As a society, and perhaps most of the world, we have deep-rooted misconceptions of what it truly means to be wealthy.
We think wealthy people go on spending sprees for stuff like this:
Or they can afford to do stuff like this:
I just cried a little on the inside. Instead of burning those bills, give them to me ‘kay?
People with a 6+ figure income are wealthy. That’s how you get the money to burn in the first place, right?
Sure, those types of people above have a lot of stuff and a lot of money to burn, but that doesn’t mean that are set for life. If they truly knew how to control the amount of money flowing into their reserves, they should be able to retire right at that moment and maintain the same lifestyle of heavy consumption indefinitely.
Another way Dr. Stanley and Dr. Danko, the authors of The Millionaire Next Door, define wealth is by net worth.
Net worth: value of your assets (e.g. investments, cash in your checking account, any houses you know you lucky college student)-value of your liabilities (e.g. that pesky student loan debt)
Dr. Stanley and Dr. Danko define two groups of people, asides from the average accumulator of wealth, into these groups:
PAWs: prodigious accumulator of wealth—they get the whole personal finance thing
UAWs: under accumulator of wealth—they need some training (or perhaps in college)
So, how do PAWs get to where they are now?
Save most of their money
Sometimes even up to 70% of their income
Or just get a job that makes boatloads of money and save some of it
If you’re making $1,000,000 a year and just save 15% of it, you are saving $150,000 a year. While you might not be able to maintain the same lifestyle that requires you to spend the rest of your money after taxes, you’ll probably still be comfy compared to everyone else.
Invest in something
Dr. Stanley and Dr. Danko make a great point that you should invest in stuff you know about. Great at fixing up houses? Planning on going into the pharmaceutical business and understand medical studies? Then you can invest in those fields (e.g. housing, pharma stock).
Proceed with caution though and don’t get too full of yourself though. I’m sure a lot of people who were the best at fixing up houses got screwed over by the Recession. Be sure to understand the risk you take when undertaking an investment, even with your special knowledge.
As a college student, it can be difficult to plunk a lot of money down in a huge investment like a house. A great way around this obstacle is to start a side hustle. You’ll learn a lot of new skills and gain a lot of experience.
Don’t rely on others (especially parents) to prop them up
I think this is a super important point for college students. Even if you are receiving assistance from your parents to go to college, don’t go on a spending spree with money that is not actually yours.
I’d love to eat out once every week to escape cafeteria food, but that doesn’t mean I need to spend my parents’ money to do so. Since the money I make from my job is limited (and I value investing earlier more than eating out every week), I have limitations on my spending.
How do you know where you stand?
Dr. Stanley and Dr. Danko provide this simple formula to gauge how much your net worth should be:
“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be” (page 13)
The formula above determines what the average amount of net worth you should have currently. Being significantly above their prescribed net worth makes you a PAW and below makes you a UAW.
If I apply this formula to my situation, I make $2,000 in an academic year because of work-study (pretax annual household income)*19 (age)/10=$3,800
My current net-worth: around $1,500 (current value of my investments+cash-student loans)
Of course, as a college student, I am certainly not in the ideal situation. My net worth has to increase by 60%.
I’m working on side hustles to improve that number and getting good grades/extracurriculars to earn more in the future. Even if I am currently below the ideal net worth, college is a perfect time to work on my PAW habits so that the increase in income does not correspondingly increase spending.
I highly recommend The Millionaire Next Door. You can get it on Amazon here* or, better yet, make use of your local library like I did. It’s a great way to orient your perspective on what it actually means to be wealthy money-wise. And what better time to learn this than while we’re still young?
*Not an affiliate link