Hello folks! I’m excited to share with you a fantastic guest post from Mustard Seed Money. Today he’s sharing his thoughts on Stealth Wealth. I must say, this is a concept that was new to me just a few months ago. Since joining the personal finance blogging community in early 2016, I have heard “stealth wealth” being thrown out here and there. Now having read Mustard Seed’s analysis and view of stealth wealth, I am a huge fan and will definitely continue to embrace it! So without further ado, take it away Mustard Seed!
How easy is it to identify a wealthy millionaire? Of course there are the ultra high net-worth people that stand out who drive flashy cars and fly on private jets. What amount of income is really considered “wealthy”? The IRS says that only 2% of American households make more than $250,000 a year.
I was born in the 80s, but honestly I don’t really remember those years very well. However, between movies like The Wolf of Wall Street, The Wedding Singer, and reruns of Miami Vice, I have a fairly “accurate” idea of how life was in that time.
In these movies, the 80s are portrayed as a time of excess. This is when Michael Douglas gave his “Greed is Good” speech, designer denim was in vogue, and showing off one’s wealth was in style. I mean think about it. One of the most popular shows was Lifestyles of the Rich and Famous with Robin Leach.
Today, it doesn’t seem as though the rich show off their wealth as extravagantly. If anything, I believe there is a greater emphasis on the wealthy giving back through charities and seeking to make a more altruistic impact in society.
I’m sure some of you are rolling your eyes and thinking that I clearly have never watched an episode of Keeping Up With the Kardashians. You are right. I haven’t 🙂 Please let me know if I am missing out on something beneficial.
“Wealthy” is a pretty subjective though. Thomas Stanley, in his book Stop Acting Rich, describes three different types of wealthy people.
These are the celebrities and other famous influencers that you see and hear about in the news. I think most people think of this group when they think about the ultra-wealthy. They are hyper-consumers with bottomless bank accounts.
This group makes up 80,000 households in a nation of more than 115,000,000 households. Which is roughly 0.7% of all U.S. households. Quick side note: Did you know that the highest concentration of U.S. Glittering Rich people live in the Tri-State metro area of New York? But Maryland is the #1 state of millionaires with 7.7% or 1 out of 13 households having millionaire status. Connecticut ranked second, with 7.3% of households achieving millionaire status; Hawaii ranked third, with 7.25%.
Income Sheet Affluent
Typically, these are physicians, attorneys, and executives who have a high income, but low net-worth. Many are driven to hyper-consume by their need to show off their high social status. Stanley refers to them as “Big Hats, No Cattle”.
Let’s say your doctor drove a beat-up Honda Civic with duct tape holding the muffler in place, wore old, tattered clothing, and had haggard facial fair. I think you might have second thoughts on how competent he was.
As I recently wrote in my Dress for Success article, well-groomed men earn $14,000 more than their scruffy counterparts. Likewise women who are unkempt earn $22,000 less than their well-groomed colleagues.
However, in trying to appear like the Glittering Rich, these households tend to save very little for their future and potentially set their children up for failure.
Studies have shown that children brought up in a high-consumption environment are unlikely to break this upbringing and consider that type of lifestyle normal. These are the children whose parents drive BMWs and think they are also entitled to a beamer as well. It is incredibly difficult to break free from this consumption-obsessed lifestyle.
Balance Sheet Affluent
These are most likely to be our Stealth Wealth individuals. The first time that I was introduced to the term “Stealth Wealth” was in an article written by Sam of Financial Samurai. While I know others, such as Joshua Kennon, have used it before, I normally credit Sam with my introduction to the term. These Stealth Wealth individuals more likely to become wealthy by savings and investing.
In Thomas Stanley’s book The Millionaire Mind, Balance Sheet Affluent includes households that exceed twice the amount of net-worth expected for an individual, couple or family by age and income. Stanley further provides the formula to show how to calculate how you are doing:
Desirable Household Net Worth = 10% x Age x Income
Household Net Worth for Prodigious Accumulators of Wealth (Balance Sheet Affluent) = 2 x (10% x Age x Income)
For example, if you are 35 and earn $100,000 per year, you should have a net worth of $350,000. Those who are balance sheet affluent would have a net worth of $700,000 or more.
Stealth Wealth Households
Some of the most common characteristics of these households are they pay less than $300,000 for their homes, pay off their mortgage early, and avoid debt. It is well-known that Warren Buffett lives in the same house in Omaha, Nebraska, that he bought in 1958 for $31,500.
Not surprising, where you choose to live, the type of house house you buy, and the neighborhood that you live in will have the biggest impacts on your balance sheet. More than anything, the research has shown that your choice of home will have the greatest impact on your spending – either a lot or not so much. When you think about it though, it makes sense. If you live in a McMansion, you are probably going to want to fill it up with a bunch of things. If you have a small, modest house, you simply wouldn’t have the room to buy excessive amounts of furniture or gadgets.
Rich People Drive Toyotas
In the book Stop Acting Rich, Stanley says that Toyota is the most made car. According to his research, more than 1 in 10 millionaires drive Toyotas. What’s even crazier is that among millionaire engineers, it’s 1 in 4!
That shouldn’t be surprising since according to Consumer Reports, Toyota was the top manufacturer with the fewest problems per vehicle after 5 years. Now contrast that with a vehicle that was manufactured by BMW or Mercedes Benz, and these cars were nearly twice as likely to have problems compared to those manufactured by Toyota.
But here’s another really interesting stat done by Experian Automotive. Only 39% of households that make over $250,000 buy luxury brand vehicles. You know what that means– 61% of people who earn $250,000 or more don’t buy luxury brands. They’re buying Toyotas, Hondas, and Fords like the rest of us.
How the Rich Become Rich
According to this survey by Fidelity, nearly 8 in 10 millionaires became so without the help of a trust fund. Worldwide, about half the world’s millionaires own their own businesses, and a scant 16% inherited their cash according to the Economist. Of these self-made millionaires, 30% told Fidelity that they struggled financially in their early days.
So how do they get there? On average, the typical millionaire saves and invests 20% of their income, while the average American saves less than 5%. The typical millionaire is debt-free and has no mortgage or automobile notes. In an analysis of 401(k) savers who made less than $150,000 a year and still had more than $1 million in their plans, Fidelity found that those millionaires saved 14% a year on average.
“The really rich never depend on one flow of income but instead create a number of revenue streams,” writes Grant Cardone, author of The 10X Rule. More specifically, author Tom Corley found that around 65% of wealthy people have three or more streams of income. He says, “Revenue streams include real estate rentals, stock market investments, annuities, private equity investments, part ownership in side businesses, ancillary products, or services, and royalties.”
Thomas Stanley believes financial independence is one of the strongest driving forces for most millionaires. Even more so than their ability to consume to their heart’s content. For many rich people, it’s not about the material stuff as much as the freedom and ability to do whatever they want with their time and resources.
So, do you subscribe to stealth wealth? Are you surprised to learn that most millionaires don’t flaunt their wealth like most would assume? Share your comments below.
– Mustard Seed Money