The Investment Coach

“Who Wants to Be a Millionaire” was a hit ABC television game show, a quiz competition with a top prize of $1 million. Originally prize awards were lump sum. In 2002 the prize switched to a fixed annuity. A $1 million winner received $250,000 up front and $37,500 a year for 20 years. Allowing for taxes and the time value of money, the purchasing power of the prize eroded over time.

Nevertheless, “found money” is not to be scoffed at. The bragging rights that go with winning would be fun.

Winning money in any contest or lottery literally is icing on your financial cake, but don’t bet your financial independence and retirement security on chance.

Most millionaires did it the old fashioned way. They worked, invested, and lived prudently.

In a recent column the 1996 book by Thomas Stanley and William Danko, The Millionaire Next Door, was cited. The authors concluded that most people have it wrong about how you become wealthy in America. “It is seldom inheritance or advance degrees or even intelligence that builds fortunes in this country. Wealth in America is more often the result of hard work, diligent savings, and living below your means.”

You are in your 20s and want to be financially independent at least by age 65, say 45 years from now. How do you become a multimillionaire? Begin with the end in mind, as Stephen Covey suggested in his best selling book, “The Seven Habits of Highly Effective People.” We added “multi” to the millionaire objective because it takes $5,105,720 in 2019 to equal the buying power of $1,000,000 in 1974, 45 years ago. You must build an “inflation hedge plan” into your wealth accumulation strategy.

Most of the millionaires studied by Stanley and Danko were married males in their late 50s, three children, earning 70-80 percent of their household’s income. Twenty percent were retired. Of the 80 percent who were working, two-thirds were self-employed. “Interestingly, self-employed people make up less than 20 percent of workers in America but account for two-thirds of the millionaires.”

Seventy-five percent of the self-employed saw themselves as entrepreneurs. If you are a closely-held business owner do you have a clear and actionable plan to grow, protect, and ultimately, harvest the value you are building in your enterprise? If you are a self-employed professional, such as a physician, lawyer, accountant, etc., do you have a plan to grow your “human capital” value?

The sample included owners of what the authors termed “dull-normal” businesses—welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, paving contractors. Today, you might see more in technology fields. Most were homeowners, had occupied their home for more than 20 years and had seen substantial equity growth. They did not live in fancy homes or overly expensive neighborhoods. Stability, roots in a community, frugality, count. They kept debt under control, didn’t drive current model or leased cars. About half had working spouses and the most common profession was teacher.

The millionaires had a “go-to-hell-fund,” enough wealth to go without working for ten years or more. We counsel something similar, a Freedom Fund. Your goal starting out should be to accumulate sufficient capital to live for one year with no income, and build from there. We want retirees to have up to five years worth of living expenses in guaranteed and low risk, low volatility investments, so you can ride out market dips without selling stocks and dividend producers at low prices.

We suspect that the millionaires of the 1990s would scoff at contemporary ideas that would have the government (read “taxpayers”) pay people who could work, but would rather not. Most of the millionaires worked 45 to 55 hours a week. Lean toward “ownership” versus “loanership.” When you loan savings via bank deposits or bonds, you can only make so much net of inflation and taxation. To accumulate wealth you must own things that will grow in value, hedge inflation, and perhaps generate cash flows and dividends—stocks, real estate, private equity, your own enterprise. Our millionaires took risks, those they saw as prudent. There is no do-it-yourself-wealth-accumulation without risk and confidence in self. It also takes time and patience. You still can buy the Stanley-Danko book from Amazon or Barnes & Noble. It’s worth a read!

Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which otherwise is unaffiliated with Capital Insight Group. He is a Gallup Certified Clifton Strengths Coach and a Certified Exit Planning Advisor (CEPA®).

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