Ask ten people how the rich got rich and you will get at least ten opinions. Some of the more common assumptions are that people become wealthy by inheriting fortunes, taking advantage of those less fortunate, or “playing” the stock market. I even remember one government employee who insisted anyone who obtained wealth had to do so illegally.
While a few people become rich in these ways, they are the exception rather than the rule. A survey by the Spectrem Group asked 132,000 people with a net worth of over $25 million where their wealth came from. Here are the results:
1. Hard Work, 87%. The majority obtained their wealth by working hard. Most millionaires put in long hours, often in careers they love enough so that work becomes play.
2. Education, 78%. Certainly, people with college educations earn more than those without. However, the right type of education for building wealth may not be found in a college curriculum. For example, I know one person with no college degree who took the equivalent of 75 credit hours of real estate education and amassed large real estate holdings.
3. Smart Investing, 72%. Don’t confuse smart investing with sophisticated investments. It’s just not that hard to invest smartly: start young, invest regularly, don’t speculate, diversify your investments over multiple asset classes and multiple securities, reduce fees and minimize taxes, and don’t time the markets.
4. Taking Risks, 63%. I would add, “smart risks.” Actions like starting a business, buying into the company you work for, relocating your family to a city with brighter prospects, changing careers, or borrowing to purchase investment real estate all carry with them a certain degree of risk. And with risk inevitably comes failure. In The Millionaire Next Door, Thomas J. Stanley and William D. Danko point out that the average millionaire makes 3.1 major financial, career, or business mishaps in a lifetime, while the average non-millionaire makes 1.6 such mistakes.
5. Frugality, 59%. I’ve often called this the common denominator of people that have wealth. My guess is that it didn’t rank higher only because many wealth builders don’t view themselves as frugal. They tend to not have written budgets, they don’t shop at thrift stores, they buy name brands, and they spend everything in their checking account. But what they forget is that they pay themselves first, which includes paying all their bills and taxes, spending heavily for education, and investing 20 to 50% of their paycheck. Then they blow what’s left. I call that frugality.
6. Being in the Right Place at the Right Time, 56%; and
7. Luck, 53%. Of course circumstances and luck—factors like timing, knowing people who can help you, and being blessed with abilities and good health—play roles in building wealth. What also matters, however, is being prepared to take advantage of favorable circumstances.
8. Running a Business, 46%. This fits closely with reason number one: working hard. When you work hard and take smart risks in your own business, you go beyond earning a substantial salary. You build a valuable asset.
9. Guidance of an Adviser, 35%. Part of reason number three, smart investing, is being smart enough to learn from skilled mentors and advisors.
10. Inheritance, 30%. Yes, inheritance is one source of wealth. I’d suggest that most of the inheritors who are able to keep and build on that wealth do so because of factors like hard work, education, and smart investing.
It appears that success in building wealth is similar to success in other areas: the harder and smarter you work, the more success you are likely to have.