I recently read a study from Ramsey Solutions (aka Dave Ramsey) in the US that surveyed more than 10,000 millionaires to see what they had in common. Let’s look at the top five findings in the report to understand how we can apply them in our personal finance journey.
First, the vast majority of the millionaires, 79%, are self-made. They did not inherit their wealth but built it over time through entrepreneurship or corporate careers, combined with plain old hard work. Intergenerational wealth plays a relatively small role in creating the next generation of millionaires. If you’re not a trust fund baby, you can still become a millionaire. The bulk of the millionaires in the study certainly weren’t waiting for a handout from their family or bemoaning the fact that they were not born the scion or heiress to some wealthy family dynasty.
Second, education: 88% of millionaires graduated with a degree from a university. Education can be a game-changer for achieving wealth, and investing in it pays dividends. It is well known that higher levels of education are closely correlated with higher income and wealth over the long term. Attaining tertiary-level qualifications generally leads to a higher-paying career and enhances professional networks. These networks can aid career progression or spark an entrepreneurial venture at some stage.
For example, in South Africa, people with a degree tend to earn at least five times more per year than those with just a matric. Pause for a second and contemplate the compounding impact of this higher earning power over a 35-year working career.
Third, regular and consistent saving and investing over a long period were cited by 75% of millionaires as a factor in their success. Once again, the magic of compounding small, consistent amounts of money over an extended period leads to incredible returns down the line.
Many people forget that you can still end up wealthy by taking the slow and steady approach and that you don’t need this one great invention, business or high-flying career to achieve wealth. This highlights another point that is frequently made: a high income does not always translate into wealth in the long term. People still need to live within their means and consciously save and invest part of their income over the long term.
Fourth, four out of five of those surveyed invested in their retirement fund, taking advantage of the tax incentives offered by the US government. South Africans can also invest in tax-efficient products such as a tax-free savings account or retirement annuity (RA).
Education can be a game-changer for achieving wealth, and investing in it pays dividends
Consider the difference between saving R1,000 a month in a current account that pays no interest and R1,000 a month in an RA for 25 years. The first example is ridiculous and hopefully nobody would ever do that. Still, the broader point is that millionaires make it their business to understand the basics of investing and how taxes affect growing their wealth over the long term.
Knowing the basics can exponentially and positively affect your wealth over that of somebody who does not. Making your money work harder and smarter and keeping taxes to a minimum through conscientious tax avoidance and pre-emptive tax planning are all part of the dollar millionaire’s toolkit.
Fifth, the top five careers for millionaires, in no particular order, were in engineering, teaching, accounting, law and management. Interestingly, many respondents said they were not high-flyers in their fields, with only 31% reporting their incomes ever exceeded $100,000 a year. Let’s say that is the equivalent of earning more than R500,000 a year in South Africa (82% of South African taxpayers earn less than this).
Only 15% of the respondents said they were in senior management and executive positions, with the vast majority just working away and saving diligently throughout their careers without necessarily reaching the very top of their industry.
There’s a correlation between these five professions and the point about education — at least four of them require a tertiary qualification.
We can apply all of the above results to our own investing journey. However, let’s also discuss these points with our children and the young people in our network to show them that building substantial wealth is possible. Show them that there are things they can do themselves to stack the deck in their favour.
* Tobin is the founder of Coffee Microcaps
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.