So when you are driving through town, where do you think the rich people are? You probably think this is a stupid question. They are obviously living in those exclusive gated communities with the country club membership, right? They are probably in those exclusive neighborhoods with the enormous houses and manicured lawns, right?
You may be surprised to learn that those fancy subdivisions are not where you will find the majority of rich people. As Thomas Stanley documents on his website, there are about three times as many millionaire families living in houses worth $300,000 or less than those living in houses worth $1 million dollars or more.
The reason lies in the mindset of the millionaire. He or she doesn’t want to impress people with a house, car, etc…. A person who becomes rich and holds onto wealth has self-confidence and probably could care less about what anyone else thinks. It is this personal strength that aided him or her in becoming rich. One becomes rich by purchasing only what is needed – reducing the amount spent on wasting things (items that go down in value and waste away) like clothes, cars, food, and vacations to the minimum. It is hard to save money away when you’re buying that expensive new car every few years to impress the people you don’t like at work.
He or she wants to hold onto wealth, and the way that is done is by investing money in things that go up in value and require little maintenance. McMansions will go up in value, but obviously not always, as the last few years will attest. Often the growth rate in price is about the rate of inflation. There are only so many people in the market for McMansions, so when you are ready to sell there won’t be that many buyers, forcing you to settle for a lower price. Well kept but modest homes are always easy to sell because there are plenty of buyers. By purchasing a home in an established neighborhood, a history of sales prices is also available. It is better to put the extra money in something like individual stocks that actually grow faster than inflation.
In addition, a large house involves a lot of maintenance. Buying a large house with a large yard involves large additional costs for roof repairs, painting/siding, yard maintenance, etc…. One can add nice furnishings to a modest house and make it extremely comfortable without increasing the cost of upkeep. If one really doesn’t need the room, why maintain it?
So who lives in those McMansions? Probably people who have jobs that pay a lot of money, but whom spend most of it each month on the mortgage, clothes, cars, food, etc…. Search for homes in the Phoenix or Las Vegas areas and just see how many large homes in trendy subdivisions are up for short sale or foreclosure sale. Putting most of your income into a big house in a fancy neighborhood is too big a risk and one that rich people usually don’t take.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.