A question that comes up on Quora fairly regularly is along the lines of “how do rich people live their lives?” After I responded to one of those inquiries I thought it might make sense to copy the reply into a blog post. That way other people can benefit from the information – without me having to remember and repeat myself. Here is the response…
If you want a good look into how wealthy people live, you should consider reading the Millionaire Next Door. From a personal perspective (and I align with a lot of what is reported in that book) I can share a few things about us personally below.
First, I’m “wealthy” not “rich”. To me being rich is more of a spending lifestyle. Being wealthy means having a large net worth and enough money that working is no longer a requirement. (You can track your net worth for free using Personal Capital’s online tool – I’ve found it to be the best option out there. Here a full Personal Capital review if you want to see what we love about it.)
That clarified, here are some common differences in how I manage my finances, as do other wealthy people I know.
* I avoid debt like the plague. I haven’t paid any interest in years – since we paid cash for our current house. Even during the 10 years or so leading up to that point we never carried a credit card balance. We also paid cash for all of our cars in recent years. Interest on debt can be a huge destroyer of wealth.
* I track every dollar spent. I can tell you exactly how much I spend on dining out each month, and on groceries, and on gas – in fact in every category. Most I know off-hand but those I don’t I can quickly access within a few minutes. I’ve used YNAB, Quicken, and Personal Capital to track and monitor expenses.
* I’m heavily invested in the stock market – and in stocks specifically. The risk of not owning stocks (holding cash or too many bonds) can be a large hinderance to growing wealth faster than inflation. I have a diversified portfolio (see our full portfolio here) that, but I don’t actively trade my investments. My investment philosophy is buy-and-hold, which has worked out very well for us over the long haul.
* I have a large emergency fund – more than the standard 3–6 months – because I never want to be in a situation where I need to liquidate investments during a downturn in the market. Our emergency fund is probably a bit bigger than it needs to be, but right now we are in a transition season of life. My wife and I are early-retired (mid-40s). Having the large cash reserves gives us options while we transition into this next season. I suspect that sometime in the next year we’ll deploy a lot of that cash into stocks and bring the reserves down to around 9-12 months’ of living expenses.
* In addition to tracking money spent, I also limit it. My wife and I hold very tight to our annual budget. We track it monthly but really care about total annual spend. This gives us some flexibility through the year but allows us to keep our total spending in check.
* Our house is modest. We used to live in a $1m+ waterfront house (that I loved) but made a conscious decision to downsize. We sold that and moved into a house which we bought with cash with the equity in the waterfront house. I miss being on the water, but it was a smart financial move. Having such a large amount of money tied up in personal real estate isn’t what we felt was the best use of those funds. Now our taxes, utility, and maintenance costs are all lower – and it is much faster and easier to clean the small house (extra bonus!). Not only did we free up cash that would have been tied into a living expense but we lowered ongoing living expenses substantially.
(Want to lower your mortgage payment by refinancing? LendingTree is a free and easy way to get multiple rate quotes to compare against each other.)
The best way to get started with investing
If you are looking for an easy way to get started with investing you might want to consider a “robo-advisor”, which is a low-cost investing service that makes it easy and affordable to build a diversified portfolio. One of the most popular options is Betterment. You can read my Betterment review here.
[NOTE: TD Ameritrade is very similar to Fidelity and is running a special where new investors can trade for free for 60 days and also get up to $600 cash. If you want to self-manage your own investments, I’d definitely look into that option.]
I hope this peek into how we handle finances is helpful.
Just as you would want to take physical coaching from a personal trainer who was fit and lived a healthy lifestyle, you should look for a financial coach who is financially fit and living out what they suggest.