Historical article note: This article was originally published on 2019-11-07. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
When you talk about 'rich people,' which images immediately come to mind? Trump, Rockefeller, Buffett, Jack Ma, Gates, or someone else? When you talk about 'fake rich people,' who do you think of? There are a thousand Hamlets in a thousand people's hearts; everyone's stereotypes are different. Rich people each have their own way of being wealthy, and fake rich people each have their own way of pretending. In the United States, there is a bestselling book, *The Millionaire Next Door*, which has several different editions, and the Chinese translations of the title vary, but the central idea remains the same: through surveys of American millionaires, it paints a picture of millionaires among the general public—these are the 'millionaires next door'—whose real-life situations differ greatly from the public's imagination. For example, the author's survey results show that the proportion of millionaires driving European luxury cars is far lower than our stereotypical image. By brand ranking, Ford is the most common, accounting for 9.2%, with the Ford F150 pickup being the most popular. Also, among the watches worn by millionaires, Seiko has the largest share, far exceeding Patek Philippe. Those flashy luxury goods were not sold to millionaires—who were they sold to? You guessed it, to the fake rich. True rich people live real, wealthy, and happy lives, while fake rich people live to show off for others and end up quickly using up the seeds they could have used to become truly wealthy. The author uses facts to tell readers that true rich people live secure, frugal, and simple lives; the pretentiousness of fake rich people only harms themselves and benefits those unknown luxury goods sellers.
01 Portrait of a Real Rich Person
A truly rich person is someone whose household has surplus grain. Those who harvest three or five extra dou are still considered farmers. Rich people are divided into two types: balance sheet rich and income statement rich. The former is the net worth after subtracting liabilities from assets, also called owner's equity, and the amount is huge; the latter is the net income after subtracting costs from gross income, and the amount is huge. Pseudo-rich people, on the other hand, have high gross income, but almost no net income left because they spend most of it on props to imitate being rich.
Profit-and-loss type rich people are actually high-income earners, but their families may not truly have surplus wealth. Dentists, specialists, lawyers, top salespeople, and business owners fall into this category. They are offensive players, earning much more than their peers and colleagues. If they are also good at defense, they can accumulate wealth and develop into balance-sheet type rich people. Profit-and-loss type rich people who achieve success early in life tend to be arrogant, thinking they can maintain this level of income forever, but often after their peak years, their income takes a hard landing. Before they can transform into balance-sheet type rich people, their prime years are already over. According to "The Millionaire Next Door," among profit-and-loss type rich people transitioning into balance-sheet type rich people, doctors are the most unsuccessful group. Doctors spend a long time studying, so they incur a lot of debt and suppress their consumption desires for too long. After completing their training, they rush to earn money to repay debts, and then, in order to match what they perceive as their social status, they buy big houses, drive luxury cars, join private clubs, buy yachts, send their children to private schools, and are so busy seeing patients that they have no time to learn about financial management. This results in the embarrassing situation where doctors do not manage finances, and wealth does not favor doctors. In reality, high-income earners who mature later in life, especially those who consider themselves socially superior, can never fully transform. Remember, wealth does not recognize academic degrees. The relationship between education and wealth accumulation is negatively correlated.
People who are wealthy in terms of assets and liabilities are true rich people. When encountering natural disasters or personal misfortunes, the surplus food at home can last 8, 10 years, or even their entire remaining life. "The Millionaire Next Door" summarizes the common traits and characteristics of true rich people so well that I’ll just copy them for everyone. Among true rich people, most have only been married once, are industrialists, and 80% are first-generation rich. The seven most notable common characteristics are: 1. Living a life where income exceeds expenses; 2. Valuing time more than money, highly efficient; 3. Considering financial independence more important than flaunting lifestyle; 4. Cannot rely on parents; 5. Their adult children are financially independent; 6. Experts at seizing market opportunities; 7. Choosing a career suitable for themselves.
Accumulating wealth requires learning; just having a high income is far from enough. There is a way to measure the ability to accumulate wealth: multiply your pre-tax annual income by your age, then divide by 10. The resulting number is the standard value of wealth. Those below this standard are considered low in wealth accumulation ability, while families above this standard are skilled at accumulating wealth. At 41 years old, with an annual income of 143,000 and an additional investment income of 12,000, the standard wealth value that should be accumulated is (143,000 + 12,000) × 41 ÷ 10 = 635,500. Wealth accumulation experts among millionaires usually have wealth that is double this standard value, which, in the above scenario, is 1,271,000. This is the calculation method and statistical result provided by 'The Millionaire Next Door.'
There are also seven ways to build a wealth empire: 1. Control current income, especially if you own a business, keeping annual income on average below 7% of assets; low current income means less tax and less leakage of resources; 2. Live in your own house for many years to reduce housing expenses; 3. Don’t wear brand-name clothes, drive domestic cars; 4. Save more than 15% of your income; 5. Send children to public schools; 6. Keep consumption from increasing as income grows; 7. Maintain family and marital stability.
02 Portrait of a Fake Rich Person
There are three types of people who live in luxury houses, drive good cars, and wear designer brands: capitalists with assets over tens of millions, income-statement-type rich people, and fake rich people. Among fake rich people, sales elites are the majority. Imitating the lifestyle of the wealthy is not a shortcut to becoming rich. Fake rich people pretending to be wealthy is essentially no different from imitators buying fake goods to dress up and show off—they do not boost self-confidence. The lives of fake rich people differ in public and in private: because no one else is watching, they are particularly stingy when tipping; a billionaire might tip a valet $20–100, while a fake rich person might only tip $2. Private travel for someone with tens of millions in wealth usually includes business class, whereas fake rich people, when unseen, genuinely do not treat themselves so well and usually travel economy class regardless of the journey length. In the book 'The Millionaire Next Door,' these fake rich people are referred to as 'no bull under the big hat,' whereas true rich people may not wear big hats but do have a herd of bulls. Unfortunately, 90% of people in this world are poor, and the poor do not know how the truly rich live; they can only judge who is wealthy by who wears a big hat. Wearing a conspicuous wealthy hat and being admired by the poor has become the driving force for fake rich people.
Fake rich people think that the mark of a 'good life' is consumption; true rich people think that the mark of a 'good life' is financial independence. Buying some items that signify superior status and carrying them around is much easier than achieving financial independence. Spending heavily before achieving financial independence is equivalent to eating the seeds of tomorrow's wealth. True rich people become wealthy first, then spend heavily; fake rich people reverse this order, so they cannot become truly rich. To achieve prosperity within a generation, any resource waste is intolerable. No one can accumulate wealth while spending excessively, not even high-income earners. People whose minds are controlled by consumption have essentially reached the end of the road in wealth accumulation. There is only one way back: change your lifestyle habits, starting today with decluttering and letting go.
"'Living well' is the pursuit of pseudo-rich people; accumulating wealth is not their driving force in life. The belief that sustains pseudo-rich people in keeping up appearances is: dressing better and living in bigger homes allows them to overcome the negative emotions brought by low social status and self-consciousness. The financial plan of pseudo-rich people is very simple: they decide where to spend before they’ve earned money, and if they have no money, they buy nothing. They are reluctant to spend 300 yuan on hiring an accountant for taxes, instead trying to find volunteers to do it for free or paying 30 yuan at a roadside stall for tax services. But they are willing to spend 70 yuan per person on a buffet and post on social media to show off taste and extravagance. When they see a news report about a middle-income TTC bus driver who left behind 15 million in real estate upon passing, they stomp and beat their chest, feeling that the driver’s life was wasted: earning so much money without spending, life is a loss. Pseudo-rich people despise all the methods of accumulating wealth and do the opposite.
Pseudo-rich people’s contribution to society may even surpass that of the truly rich. To be a counterfeit rich person, one cannot avoid consuming and packaging oneself. The biggest beneficiaries of luxury consumption are the tax authorities, followed by luxury goods sales representatives. For pseudo-rich people, maintaining high consumption requires high income, which inevitably leads to high taxes. As mentioned earlier, the truly rich do not maintain high income just to sustain consumption, keeping annual income below 7% of their assets. Luxury goods sales representatives love having pseudo-rich customers; a few compliments can close the deal, and adding them on WeChat ensures long-term provision of premium services. From an economic perspective, the existence of pseudo-rich people has a positive externality for society. 'Positive externality' refers to an economic agent’s activity leading to additional economic benefits for other agents without the beneficiaries having to pay for it. These positive, spillover benefits are called positive externalities. For example, a beautiful woman on the street, dressed stylishly in brand-name clothes, draws the gaze of men without those men paying for her attractiveness. Thus, her walking down the street is a positive externality in economic terms. We should express gratitude for the contributions pseudo-rich people make to society.
03 Different Types of Truly Rich People
Truly rich people in the United States are divided into two types: industrial capitalists and commercial capitalists.
Millionaires engaged in real industry naturally apply their business experience to family financial management: balancing offense and defense, being able to make money and also preserve it; conducting business does not require extravagance, but rather careful calculation; finding something they enjoy doing and sticking with it long-term, becoming the best in their industry in a monotonous and boring business, rather than showing off under the spotlight and then it's over; success in real industry is difficult, and most of these people can only gain a stable foothold in business after 45, by which time their spending habits are established and their consumption does not increase with income; long-term contact with professionals such as accountants and lawyers makes them cautious and restrained in behavior, understanding that the biggest expense is taxes and trying to minimize them through the 3D principle of defer, divide, and deduct in tax matters; apart from taxes, the largest living expense is housing, and a luxurious owner-occupied home is the biggest financial black hole; buying a new car is to save time and effort in selection, with domestic cars being the first choice as they are affordable and low-key, so if the vehicles of American industrial millionaires were weighed, they would be luxury cars. Industrial capitalists find joy in work, earning money is a byproduct, they pursue financial independence rather than high consumption. Henry Ford, Rockefeller, Sam Walton, and Andrew Carnegie are extraordinarily wealthy industrial billionaires, and their views on career, money, financial independence, and consumption are almost the same. About 3 million smaller-scale industrial millionaires in the U.S. follow the same investment and lifestyle logic.
The main representatives of commercial capitalists are the big shots on Wall Street. Compared with industrial capitalists, the life and consumption of these commercial capitalists are much more dazzling; work is purely for money, making money is everything in life, seeking status in public, and enjoying life to the fullest. The movie *The Wolf of Wall Street* is more like a Wall Street-level film than a dark comedy, but the movie is considered a documentary. The Wall Street investment banker Jordan Belfort, played by Leonardo DiCaprio, is a real person, and Jordan himself even made a cameo in the film. As a Wall Street commercial capitalist and financial philosopher, Taleb, in his own book *Fooled by Randomness*, disagrees with the frugal capitalists praised in *The Millionaire Next Door*, because ‘the rich who look poor’ don’t spend extravagantly or create positive externalities for society; they are too selfish. Personally, I think American industrial millionaires and commercial millionaires look down on each other mainly because the ways they acquire wealth are so different: one earns it, the other wins it.
04 How to Become a True Wealthy Person
From the above profiles, everyone should be able to see a reflection of themselves. Becoming truly wealthy is not impossible. But if you can’t do the following points, it really won’t work.
Try to marry only once in your lifetime; marrying more than once is really too costly. Munger said: a good spouse is definitely not a fool; to find a good spouse, you must strive to be worthy of them.
A lifetime is enough to accumulate four times the standard wealth. 80% of American millionaires are first-generation wealthy. If others can do it, so can you. The key is not to waste any seed that could be used to create wealth, and not to waste any day that could be invested. If you have wasted too much time in school, you should especially seize the day. Wealth does not care about your educational background or whether you graduated from a prestigious school.
The ability to delay gratification is inherited. If you are always impatient to consume, your parents are to blame. Psychologists conducted a classic experiment in which children were given a lollipop and told: hold on, if you don't eat it within an hour, you'll get another one. Those children who immediately ate the lollipop mostly grew up to achieve nothing. Differences in the ability to delay gratification reflect differences in imagination. People with strong delayed gratification have stronger imagination and can envision the future value, while those who struggle to delay gratification have weaker imagination and can only see the present value. This is currently the cutting-edge research result in behavioral economics. The ability to delay gratification is determined after birth; to change it, deliberate practice is required.
People who consider time more important than money achieve financial independence faster. Those who stand in line to save money, or who avoid hiring professionals to save money, are too inefficient and waste their lives. Saving time actually means using the leverage of time. For example, hiring employees to do things for you is using the leverage of time. Industrial millionaires use both time leverage and financial leverage, and it's as if they have two wheels of fire under their feet, allowing them to run much faster than others on the path to wealth.
Choosing family financial goals is very important. The goal of truly wealthy people is family financial independence. In other words, the family should have surplus resources, able to get through years of scarcity or disasters, and even build their own wealth structure for retirement purposes. If the family financial goal is set as 'living a good life,' then you can only live well when income is high, and endure hardship at other times.
The world has long entered a complete buyer's market; even the best products need advertising to be sold. Some things are particularly hard to sell, such as insurance, real estate, luxury cars, and high-end watches, which require specialized salespeople. The backgrounds of top salespeople vary; they are not only beneficiaries of selling valuable goods and luxury items but also victims. Pretending to be successful has become a common trait in this group. Without deliberately converting high income into high assets to become truly wealthy, the time these top salespeople spend 'living the good life' is likely to be short-lived. To maintain the 'good life,' one needs to delay gratification and improve financial literacy.