Chapter 1
What Is a Millionaire?
"A man with a million dollars can be as happy nowadays as though he were rich."1
For this book, a millionaire is someone who has accumulated at least one million U.S. dollars in net worth. A millionaire does not have to make a million dollars in income each year. Someone making less than a million per year but that has saved or inherited net wealth would qualify as a millionaire for purposes of this book. It is net wealth that's being measured; having a million dollars in assets is not enough to qualify if their debt is also high. Net wealth is the assets (investments and items that will be useful in the future) that we have minus the debt that we owe. A millionaire will have at least a million dollars in assets above and beyond all their debts.
For example, two neighbors have a house worth 1.2 million dollars. The first neighbor has a mortgage of $800,000 but the second neighbor has paid off their mortgage. The first neighbor would not be considered a millionaire while the second neighbor would be. This is because the first neighbor only has a net wealth of ($1.2 million - $800,000 =) $400,000, which is well shy of a million dollars in net wealth, while the second neighbor has a net worth of 1.2 million dollars because their house is paid off.
Notice in this example how both the millionaire neighbor and the indebted neighbor both live in the same neighborhood. This is common for a couple of reasons. First, as each neighbor makes more money, their ability to get credit and spend more goes up. Some neighbors spend everything they have and more (on credit) while some neighbors live beneath their means and are savers. Being a millionaire is not about flashing wealth, it's about having wealth. Many millionaires live in houses costing much less than a million, while others live large, and risk bankruptcies. While living too large can happen everywhere, it's especially visible in celebrities' lives, because they live so much of their life in the spotlight and can gain wealth more suddenly than they can gain the knowledge of how to properly manage the wealth. With the rise of social media, this visibility has increased over time.
TV Guide2 lists actors Stephen Baldwin, Gary Busey, Randy Quaid and Burt Reynolds, and singers Tionne "T-Boz" Watkins of TLC, and Natalie Cole as celebrities that have gone broke despite promising careers. The article also notes that celebrity businessman and U.S. President Donald Trump has taken businesses bankrupt in 1991, 1992, 2004, and 2009 to re-structure or eliminate debt that the companies could not pay back. With some people, spending outpaces income, leading to financial insolvency. Boxer and celebrity Mike Tyson made more than $300 million in his career, but filed for bankruptcy in 2003, claiming an extra $23 million in debt. MC Hammer's net worth was valued at $33 million in 1991; five years later, he was bankrupt, owing $13 million in debt. Toni Braxton filed for bankruptcy in 1996, and again in 2010, having sold some of her Grammys to make ends meet.
Professional athletes face a similar problem, although having a short career should be more evident to them than to actors. MSN.com lists several professional athletes that made high salaries but went bankrupt nonetheless.3 NFL quarterback Vince Young went bankrupt after signing a $26 million contract, in part because of legal fees. NBA's Antoine Walker earned over $108 million but filed for bankruptcy after spending more than that on bad real estate investments, family assistance, and luxury items. WNBA and three-time Olympic gold medalist Sheryl Swoopes declared bankruptcy in 2004. Manchester United player Eric Djemba-Djemba, who made about $6.2 million, declared bankruptcy in 2007, citing poor financial planning. NHL player Jack Johnson declared bankruptcy after borrowing at high interest rates and incurring high fees after defaulting on those loans. MLB Jack Clark filed for bankruptcy in the second year of a 3-year, $8.7 million contract. His lawyer said that he "had some expensive hobbies, and I think they got ahead of him." Mike Tyson, famous in part for owning Siberian tigers, also declared bankruptcy.4 Lawrence Taylor declared bankruptcy in 2009 due to "bad spending habits, drug addiction and poor lifestyle choices."
Sometimes people that earn large sums very quickly think that will always be the case and it isn't. We all can name people, who, for every dollar they make, they spend more, and we all can name poorer people that we know who still manage to save a little something. It is no different with celebrities. We aspire to be the millionaire, not the celebrity, or at least we don't confuse the two. The worst thing that can happen to those of us who overspend is that we win the lottery, because if we win $50 million, we may spend $60 million, and the odds that we'll win another lottery for $10 million and change our spending habits so that they're financially even are not very good. Similarly, some celebrities spend based on their current success, not their average success which included years as a starving artist. In those cases, their future is grim.
"Mo' Money, Mo' Problems:"5 Does Everyone Want to Be a Millionaire?
Most people do, but most of us also realize that wealth is not the most important thing in life. A healthy, well-adjusted life, with a healthy, well-adjusted family and support system is worth far more, and not just because medical costs and profound problems drain wealth. Love and the smiles of our children our priceless.
About 6% of people say that they don't care about money, and another 11% say that they can live on very little.6 There is "enough" money for some, if not most of us, when we are as financially secure as can be expected and we're willing to trade money for time with family and/or when we consider giving large sums of it away to accomplish more good in the world. However, nearly everyone wants more money.7 And, by understanding how we move through economic classes, we may be better able to help others on a larger scale, both those who are close to us and those in society.
The premise of this book is that most of us can be millionaires, but our own thinking gets in the way-for very good reasons. The skills, habits and mindsets that allow us to survive or succeed at one socioeconomic level may actually hurt us at the next. At some level, we know the rules change, but they change gradually. Imagine Bill Gates, Warren Buffett and other billionaires sitting around a kitchen table, trading 25-cent coupons for cake mix and fabric softener. It takes imagination, because they probably do not collect coupons. Coupons like this are practical and wise at a lower-middle class level, but not at the mega-rich level of income. For billionaires, time is better spent getting a bargain on the purchase of a cake or fabric softener company or protecting their wealth through prudent tax planning. However, we also know that abandoning all we've learned because we think that the common sense rules of finance don't apply to us anymore can also be a road to financial ruin, as seen by the celebrity and athlete bankruptcy list earlier in the chapter. The trick then is to realize that the financial advice that we should be following changes some as we get wealthier. Understanding how that advice should change and accepting the changes in spite of the fear of what would have happened if we responded to changes too soon, is key.
Some of us are afraid to take risks, and those of us who take risks tend to be overly-cautious because the risk of failure looms larger than the reward of additional success.8 For example, we might think that receiving $50 would feel just as good as receiving $100 and then losing $50. In both situations, we gain $50. We would be wrong. Most of us view a single gain of $50 more favorably than gaining $100 and then losing $50, even though the cash position is the same in the end. Where a loss is unsustainable, this fear makes sense, but where the loss is sustainable (as in the example above), this fear is not fully rational. Research shows that humans don't process economic information in a rational way. In fact, in 1979, two behavioral researchers, Kahneman and Tversky, presented an idea called "prospect theory," which said people valued gains and losses differently, and based their decisions on perceived gains rather than on perceived losses.
To progress to the next economic level efficiently, we need to change our thinking. We need to change our skill set but we also need to change our mindset. We must be financially skilled to properly manage wealth, but also psychologically ready to transcend to the next economic level. Sometimes our financial thinking can be off-base enough to cause psychological problems, or so a psychologist found.
Brad Klontz and his colleagues studied the money beliefs of 422 people who were seeing a therapist for money-related problems.9 Some people stressed about having too little money, while others stressed about losing what they had. Still others felt guilty about having so much. Some disliked people with money. Some were spenders; some were savers. Klontz was able to classify people who had psychological problems with money as having one of four money "scripts:"...
