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NCB Chairman Michael Lee Chin
Hopeton Morrison, Contributor
PEOPLE SOMETIMES ask if there is one single factor in the business of wealth creation that almost guarantees that an individual will be wealthy for all of his or her life.
With the plethora of motivational books, speakers, investment advice on radio, in magazines and on local and international cable television the overriding question is what in all of this represents the single factor that almost guarantees that an individual can become very wealthy within a lifetime.
One of the best-selling books that we have read on the matter is The Millionaire Next Door. The authors Thomas Stanley and William Danko listed seven factors that were characteristic of the thousands of self-made millionaires and other high net worth individuals that formed the basis of their book conducted by way of a study of these individuals over a 20-year period.
FRUGALITY
The very first and easily the most important wealth-creation factor on their list was that these high net worth individuals all lived below their means. In other words these were persons characterised most of all by a great sense of frugality. Stated in plain Jamaican terminology they were "mean and/or tight".
The whole thing speaks to an anachronism. There is a difficulty here especially for males. For we have discovered that there are few things more distasteful to Jamaican women than a man who is 'tight' or 'mean'. It seems that while Jamaican women will tolerate a man who has other shortcomings the perception or reality that he is just a 'Titus' is more than they will take.
One of the more amusing sides to National Commercial Bank's (NCB's) chairman Michael Lee Chin, is his recount of his first foray into the heady world of selling securities in Canada. He recounts that after making Can$10,000 on one deal he bought himself a Mercedes Benz. When quizzed by one local talk show host on the efficacy of that move he quipped a favourite line of Americans: "You got to fake it before you make it".
The operative word here is 'fake' folks. Many would be wealthy individuals have been lured into the heady world of the rich and famous on the basis of one large windfall only to find themselves crashing out because of their inability to sustain such a lifestyle. If you want to be wealthy you must first of all set out to build a high net worth for yourself and frugality is the main plank in achieving that.
Some years ago there was a popular weekly television special entitled Lifestyles of the Rich and Famous, hosted by Robin Leach. Well, surprise, surprise. Only a very small minority of the world's millionaires engage in the type of lifestyle that Leach presented and usually these were the ones who either inherited their wealth or their sudden good fortune 'frightened' them.
There is a very credible counter-argument to this. What is the point of having all of this money if you are not going to enjoy even some of it? The straight answer is lifestyle. Just last night a former very wealthy heavyweight boxing champion re-entered the ring to help bail himself out of bankruptcy. Some former wealthy and high living local reggae/dancehall artistes and sports personalities have also found themselves facing similar prospects with some now living in or near abject poverty. They fooled themselves into thinking that the surge of money in front of them would last a lifetime and engaged in a lifestyle consistent with that illusion.
Frugality is all about lifestyle. Stanley and Danko's research found that most of the millionaires in their study did not make it until they got well into their 50s, with age 57 being a prototypical age for males. Wealth creation for the majority of millionaires and high net worth individuals was not an overnight activity. And interestingly, as a group, these self-made millionaires don't wear expensive designer clothes, which itself debunks another popular sentiment that one needs to 'dress for success'. Another interesting finding coming from Stanley and Danko was the question: 'Is your spouse more frugal than you are?'.
The most successful of these self-made millionaires and those possessing the highest net worth all answer yes to this question. It is also more than coincidental that most of these persons headed strong family units invariably being with one spouse all of their lives and parenting ambitious and disciplined children. The moral here is that a philandering lifestyle is a major deterrent to wealth creation.
We have been carrying the theme that the cornerstone to wealth building is frugality. Well, the cornerstone to frugality is budgeting. Many Jamaicans do not budget. The argument among some is that it is pointless for them to budget as what they are earning cannot suffice to make ends meet in the first place. Such an argument is completely wide of the mark. A written budget is critical if you are to seriously plan for your wealth creation and therefore your success. The millionaires that we refer to all spend an average of 20 hours per month using pencil and paper to map out their earning and spending strategies. It is ironic that we spend anywhere between 17-23 years preparing ourselves for our chosen vocation. The first number of years are usually spent in kindergarten/basic school then on to primary/preparatory school and finally on to secondary school usually up to age 17 or 18.
PROPER MANAGEMENT
For those who go on to a profession (e.g. nurse, teacher, engineer, lawyer, doctor) it could take another three to six years. The irony is that although we tend to have no problems expending this time to prepare ourselves for work, we spend little or no time in proper management of the money that we earn. The main reason that we work in the first place, is to earn sufficient money to afford the necessities of life for ourselves and our loved ones, and to be financially independent after retirement. We just don't give equal attention to personal financial management as we do with so many other areas of our lives.
In fact, this business of budgeting goes further than pencil and paper. Many wealth creation manuals and books speak to a principle of 'paying yourself first'. This creates even further astonishment among the would-be financially independent. If it is so difficult to make ends meet in the first place, it will be next to impossible to take out 10 or 15 per cent of this at the top. The rebuttal to this often comes in a simple illustration.
If you were offered a choice of a cut in salary or to lose your job, which would you take? The prudent person will chose the former. Jamaican public sectors workers have done just that with their signing of the Government/Trade Union's Memorandum of Understanding (MoU). Wealth-creation manuals speak to paying yourself at least 10 per cent of all realised earnings, but most of the millionaires in the instant-study raised this to as high as 15 per cent of earnings.
DEFINING CHARACTERISTICS
One of the defining characteristics of millionaires in the study and of a couple that we know about locally is that they realise a small amount (less than 10 per cent) of their net worth in annual income. So although many of these persons have substantial wealth in financial assets (including real estate, art, bonds and stocks) these assets are kept unrealised. We find then that many of these persons are very wealthy individuals but are often cash poor. This is a deliberate strategy on their part to maintain their defence strategy (very frugal spending patterns). It is fair then to repeat the age-old maxim: "It is not how much you make that makes you a man/woman but how much you invest". Danko and Stanley take it a stage further. They argue that for purposes of wealth-building, income is ultimately a non-functional variable as it is not the amount of money that you make each year but how you manage that which you already have. Another plank then in the wealth-building equation is to minimise realised (or taxable) income and maximise your unrealised (or non-taxable) income.
So if you would be wealthy and financially independent, then be frugal like the millionaires are. Remind yourself that you are simply sacrificing a lavish consumption lifestyle today for a lifetime of financial peace tomorrow.
Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com.
