A question that comes up on Quora fairly regularly is along the lines of “how do rich people live their lives?” After I responded to one of those inquiries I thought it might make sense to copy the reply into a blog post. That way other people can benefit from the information – without me having to remember and repeat myself. Here is the response…
If you want a good look into how wealthy people live, you should consider reading the Millionaire Next Door. From a personal perspective (and I align with a lot of what is reported in that book) I can share a few things about us personally below.
First, I’m “wealthy”, not “rich”. To me being rich is more of a spending lifestyle. Being wealthy means having a large net worth and enough money that working is no longer a requirement.
That clarified, here are some common differences in how I manage my finances, as do other wealthy people I know.
I avoid debt like the plague
I haven’t paid any interest in years – since we paid cash for our current house. Even during the 10 years or so leading up to that point we never carried a credit card balance. We also paid cash for all of our cars in recent years. Interest on debt can be a huge destroyer of wealth.
I track every dollar spent
I can tell you exactly how much I spend on dining out each month, and on groceries, and on gas – in fact in every category. Most I know off-hand but those I don’t I can quickly access within a few minutes. Quicken is my go-to tool for budgeting and tracking expenses.
I’m heavily invested in the stock market – and in stocks specifically
The risk of not owning stocks (holding cash or too many bonds) can be a large hindrance to growing wealth faster than inflation. I have a diversified portfolio, but I don’t actively trade my investments. My investment philosophy is buy-and-hold, which has worked out very well for us over the long haul.
I have a large emergency fund
More than the standard 3–6 months – because I never want to be in a situation where I need to liquidate investments during a downturn in the market. Our emergency fund is probably a bit bigger than it needs to be, but right now we are in a transition season of life. My wife and I are early-retired (our mid-40s). Having the large cash reserves gives us options while we transition into this next season. I suspect that sometime in the next year we’ll deploy a lot of that cash into stocks and bring the reserves down to around 9-12 months’ of living expenses.
In addition to tracking money spent, I also limit it
My wife and I hold very tight to our annual budget. We track it monthly but really care about the total annual spend. This gives us some flexibility throughout the year but allows us to keep our total spending in check.
Our house is modest
We used to live in a $1m+ waterfront house (that I loved) but made a conscious decision to downsize. We sold that and moved into a house that we bought with cash with the equity in the waterfront house. I miss being on the water, but it was a smart financial move. Having such a large amount of money tied up in personal real estate isn’t what we felt was the best use of those funds. Now our taxes, utility, and maintenance costs are all lower – and it is much faster and easier to clean the small house (extra bonus!). Not only did we free up cash that would have been tied into a living expense but we lowered ongoing living expenses substantially.
I hope this peek into how we handle finances is helpful.
In Closing
Just as you would want to take physical coaching from a personal trainer who was fit and lived a healthy lifestyle, you should look for a fee-only financial planner who is financially fit and living out what they suggest. Start Hereand let’s talk about how I can help maximize your money to achieve your financial life goals.
Wonderful article. Thank you so much for sharing your life. I look forward to reading more.
Brad, nice insight here. Totally agree with your point about the modest house. When I was younger, I dreamed of that large, beautiful home. Until I bought one. Now, I’m all about keeping my house simple and easy.
Thanks JT! We’re so much happier with our living situation since we sold our big house and downsized a few years ago. There is a lot of peace that comes with simplifying one’s life!
Sold a 1 million dollar house to save money?!? Sounds upper middle class at best, not wealthy.
What does being wealthy mean to you Phineas?
I like the wealthy definition of “more than enough to gratify normal needs or desires.”
Having reached financial independence in my early 40s, with no requirement of additional income to last the following 50+ years, is wealthy in my (and most people’s) book.
Someone being in the upper-middle class doesn’t have any impact on them being wealthy or not. In fact, “classes” as you are referring tend to relate more to annual income levels than net worth. Level of net worth and usable assets, compared to spending levels, is a better metric to use when reviewing someone’s wealth and financial situation.
I am about to be 35, and work in public safety. I plan to retire in my early 50’s. I am going to take your advice so that I can be wealthy. I want to have enough money to do what I need to do.
I don’t have a million but I am debt free and plan to stay that way.
You are wealthy and live like average people. What do you have the wealth for? I don’t understand you. Money is to be spent on better life style and higher enjoyment of life. If you don’t use it it is like you don’t own it and you are managing it for your heirs.
Hi Iraj,
I have wealth so that I can live the way I want to live, without working “just to pay bills”. It’s about financial freedom and independence – not gluttony. I have quite a “higher enjoyment” of life than the average person.
I hope that helps clarify for you.
My husband and I purchased a lovely home with a basement apartment — which we rented out for six years. We made double payments with the money we received from our income and the tenant. This helped us to pay down our mortgage quicker. It was a huge sacrifice living with tenants in the basement but we stayed focused on our end game. When we decided to downsize and sell it, we had a small mortgage balance. We had no debt. We had a plan and moved into a one-bedroom condo apartment with our young daughter. We bought it cash. With the money from our sale, my husband and I were able to go back to school and start our own businesses. We also were able to send our daughter to private school in which she is now trilingual. Our family and friends couldn’t understand what we were doing and for years thought we were crazy. They still think we are…because we are still in the condo, but it’s our choice. We are happy. We will get what we want when it is right for us. We had to think differently in order to live a life and have the freedom we wanted. No one will understand what you are doing except you. And to find a partner that will agree with you is a bonus!
That’s great Kaydee – thanks for sharing! It sounds like all your hard work is paying off well! Ignore those who “don’t get it” – they’ll “get it” at some point and wish they had taken similar steps themselves. :-)
Thanks for stopping by and sharing your story!