In the book The Millionaire Next Door1, the authors state that most millionaires have not inherited a large amount of money, but are wealthy as a result of having a good offense and a good defense. The information given there is that most millionaires are still making somewhere in the range of 100K, but are able to save/invest 20K per year to develop their net worth.
The four commonly agreed upon factors that help increase net worth are increasing income, increasing savings, decreasing expenditures (via budgeting) and reducing your debts. To be wealthy you really don’t need a bigger house, you need a bigger net worth, although sometimes the two are related. Because wealthy people think in terms of net worth, they balance their spending on enjoyment with investing for freedom tomorrow.
Now that you have calculated your net worth, take a moment and let the impact of this thinking settle into your heart. At issue is not what your net worth is, but thinking in terms of net worth and increasing it. You now need to make a plan to increase your net worth. We will talk more about crafting a financial plan in upcoming posts. Saving and investing 5%-10% of your income would be a good place to start in a long-term financial plan. However, the most important part is that you start doing something.
1 Stanley, Thomas J. The Millionaire Next Door. New York: Pocket, 1996.