Six Lessons from the "Average Wealthy"


By Richard M. Rosso, MS, CFP, CIMA, a financial advisor on NerdWallet’s Ask an Advisor.

We all have dreams of what life would be like if we didn’t need to worry about money, especially through decades in retirement.

Post-financial crisis, the majority of people are convinced financial independence is a dream, impossible to achieve. They believe financial security is reached through beating impossible odds like playing the lottery. I’ve seen many people fall for investment schemes that ostensibly were too good to be true.

Surprisingly, average individuals (like us) achieve wealth. Health care workers, mechanics, salespeople – they come from all walks of life. They are not fortunate enough to be recipients of lofty inheritances. They’ve accomplished what appears to be a masterful feat through unwavering discipline, strengthened money awareness and establishing and sticking to financial objectives. This group seldom gets discouraged.

So – how did they do it? What traits do they have in common?

Here are six:

1). Their definition of wealth is based on modesty. Initially, it’s easy and tempting to let your mind wander (stop drooling) about what life would be like if money worries were alleviated. We like thinking about possessions like new cars, big houses. But after all the day dreaming, comes practical soul-searching reality.

The “average” definition of wealth rests in a foundation of independence, not extravagance. It’s about keeping a low profile; there’s no desire to accumulate expensive things to “keep up” with others for appearances. People who pursue this path are passionate, perhaps borderline obsessed, with ways to spend less and save more – they’ll do everything possible to follow this simple, boring rule. It’s the core of their financial belief system.

Living below their means is a soul-satisfying accomplishment, part of a dedicated lifestyle. Clutter is abhorred. Less debt, less “stuff,” means less stress.

I know people who never earned more than $47,000 a year and retired with seven figures. It takes a change in mindset – a constant focus on spending less than the money that flows into a household.

Financial peace of mind is a requirement of their existence.

2). They go long and cherish used things. They delay gratitude; they don’t have a desire for new cars every three years. They don’t purchase homes and move frequently to upsize. The “average wealthy” waits as long as possible before replacing high-ticket durables; used is preferable over new for almost every item, including appliances. They frequent thrift shops for clothes (you would be surprised at the quality and condition of the goods). They’ve turned finding stuff they need or want into a hobby. Garage and estate sales are a must. Vacations are far from extravagant. There’s limited overseas travel or none at all. “Staycations” and taking advantage of local venues are more the norm.

3). They have financial plans and advisors. This group doesn’t leave their finances to chance or informal analysis. They take control by working with financial planners and advisors to create, monitor and adjust saving, investment and insurance plans and goals. Uncovering weaknesses in their financial condition and creating written action plans to overcome them are priorities. They’re not easily discouraged. Awareness and validation are important to their motivation. Making sure health care and disability insurance is more than adequate is extremely important and provides a sense of security.

They set aside two hours a week, usually on the weekend, to examine budgets, recent spending trends, savings and investments. Regular review time is mandatory. The family is involved, too, as a way to communicate progress and discuss what areas can be improved financially.

4). They don’t ignore retirement accounts. This group is not passive when it comes to creating a vision of life in retirement. They save at least 15% of their income and have done so consistently since their first paycheck. Five to 10 years from an estimated retirement year they seek to increase the percentage to 25%.

Asset allocation isn’t ignored. All investment accounts are examined as one unit for risk and return. Investment choices in company retirement accounts are reviewed and changed periodically depending on long-term performance and fees.

Occasionally with the assistance of an advisor, they will construct a balance among stocks, bonds and cash that fits their risk attitude and periodically adjust portfolio allocations back to pre-defined targets. In other words, they remain proactive at monitoring retirement investments and don’t allow savings in retirement accounts to sit dormant in cash for long. The cash held is a targeted segment maintained within an investment plan. They are also receptive to selling company stock based on guidelines that take the emotion out of a decision. They’re sensitive to keeping their investment in their own company’s stock at less than 15% of their total portfolio.

5). Some part of their future income is guaranteed. The “average wealthy” believe in insurance and look to create a stream of income for life in addition to Social Security (which they think should be a complement to a sound retirement plan). They’re sensitive to expenses so variable annuities are generally not a choice. Favorite investment vehicles include deferred income or single premium immediate annuities that insure against life expectancy risk and prolong longevity of retirement investment portfolios.

6). They don’t discourage easily. Financial setbacks don’t deter them. Several members of this group have faced serious illnesses, financial support for aging parents and adult kids with employment difficulties and yet they still persevere. Great savings, investment habits along with living below their household incomes have afforded this group flexibility in times of crisis. They are buffered against temporary obstacles and receptive to adjusting their retirement plan by working longer. In some cases, dramatic changes have been initiated like downsizing and selling assets to replenish savings.

Nobody said that building wealth was easy. I’ve witnessed those with retirement savings of $100,000 live like kings and I’ve seen households with $5,000,000 in investment assets worry about meeting living expenses. It begins with a personal definition of wealth and having the strong, long-term fiscal discipline to attain it.

There are many “average Joes” among us who are enjoying financial success. That means there is hope for all of us who are willing to do the work to get there.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Retirement , Basics , Credit and Debt

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