It's not what you make, but what you keep - excerpted from 'The Millionaire Next Door'

Black Enterprise, July, 1997 by Thomas J. Stanley, William D. Danko

The consumer spending patterns of millionaires go a long way toward explaining how wealth is accumulated. Here's how the rich get that way.

THERE HAS NEVER BEEN MORE PERSONAL wealth in America than there is today (over $22 trillion in 1996). Yet most Americans are not wealthy. Nearly one half of all wealth is owned by only 3.5% of U.S. households.

That's why the authors of The Millionaire Next Door began studying how people became wealthy 20 years ago. What was so profound about their discovery is that most people have wealth in America all wrong. Wealth is not the same as income. The authors, Thomas J. Stanley and William D. Danko, have discovered who the wealthy are and are not. And in this book they share how ordinary people, too, can become wealthy. Here's an excerpt from their book that can shed some light on this fascinating topic.

Building wealth takes discipline, sacrifice and hard work. If you are willing to make the necessary trade-offs of your time, energy and consumption habits, you can begin: building wealth and achieving financial independence.

Years of surveying various high-income/high net worth people have helped us develop several wealth equations. A simple rule of thumb, however, can help you to compute your expected net worth: Multiply your age times your realized pre-tax annual household income from all sources except inheritances. Divide by 10 (age x pre-tax annual income / 10 = net worth). This, less any inherited wealth, is what your net worth should be. Given your age and income, how does your net worth match up? If you are in the top quartile for wealth accumulation, you are a PAW, or prodigious accumulator of wealth. If you are in the bottom quartile, you are a UAW, or underaccumulator of wealth. PAWs are builders of wealth--that is, they are the best at building net worth compared with others in their income/age category. UAWs tend to live above their means; they emphasize consumption and de-emphasize many of the key factors that underlie wealth building. AAWs (average accumulators of wealth) fit in between the two extremes, neither being big spenders nor big accumulators.

Being frugal is the cornerstone of wealth building. Yet far too often the big spenders are promoted and sensationalized by the popular press. It's unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles and the like. To them, superior people have excellent tastes in consumer goods. But it is easier to purchase products that denote superiority than to be actually superior in economic achievement.

We've found that the affluent tend to answer yes to three questions we include in our surveys:

1. Were your parents very frugal?

2. Are you frugal?

3. Is your spouse more frugal than you are?

This last question is highly significant. Not only are the most prodigious accumulators of wealth frugal, their spouses tend to be even more frugal. Consider the typical affluent household. Nearly 95% of millionaire households are composed of married couples. In 70% of these households, the male contributes at least 80% of the income. Most of these men play great offense in the game called income generation. Great offense in economic terms means that a household generates an income significantly higher than the norm, which in America is an annual realized income of approximately $33,000. Most of these households also play great defense; that is, they are frugal when it comes to spending for consumer goods and services. One frugal high-income producer within the married couple category, however, does not automatically translate into a high level of net worth. Something else must be present. A couple cannot accumulate wealth if one of its members is a hyperconsumer. This is especially true when one or both are trying to build a successful business. Few people can sustain profligate spending habits and simultaneously build wealth.

BUILDING A GOOD DEFENSE

Why aren't you wealthy, you ask? Well, let's examine you lifestyle. Is it one of great offense? Are you in the $70,000, $100,000, $200,000 income category? Congratulations, you play wonderful offense. But how is it that you keep losing the game called wealth accumulation?

Be honest with yourself Could it be that you play terrible defense? Most high-income earners are in the same situation, but not most millionaires. Millionaires play both quality offense and defense. And quite of en their great defense helps them outscore/outaccumulate those who outearn/have superior offenses. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.

Let's ask the typical American self-made millionaire about her defense. We will refer to her as Mrs. Jane Rule. Mrs. Rule and her husband own a small business, an auctioneering/appraising company. They also invest in several categories of items they appraise. Mr. Rule is the visible manager of their business. He gets much of the credit for its success. After all, he speaks very well and very quickly. But it's actually Mrs. Rule who is the true force, the real leader, of this enterprise. It's her planning, designing, budgeting, bill collecting and marketing that has made this auctioneering company successful.