaires did not inherit any of their wealth.
If these 80% of millionaires created their wealth during their own lifetimes, we should study their habits and behaviors to better understand how to build wealth.
You may have read my recent article debunking the myth that residential real estate is a great investment. Don’t get me wrong: I really appreciate beautiful homes. I admire the architecture, the carpentry, the high-end design elements, and the gorgeous outdoor spaces of a fancy home.
But I also know that expensive homes are not a wealth-building tool. Expensive homes are great for people that have already built wealth and can pay cash for real estate. But we have seen far too many people hampered in their wealth-building capabilities by having more house than they can reasonably afford.
Look at Warren Buffett. The man is now worth $75 billion – the second-wealthiest person in the world. His home in Omaha is worth about $800,000.
This is where ratios become so helpful. Ratios give us a framework for making decisions about real estate and vehicle purchases. If your decisions about what home or vehicle to buy are based on the monthly payments of taking on debt, you’re going to be an Under Accumulator of Wealth (UAW).
The best way to fool-proof your wealth-building plan is to limit your total monthly housing payment (PITI: principal; interest; taxes; and insurance) to 25% of your take-home pay.
A second outstanding way to fool-proof your wealth-building plan is to limit your vehicle purchases to either 7.5% of your annual household income. That metric is based upon what America’s actually wealthy do, according to (you guessed it) The Millionaire Next Door.
There is typically nothing fancy about building wealth. It’s a lot like getting fit and staying fit: consistent behaviors applied over a long period of time. We are here to help our clients adopt and maintain those consistent behaviors and decision-making processes that lead to wealth creation.
I’ll leave you with the fascinating infographic below, courtesy of Money Magazine last year: