savings

To act like the rich, be frugal

For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires. Yes, people with very high incomes, high levels of wealth are more likely to drive status automobiles. But in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other.

Why do these people act this way? In large part, they are trying to imitate economically successful people. They take their cues from Hollywood and the advertising industry. The problem is that most aspirationals know few, if any, really wealthy to emulate.

Would they still continue to drive prestige makes of cars if they knew that the No. 1 make of automobile among millionaires is the Toyota? Along these lines, would they still crave living in a $1 million home when they find out that nearly three times more millionaires live in homes valued at under $300,000 than live in those valued at $1 million or more?

q_v2.gifShould financial freedom be everyone's ultimate goal, and where does that leave the people whose life goals are simply to have some of the trappings of wealth, such as the nice house in the tony suburb and a European sports car?

a_v2.gifAmerica is often referred to as the land of the free. But most people in this country are not really free. They are tied to debt and a treadmill existence in terms of earning a living.

At this moment, our federal government has promised future social benefits in excess of $50 trillion. That figure is approximately the same amount of the total personal wealth held by Americans.

In the future, it is very likely that the government will not be able to provide the promised social benefits to our seniors. The typical household in the United States has a net worth of just over $90,000. That is about the same annual cost of a decent quality nursing home.

Also, if home equity and equity in motor vehicles is netted out of the $90,000, then the typical household's net worth drops down to about $30,000. That is only about 60 percent of the typical household's annual income. Therefore, it should be everyone's goal to provide for their economic future by being fiscally responsible.

Otherwise, what will happen when millions of seniors are no longer able to work and have little or no wealth accumulated? Many of them will become completely dependent upon their adult children or become destitute. The money that they spent on the trappings of wealth yesterday (the house in a tony suburb or a European sports car) will not pay for tomorrow's food, clothing and shelter (possibly a nursing home).

“We encourage our children to major in consumption and minor in frugality!”

q_v2.gifHow do you recommend that people become prosperous if they would prefer to get off the consumer treadmill?

a_v2.gifThe simplest way is to live below one's means.

The typical household should be able to put away 5 percent of their annual income while they are in their 30s, 10 percent when they are in their 40s, and 20 percent when they are in their 50s.

This is also related to satisfaction with life overall. There is a highly significant correlation between satisfaction in life and living in a home and neighborhood which are easily affordable.

What is a good rule if you are determined to become wealthy?

The market value of the home you purchase should be less than three times your household's total annual realized income. Also, if you are not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

q_v2.gifDo you have a sense that American consumer values are shifting from aspirational luxury purchases that seemed to be heavily marketed in the early 2000's asset bubble days to more frugal ones?

a_v2.gifNo, I don't think that the values are shifting.

The only reason that people aren't spending as much as they did prior to the current economic meltdown is that they don't have as much money to spend right now. We are a nation of hyper-consumers. We encourage our children to major in consumption and minor in frugality!

The smartest people in the world are in the marketing and advertising industries in this country. How else can you explain that 300 different brands of vodka coexist in our domestic market? In 2009, about 2.3 million American seniors will pass away. What did they do with the more than $2 trillion in income that they earned in their lifetimes?

I estimate that only 2.3 percent will leave behind a gross estate (all assets included) of $1 million or more. What did the other 97.7 percent of the decedents do with all of their income? If they did not save their income, invest it or allocate it to things that appreciate, where did the money go?

Beyond the basic necessities, an awful lot of it was spent on things, many things that now reside in landfills and thrift shops. We are and will continue to be a culture of hyper-consumption.

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