Money and morality tales

Years ago, the authors of The Millionaire Next Door made a splash with what should be an obvious point: being a millionaire amounts to having a certain net worth. Since most consumer goods are not actually appreciating assets, having a high net worth requires spending less than one makes on consumer goods. The difference between what one earns and one spends can be invested in assets that are more likely to appreciate (stocks, a business). Over some amount of time, these assets may cross the 7-figure mark. If you earn more than 7-figures per year, it can cross it quite quickly. But as most people who read personal finance books aren’t in that situation, personal finance writers have, in general, been more interested in the millionaires with 6-figure incomes (or in some cases, even 5-figure incomes). These families must live relatively modestly to have significant savings that, over decades, launch their net worth into the 7-figures. They are, as The Millionaire Next Door puts it, “Frugal Frugal Frugal.” (That is a chapter title).

This idea of the frugal millionaire has become gospel in personal finance circles. In particular, many people have become quite excited about millionaires driving used cars. Dave Ramsey has a spiel about millionaires being “people just like you who work hard, don’t live in fancy houses, and drive used cars.”

It is true that in The Millionaire Next Door, the authors reported that only 23.5 percent of millionaires drive the current year’s model. But this is not quite the same as saying the majority are driving around in used (as in pre-owned) vehicles. The book reports that “nearly 37 percent” of millionaires bought their cars used. By my calculation, that means that the majority (63 percent) bought new cars — they just didn’t keep buying new cars every year. But that also doesn’t mean they kept them that long either. The authors make a big deal about the fact that 25.2 percent of millionaires have not purchased a car in four or more years, but if you look at the chart, this also shows that roughly three-quarters of millionaires drive cars that are three or fewer years old. (Thomas J. Stanley, one of The Millionaire Next Door authors, writes about the used car myth here).

The reality that most millionaires buy their cars new, and that their cars are three or fewer years old, isn’t surprising. So why do people so want the opposite to be true? The Millionaire Next Door has a scene of a man with an 8-figure net worth (>$10,000,000) announcing he drinks Budweiser, which is held out as so interesting that the authors call him Mr. Bud. But this same gentleman also mentions drinking scotch, which is often quite a bit pricier. Calling him Mr. Scotch wouldn’t have created the same impression.

I’ve been amazed, as I spent the past few years researching and thinking about personal finance for All the Money in the World, just how strong the morality tale aspect of wealth is in the common narrative. I say this as someone who very much admires what it takes to grow a business, but I also think a lot of the personal finance literature misses the mark with preaching that millionaires are frugal people, and by extension, people who drive new cars and wear sharp clothes must be deep in debt, or at least broke, and trying to impress the Joneses. “Could it be that they have chosen to trade wealth for acquiring high-status material possessions?” Maybe. But it’s also true that most material possessions cost a rather insignificant chunk of truly wealthy people’s net worth.

I was struck by this while helping to research a package for Fortune back in 2000 called “40 under 40.” We tried to find the forty richest Americans under age 40 (this was during the dot-com craze). Part of that was estimating net worth. We soon realized that there was no point in even looking at people’s homes — by the time you got to the top 40, any personal real estate holding was pretty much irrelevant. It may not be irrelevant for a more “average” wealthy person, but homes are by far the most expensive thing most people own. A car? Clothes? A rather insignificant market fluctuation (let’s say 0.15% rise or fall) translates into a $15,000 daily change on a $10,000,000 portfolio. In that world, does a new car say that our millionaire is trying to impress someone? Or does it just say he liked that car?

The morality tale narrative would point out that most people don’t know folks worth $10,000,000 — so if they see someone driving a shiny new car, it says something else. Perhaps. But that doesn’t mean that all wealthy folks are hunting the sales racks at K-Mart, too, or adopting an intense coupon habit, and that this has anything to do with their net worth. Indeed, as I wrote before on one very small survey of women who owned $1-million-plus businesses, all of them were getting their groceries delivered. It wasn’t about frugality. Their favorite currency was time.

Photo courtesy flickr user 401(K)2012

8 thoughts on “Money and morality tales

  1. The thing is, though, there are a lot of people with insanely high incomes who somehow still manage to end up bankrupt. So I don’t think it’s entirely fair to say, “Well, cars and houses don’t really make a dent in their income.” because clearly, some people have managed to make quite a dent in their very large incomes.

    Like I always say, frugality isn’t the be all end all, but if you earn a bazillion dollars and spend all of it, you’ll still have no money in the bank, you know?

    And then too, there’s the fact that most of us aren’t going to earn a bazillion dollars, so we have to manage find the happy place where earning and saving meet.

    I shared my thoughts about that on my blog a little while back, actually.

    1. @Kristen – there are certainly anecdotes, including some famous ones of people who somehow spent everything (like Michael Jackson). And some people with low incomes have built up phenomenal amounts of wealth. But in general, as people earn more, they become more likely to save. Almost 85% of families in the top 10 percent of the income distribution save — meaning that the vast majority of people who are doing pretty well (not millionaire well, but pretty well) aren’t spending all of it.

      1. I guess I don’t think about this topic in multi-millionaire terms very often, which is part of my problem. I think about it more as it relates to people who have average incomes.

        Mr. FG and I lived on a fairly small income for many years. In that time, I watched people with incomes more than twice as big as ours amass debt while we managed to live debt-free (aside from a mortgage) and put money in savings. So, that kind of cemented my belief that having a good income isn’t all that helpful if you don’t know how to live within your means.

  2. My main thought when reading these sorts of articles is always, “A million dollars isn’t what it used to be.”

    We live in a university town with lots of retired professors and state employees and, considering the values of their pensions and houses on the West Coast, they’re pretty much all millionaires. All but two of my husband’s and my aunts and uncles are millionaires, and those two are divorced, or they probably would be too.

    I think at least two of my husband’s uncles are multimillionaires (worth more than $5 million, perhaps more than $10 million). They are multi-vehicle households and sometimes all their vehicles are more than 3 years old. They replace vehicles when they become unreliable, because they don’t want to deal with unexpected vehicle repairs, which is one of the privileges of wealth.

    (We, on the other hand, got a jump when visiting with a truck with 191,000 miles, ’cause we are not multimillionaires.)

  3. I see your point…especially that time is just as important as income, especially for the more mundane chores. The Brick and I finally hired a teenager this summer to mow our lawn and do other stuff. (Much of it heavy lifting.) For one thing, our backs could no longer handle it. For another, I started to realize that I could budget the extra costs in — especially if I disciplined myself to write an extra article to pay for it.
    This was big for us — we NEVER hired anyone to mow our lawn before. Too dedicated – and cheap – to do it.
    I wonder, though, if you’re skipping over another important issue: how these people made the money that became the foundation for their current holdings. Buying new cars, expensive houses, clothing and such really does add up if you’re still working at your first $30,000.
    Thanks for a thought-provoking post.

    Last post:

    1. @Cindy- glad you like the post! To build up wealth, you need to live within your means. It’s easier to live within your means if you make more money, though people do it at all income levels. So yes, if you’re earning $30,000, and want to build up wealth, that will mean quite modest housing, probably a used car (or using public transport). But that’s not the same as this morality tale we’ve built up about millionaires driving used cars and keeping them for ages.

Leave a Reply

Your email address will not be published. Required fields are marked *