Nov. 15, 2021

This paid piece is sponsored by First National Wealth Management.

When people hear the word “millionaire,” they often think of luxury cars, designer clothes, big houses and yachts. In reality, your unassuming next-door neighbor could be a millionaire. And if you play your cards right, you could be too!

On the latest episode of “Common Cents on the Prairie,”™️ we sat down with Dr. Sarah Stanley Fallaw, founder of DataPoints and co-author of “The Next Millionaire Next Door.” With a Ph.D. in applied psychology, Fallaw has done research on psychometrics and financial psychology that has been featured at multiple conferences and in publications. She also joined forces with her father — who authored “The Millionaire Next Door” in 1996 — to re-research the premise of the original book. In this episode, Fallaw discusses their findings and shares the secret to how you can become a millionaire.

You can read a recap of our conversation here, listen to the entire episode or find “Common Cents on the Prairie”™ wherever you stream your podcasts.

Income does not equal wealth

A lot of us grow up thinking that brand names and material possessions are indicative of someone’s wealth; in fact, it’s usually the opposite. More often than not, people are simply stretching their income to purchase those things rather than saving money. On the other hand, a “millionaire next door” is able to transform income into real wealth.

Even if they have modest salaries, millionaires next door are able to create wealth by being frugal. These people can ignore what their neighbors are doing and avoid following trends — a concept known as “social indifference.” Often, they have their own goals for their money and stay focused on those.

Millionaires next door may not look rich because they drive a used car or have a modest-sized house, but these lifestyle choices can translate to more money in the bank. Simply put, income is how much you make, while wealth is how much you save.

Characteristics of a millionaire next door

Even if the careers, job titles and businesses owned by millionaires next door change over time, this class of Americans typically has behavioral or personality characteristics that stay the same. Being frugal or economical with resources is one characteristic they consistently model. This characteristic distinguishes those who can build wealth from those who spend most of what they make.

Additionally, we know from research that those who are conscientious, attentive to details and follow through with what they say they’re going to do tend to have a higher net worth than those who are more scattered or disorganized.

Confidence is another characteristic that defines millionaires next door; those who are thoughtful and feel good about the way they manage their finances tend to achieve their financial goals and transform income into wealth.

Speaking of the Joneses

Of course, there are increasing challenges to becoming a millionaire. It’s difficult to implement social indifference in the world of social media. To become a millionaire in this day and age, it takes a combination of behavioral factors as well as leveraging the lessons you learned in your formative years, like how your family dealt with money.

This nature-versus-nurture component plays a major role in your ability to become a millionaire. In fact, the ability of prodigious accumulators of wealth to block out what the proverbial Joneses are doing could even be considered a superpower!

Furthermore, it’s important to remember that social indifference and ignoring the Joneses applies to social media as well — not everything you see online is indicative of real life. You may see a brand-new car or a trip to the Caribbean on your Instagram feed, but those people may not have anything saved for retirement or money for their kids’ college education.

Where you are on the scale

“The Next Millionaire Next Door” outlines three types of accumulators of wealth: prodigious accumulators, average accumulators and under-accumulators. Under-accumulators of wealth have a net worth that is less than one-half of their expected net worth. Meanwhile, average accumulators of wealth are on par with their expected net worth, and prodigious accumulators of wealth have a net worth twice their expected level.

You can determine your position on the scale by first finding your expected net worth — age times income divided by 10 — and then subtracting that from your actual net worth. If you don’t love where you ended up, don’t freak out! While this formula is a good rule of thumb, it might not work for everyone.

For example, younger adults who are just starting out may end up with an overestimation of net worth. Additionally, those with consistently increasing incomes have a difficult time catching up to their expected net worth. Therefore, it is more applicable to older adults and those nearing retirement.

Where you fall on the scale, though, doesn’t affect whether you can still become a prodigious accumulator of wealth on track to becoming a millionaire. While you can’t turn around tomorrow and suddenly become a millionaire, you can alter your spending and saving decisions to help you get on the path. By practicing the key behaviors discussed above, you can build money habits that help you accumulate wealth to become a millionaire eventually.

If you’re ready to change your money habits and start working to become a millionaire, our team would be happy to help. Send us a note.

Any comments, insights, or strategies discussed in this article are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything written here, please consult with your attorney, CPA and/or your financial advisor.