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In Defense of Frugal: The Happy Home

Fortune cookie: small house, big happy
source: Myra Matos

One bit of financial advice my father gave me when I was younger was, “Son, you can’t drive your house but you can sleep in your car.” I didn’t really get it at the time but I definitely do now. Essentially he was saying don’t spend too much on a home, you’ll be financially better off if you don’t. Without getting too much into my parents’ finances, on a teacher’s and painting contractor’s income, they have been able to save and invest where their capital will kick off enough income in retirement as they earned when they were working. They live modestly but do not need to. They could actually increase their lifestyle substantially if they wanted, but are satisfied making cookies with my daughters, their grandchildren, and going on the occasional vacation.
Originally, as I promised to do in “Are You A Millionaire?”, I was going to post about the second measure of wealth. I talked about the first in “Your Wealth Ratio”. But some conversations recently prompted me to find out if my father’s advice stood up to muster. I went back and skimmed some of Thomas Stanley’s books, including his most recent, Stop Acting Rich. One of the tidbits I found very interesting is that Stanley’s research revealed that most millionaires carry mortgages despite the ability to pay them off in full. I thought it’d be interesting to see, given recent years’ turmoil in the mortgage and real estate markets, if these numbers still held up.
Using the information in Stanley’s recent work and two of Stanley’s earlier works, The Millionaire Mind and The Millionaire Next Door, somewhere between 50% and 60% of the millionaires surveyed hold mortgages on homes purchased 23 years prior. Additionally, the current outstanding mortgage on homes belonging to deca-millionaires (those with $10 million in or more in net worth) is equal to 7% of the home’s current value while the typical millionaire (50% have less than $2 million) has a mortgage balance of just under a third of the home’s market value. Thus, I assumed a mortgage of 15% of the home’s value for milionaires between $3.5 to $10 million and overall of 30% for those under $3.5 million. I used the IRS Personal Wealth Statistics from 2004 (http://www.irs.gov/taxstats/article/0,,id=185880,00.html) The below chart shows that millionaires still have more than enough cash to pay off the mortgages whenever they want. (Please click the table or here for a larger view.)

In other words, according the IRS study and Stanley, millionaires on average hold nearly five times the value of their outstanding mortgage in cash and cash equivalent securities. They can pay off their mortgage at any time.


Although the IRS study lists debts (Debts and Mortgages) of millionaires, it doesn’t break out primary home mortgage debt from all other debts. But what’s interesting is that millionaires’ total debts (mortgage, business, personal, etc) are still less than their cash holdings. (Please click the table or here for a larger view.)

So what is the takeaway from this? There are a few things, some obvious, some not:
Millionaires are cash rich and house “poor”: From the data above this is obvious, right? But most non-wealthy people not armed with this data think wealthy people live in gigantic McMansions. Although millionaires may live in very nice homes, for the most part, they live in modest neighborhoods requiring modest upkeep, care and financing. This is how they are able to allocate a significant portion of their discretionary funds to investments and their personal businesses. The return of every dollar invested in the stock market triples (at least) the “return” of every dollar invested in one’s home. By buying a smaller and/or less expensive home, millionaires are freeing up more dollars to be invested where those dollars will be treated best.
Additionally, the adage “buy as much house as you can afford” doesn’t apply to millionaires or those likely to become wealthy. Most are able to live comfortably on half their household income. This is not because millionaires earn outrageous salaries (especially during the time before they become millionaires). It is because they live well below their means. A home is the biggest expense most people will have. Thus “buying right” as it relates to your home is biggest move you can make on your journey to wealth.
Millionaire wives are cheap dates: Not so obvious, but true nonetheless. There is a positive correlation, albeit perhaps an indirect one, between buying affordable housing and investing the surplus and millionaire wives being cheap dates. So much of the ill-advised things men do with their money is to impress (and in some cases suppress) a woman. To paraphrase comedian Dave Chappelle,

Men have nice cars– not ’cause they like nice cars– because they know women like [men with] nice cars… Women love comfortable surroundings, so men get comfortable surroundings. But let me tell you something, if a man could (bleep) a woman in a cardboard box, he wouldn’t buy a house.

Stanley points out, “Living in a pricey neighborhood will cost you more than just a jumbo-sized mortgage and is not, in fact, how most millionaires live. Why is it that most millionaires live in moderately priced homes situated in less-than-prestigious neighborhoods? The majority report that their spouse (typically the wife) is more frugal than her frugal husband… Those respondents who are most productive in converting dollars of income into dollars of net worth often tell me, ‘I can’t get my wife to spend money, no matter how hard I try.’ For these spouses, displaying a family’s economic success through home and related products is not important.”
Millionaires buy time and not toys: All of us know this to some degree: every purchase we make, whether it be clothes, cars, wine, tropical vacations or a home, casts some commentary on our “worth” as human beings. We are always judging others and ourselves on “outer stuff” instead of “inner stuff”. All of us are to some degree mesmerized by shiny new toys. The shinier the toy, the happier we will be. Or so we think. It’s human nature and we are all human. But what studies show, and millionaires have figured out, is beyond money’s role in taking care of the basic necessaries of life:

There is no significant correlation between one’s satisfaction with life and the amount of material possessions one has.

In fact, some studies have shown the more “things” one has, the less he or she enjoys life. Partially because purchasing, maintaining and managing lots of stuff diminishes the chances you can store a safety net of wealth. It’s wealth, cash in the bank wealth, that buys security. And security, not stuff, buys happiness.
Thus, when millionaires do spend on things that don’t necessarily enhance their wealth, they concentrate their spending on enhancing life experiences. Stanley iterates this in The Millionaire Mind – millionaires spend money on goods and services that allow them to leverage more of their time for the things in their life that matter most. The top five activities millionaires engaged in during a 30 day period in Stanley’s survey were:

  • Socializing with children/grandchildren
  • Entertaining close friends at home
  • Planning & studying investments
  • Taking photographs
  • Watching children/grandchildren play sports

Were shopping at expensive stores or vacations to exotic locations on the list? Yes, but way way down there. And even then, the millionaires who engaged in these more expensive activities had been wealthy for quite sometime. Millionaires know you can own a small home, make it beautiful, enjoy it with your friends and family, and this will increase your chances of achieving financial independence.

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