Financial Literacy - How to prosper
Thomas Stanley
savings
To act like the rich, be frugal

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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