People often ask me what is the secret to financial success.
In most instances, true financial prosperity is the result of hard work and commitment – it’s not something that is handed to you on a platter alongside the proverbial silver spoon.
And while media outlets may paint an enviable picture of “overnight success stories”, they often gloss over the ups and downs, trial and error, and years of hard work that led to the person’s “instant” prosperity.
Having spent the past 16 years working as a financial planner, I can tell you there is no one “secret” strategy for guaranteed wealth.
There are, however, essential behaviours for building wealth.
In the mid 1990s, US market researchers Thomas Stanley and William Danko launched a book, The Millionaire Next Door, which used their years of research into the mindset of almost 1500 affluent Americans to create a somewhat surprising profile of the typical millionaire.
What the New York Times bestseller highlighted was that many of the “first generation” millionaires interviewed (i.e. people who had earned their wealth, not inherited it) exhibited similar traits or behaviours and lived lifestyles that often had little in common with the stereotypical portrayal of a wealthy individual.
The researchers identified seven common denominators exhibited by those who had successfully built wealth, including their decision to pursue the “right” occupation – i.e. one with a good income-earning potential – and their ability to find or create wealth-building business opportunities.
A numbers of years later Stanley’s daughter, Sarah Fallaw, founded DataPoints, a behavioural finance research company that expanded on her father’s research to develop assessment tools, which analyse a person’s potential to build wealth.
DataPoints’ research showed there are a number of essential behaviours common among wealthy people, which helped them convert their regular incomes into long-term prosperity.
A key factor identified by both Stanley and Fallaw, a person’s ability to live – and spend – well below their means is crucial in developing wealth. Someone who lives week to week, spends like there is no tomorrow and uses a pay rise or bonus to improve their lifestyle in the short term, rather than their bank balance in the longer term, is not on the path to financial freedom. Living frugally doesn’t have to mean always missing out – it might just mean not always being first in line. Plan your spending, know your limits and factor a savings plan into your weekly budget.
This factor works on two levels. Firstly there is the literal interpretation of taking responsibility for your finances – actively controlling how much you spend, save etc. But responsibility also refers to a person’s mindset – do they believe they are responsible and have control of their financial outcomes, or do they think their outcomes are determined by factors beyond their control – interest rates and the cost of living increasing, not being able to find the right job or secure a pay rise, not being born into a wealthy family. People with the latter mindset are more likely to blame others for their circumstances rather than take control themselves and use that control to work towards wealth.
While most people would think of confidence as a general life skill, it’s also important when it comes to building wealth. You need to be confident that you’re capable of improving your financial situation and believe in the decisions you make to get there. While self-doubt can sometimes be a useful internal restraint to stop you from acting impulsively, not enough confidence can stop you from making the decisions necessary for prosperity.
Planning and monitoring:
If you fail to plan you plan to fail. Wealthy people take control of their financial future by setting goals and following through on them. They take time to sit down and plan their course of action and then commit to monitoring it, enabling them to adapt and get back on track if the outcomes don’t pan out as expected.
Focus and composure:
Building wealth is a long-term proposition – you need to be able to stay focused now and into the future. Affluent people keep their eyes on the prize, they remained focused on what they are doing in the long term and ignore short-term distractions. They also exhibit composure in the face of turmoil – an especially important behaviour when it comes to investing. Markets go up and down, share prices rise and fall and, consequently, portfolio values will fluctuate. Composure allows a person to step back and take a breath rather than overreacting to every little bump in the road.
The millionaire stereotype would have us believe that the wealthiest among us like to flash it around – buying the biggest house, the best car, the coolest clothes. They use their wealth as a status symbol, spending their way to a higher social standing (in their eyes at least). Then there’s the concept of “keeping up with the Joneses” – letting the spending habits of others affect and guide what you buy. People who are socially indifferent, who don’t relate their social standing with how others perceive them based on their material possessions, are more successful at building and creating wealth – they work to secure financial independence rather than a certain level of luxury in life.
Understanding the behaviours necessary for prosperity can create a solid foundation for your financial future – what you choose to build on it from there is up to you.
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