Wealthy Middle-Class Poor and the Differences in How They Handle Their Money



Posted: Sunday, January 20, 2008

by
Global Investment Institute

Believe it or not, middle class people are bigger spendthrifts than their wealthy counterparts, spending more for cars, clothes boats and other big ticket items than the rich. Don't believe it? Well, it's true, according to Thomas J. Stanley, Ph. D. and William D. Danko, Ph. D., who wrote the surprising 1996 book "The Millionaire Next Door." Danko and Stanley studied the spending habits of millionaires and found that they're usually exceedingly frugal, buying off-the-rack clothes, driving used cars and looking for deals wherever they can find them.

According to these authors, rich people are big on saving, routinely socking away about 20 percent of their money into investments and savings accounts. Very few drive current-model cars, and almost never lease them (unless it's done through their company). Most also have what Danko and Stanley call a "go to hell fund," enough accumulated wealth to last them for 10 to 15 years should they leave their jobs - jobs which most of them work at an average of 45 to 55 hours a week. Most millionaires buy their suits from mid-range department stores, spending more money on their children's education than on the trappings of wealth.

But if you look at middle class people, you'll often see what's termed "conspicuous consumption" at work - a brand-new, leased SUV in the driveway, designer labels hanging in the closet, and credit-card debt up the wazoo, because the middle class income is stretched to its limit to pay for these luxuries. The difference between wealthy and middle class is one of income certainly, but often the biggest divide comes when you examine their net worth. The wealthy become rich - and stay rich - by living well below their means and investing their money for the future. A middle-class family, on the other hand, often undermines its own potential for wealth by overspending compared to what they earn, because they're concerned with measuring up to their neighbors in terms of how big their house is, what sort of car they drive and the price tag on the clothes they wear.

One of the biggest financial challenges for those on the less privileged end of the spectrum is escaping from lower class income and spending, and elevating themselves to middle class. When you're fighting to keep your children fed and to pay the rent on time, it's difficult to conceive of how you can possibly invest any of your much-needed income for the future. Even the most frugal of working-class families find their resources stretched to the limit - everything that they need and buy costs the same as it does for people with higher incomes, so everything from gasoline to food to home appliances takes a much larger chunk, percentage-wise, out of their net income.

Can spending habits among lower income households be improved, though? Absolutely. As with middle-income people, there's often a belief that they "need" certain items to fit in as average Americans - so they buy cars at high interest rates, video game systems for the kids, microwave ovens and brand name sneakers, leaving no money left over for savings.

The biggest difference between the wealthy and the not-wealthy is, it turns out, how tight they are with their money - the rich are better savers. Income plays a part, of course, but if you want to live a more comfortable life in the future, cutting back on your expenses today can go a long way towards making that dream a reality. Live within your income, reduce your credit debt, and spend wisely.

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Top-level comments on this article: (1 total)
» left by Nekoda from London 1 year 70 days ago.
I hear what you're saying about how the poor in desperation to appear rich, spend money they should be saving, whereas rich people live within their means and save substantially in order to maintain our wealth. However, to suggest that rich people don't buy expensive cars and clothes is in my opinion is a little misleading to someone uneducated on the subject and could understandably cause confusion and even anger in a reader of this article. The reason for the confusion and anger of a poor person who wants to be rich when reading this article would be accompanied by the question, "If a rich guy didn't buy that Ferrari I saw drive past me last week, and a poor person didn't buy it...who the hell bought it?" Believe me when say rich people DO buy expensive stuff, it's just that to us its not expensive, it's affordable. If a rich person was in scarcity mentality as you described i.e buying second hand cars and clothes for fear of losing our wealth, then they will lose their wealth. Sooner of later. Rich people understand abundance, we don't shop in charity shops. If we wanted to, we wouldn't have bothered getting rich inthe first place. You're right about one thing though. Save. But only enough to make you FEEL comfortable and secure. Then. Buy Whatever you want. It's only money.
» left by Anonymous 1 year 68 days ago.
Thank you so much for clearing that up. Mika Hamilton's article was a little misleading.
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