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Financial independence

Wouldn’t it be great if you were rich? You wouldn’t have to worry about mortgage payments, health insurance, or paying for your kids’ education. You could spend winters in the sun, and travel the world in style. Best of all, you could work on things you really care about, even if you’re not getting paid.
The purpose of this article is to help you achieve financial freedom as soon as possible. Let’s start by investigating the secret life of millionaires.

Having lots of money doesn’t change anything. It just amplifies it. Jerks become bigger jerks, and nice guys become nicer.
-Ben Narasin

Worldwide, there are over 9 million millionaires1. Over 3 million of them live in North America. In the United States, about 1 percent of people are millionaires. The table below shows the distribution of millionaires by geography. America truly is the land of opportunity.

North America 3.2 million
Europe 2.9 million
Asia-Pacific 2.6 million
Latin America 0.4 million
Middle East 0.3 million
Africa 0.1 million

Where do millionaires put their money? Hint: it’s not under a mattress. Their top three investments are stocks, real estate, and fixed income securities such as bonds and Treasury bills1. Millionaires spread out their money so that even if one investment goes bad, the others will make up for it. This diversification is based on the principles of Modern Portfolio Theory (MPT). In the 1950s, Harry Markowitz of City University in New York showed that a diversified portfolio increased returns while reducing risk2 (it’s the financial equivalent of a “free lunch”). For his groundbreaking work, Markowitz won the Nobel Prize for Economics in 1990. The lesson is: don’t put all of your eggs in one basket. But how do you get a nest egg in the first place?

Equities (e.g., stocks) 31%
Real estate 24%
Fixed income (e.g., bonds, Treasury bills) 21%
Cash/Deposits 14%
Alternative investments (e.g., foreign currencies, hedge funds, private equity, venture capital, art and collectibles) 10%

Profile of a Millionaire
How do millionaires become millionaires? In The Millionaire Next Door and The Millionaire Mind, Thomas Stanley and William Danko interviewed hundreds of millionaires to discover their secrets. More than 80 percent accumulated their wealth on their own, without the help of a big inheritance. The table below compares some of the key differences between millionaires and average Americans.

College education3 80% 28%
Median annual income4 $131,000 $48,000
Annual savings rate5 20% 1%
Self-employed business owners or entrepreneurs6 67% 8%

Millionaires tend to be highly educated. Eighty percent are college graduates, and many hold advanced degrees: 18 percent have Master’s degrees, 8 percent have law degrees, 6 percent have medical degrees, and 6 percent have PhDs. Although it’s important to get a college degree, your actual grades don’t seem to matter much—higher SAT rankings and GPA scores are not associated with higher net worth or annual income. Instead, millionaires say that the most important lessons they learned in school were “developing a strong work ethic” and “learning how to make accurate judgments about people.” Learn how higher education leads to higher salary in the Career section of this wiki.

Money Management
In terms of spending habits, millionaires typically wear off-the-rack suits and drive old cars. Their homes were constructed an average of 40 years ago, and about half have lived in their current home for more than 20 years. The richest millionaires spend an average of 8 hours a month planning their finances. For those who don’t budget, the majority “pay themselves first.” They spend only the money that’s left over after saving and investing.
Millionaires cut coupons and shop for deals. They usually marry partners who are even more frugal than they are. Millionaires also train their kids to be financially disciplined from an early age. This way, their kids grow up to be self-sufficient adults who aren’t looking for handouts.

Warren Buffett is America’s richest man. He believes wealthy parents should leave their kids enough money so they feel they can do anything, but not so much that they could do nothing. He says, “The idea that you get a lifetime supply of food stamps based on coming out of the right womb strikes at my idea of fairness7.” Following Warren’s advice, Microsoft founder Bill Gates has decided that his three kids will receive an inheritance of $10 million each8. The rest of his $56-billion-dollar fortune will go to the Bill & Melinda Gates Foundation, which funds research to cure diseases in the developing world.

With their frugal spouses, frugal kids, and frugal spending habits, millionaires save an average of 20 percent of their annual income. This compares to a measly 1 percent for the average American. Check out the Spending and Saving and Investing articles to learn how to manage your money like a millionaire.

Next Generation
About 17 percent of millionaires are self-employed professionals such as doctors, lawyers, and accountants, while another 50 percent are business owners. Although business owners are the richest millionaires, they usually encourage their kids to become self-employed professionals. Compared to the average American, millionaires are four times more likely to send their kids to law school, and five times more likely to send them to medical school. Whether you’re a doctor or a businessperson, it pays to know how to build a company of your own. Learn how to become a successful entrepreneur in this Entrepreneurship article.

  1. Capgemini. (2007). World Wealth Report 2007.
  2. Markowitz HM. (1952). Portfolio selection. Journal of Finance. 7(1):77–91.
  3. U.S. Census Bureau News. March 28, 2005. College degree nearly doubles annual earnings, census bureau reports. CB05-38.
  4. DeNavas-Walt C, Proctor BD, Smith J. (2007). Income, poverty, and health insurance coverage in the United States: 2006. U.S. Census Bureau. Current Population Reports. pp. 60–233.
  5. Swann C. (2007). GDP and the economy: advance estimates for the third quarter of 2007. U.S. Bureau of Economic Analysis. November 2007..
  6. Blanchflower DG, Oswald A, Stutzer A. (2001). Latent entrepreneurship across nations. European Economic Review. 45:680–691.
  7. Lowenstein R. (1995). Buffett: the making of an American capitalist. Random House. p. 342.
  8. Intini J. (2007). Are your kids better off with no inheritance? Maclean’s. October 15.

Copyright © 2009 by Paul Lem, M.D.
Buy the book at www.MasterLifeFaster.com