Spending over 20 years in financial services I learned a great deal about the practices of the wealthy and the practices of the majority – most Canadians and Americans.

There are many myths about achieving wealth and it may surprise you to learn – only a few tactics – separating the wealthy from those who struggle, living pay cheque to pay cheque.

In my first article in this series I wrote about beliefs.

A second difference is that few millionaires and multi-millionaires focus on income as a means to accumulating wealth.

Why? Because income has less correlation with wealth than most North Americans realize. A key differentiator between the wealthiest 10 percent and most of the rest – a focus on net worth.

Net Worth, Not Income

High income does not equal high net worth.  Your friends and my clients with one or more of the boat, the sports car, the Rolex, exotic vacations, big house and big income often has a big debt load.  This may even be you.

One can have a high income, but a low net worth.  This is not a good position to be in as it makes us very vulnerable and at greater risk during economic downturns or life changes including increases in interest rates, changes to employment situation, marital status etc.
Wealthy people know this. They accumulate wealth  and high net worth because they pay attention to and track their net worth on a year over year basis and over time.

Many people with moderate incomes have higher levels of net worth than their counterparts with higher incomes.

We have largely been socialized to pursue employment offering large compensation and think that (or marrying rich or being born with a silver spoon) are the only or optimal ways to accumulate wealth. Too few people pay attention to their net worth – particularly those who falsely think their high income or ongoing pay increases or big bonuses will build their wealth.

In the book Millionaire Next Door, authors Stanley and Danko wrote of a surprising discovery; the typical American millionaire was often not the physician or highly paid executive earning $250,000 a year but the middle class average income earner.

Establishing a higher net worth is within your reach – on your income – by living within your means and by not spending tomorrow’s money today.

How do you determine if you are an under accumulator, average accumulator or prodigious accumulator of wealth?

First calculate your net worth – Total investments (cash, savings, home, all assets) minus all debt (credit cards, mortgage, line of credit, etc. etc.)

Next – multiply your age x 0.10 x your income from all sources, e.g. a 50 year old physician making $250,000…50 X 0.10 X $250,000 = Y.

If Y is less than your net worth, you are an under accumulator of wealth.

If Y is approximately equal to your net worth, you are an average accumulator.

If Y is twice your net worth, you are what Stanley and Danko considered prodigious accumulators.

A caveat with this calculation – it applies well to those 40+ and becomes increasingly less accurate the younger you are. At age 25 you have had much less time to accumulate wealth. But if your results are low, you are not off the hook! Using this calculation you can still predict your future by assessing your current debt load and income. If you are spending more than you are earning and accumulating debt without offsetting wealth, you are on the wrong path.

And yes, I realize that it is tax advantageous in the US to carry mortgage debt. However, the calculation still applies and a lower net worth puts you at greater risk. We only have to look to the recent global crisis to have that affirmed.

Tactics of the Wealthiest 10 Percent

#1 Differing Beliefs

• What are your beliefs about money and wealth?
• Where did you learn them?
• Which beliefs are serving you and which are getting in your way?

#2 Net Worth, Not Income

• What is your net worth?
• Are you living within your means? Or spending tomorrow’s money today?

More to follow…Join me for the next post in which you will learn how your spending habits can be so powerful in building wealth.

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