Some people seem to move relatively easily from paycheck to paycheck into comfort or wealth, while others get stuck or worse, fall back. What are the attributes and abilities that set them apart? Do they exhibit common behaviors and personalities? In her new book, “The Difference,” financial expert Jean Chatzky lays out the four types of people that make up today's economic strata in America, and shares tips on how people can move up to being financially comfortable or even wealthy. An excerpt.
Meet the wealthy
Confident. Driven. Intuitive. Resilient. Only 3 percent of Americans are truly wealthy. But there is no doubt it’s good to be one of them. On average, they have investable assets (not including home equity) of nearly $2 million, but we also categorized them as wealthy if they had achieved significant wealth at a younger age:
• $1 million or more for ages 55 or older
• $750,000 or more for ages 45–54
• $500,000 or more for ages 35–44
• $250,000 or more if under age 35
What made them wealthy? The vast majority didn’t get there overnight. Nor did they get there because someone died or handed them a check. In fact, nearly nine out of ten said their wealth developed over time. They credit a combination of the Top Twenty factors for their success. Some are attitudes or attributes that seem to make up their personality; others are habits that support wealth. Both are needed to build a life of lasting wealth. When you have the habits without the personality, you are likely to be ﬁnancially comfortable, but it’s less likely you’ll become truly wealthy. When you get the attitudes without the habits, the picture is even less rosy. We have all met that person who is able to get job after job but never climbs the ladder. Without solid ﬁnancial habits, paycheck-to-paycheck is usually where they get stuck.
Seven traits of the wealthy personality
Optimism. Optimism is an expectation that good things are going to be plentiful. The wealthy generally have the sense that life will bring good rather than bad outcomes. That doesn’t mean they believe that good things will be omnipresent, but that they will outnumber the not so-good.
Resilience. The wealthy are confident in their abilities to overcome bad situations — on the job, in their personal lives, with their ﬁnances. Many have triumphed over dismal ﬁnancial starts. And, unlike most of the population that hops from job to job, career to career, the wealthy are much more likely to stick with what they start.
Connectedness. The wealthy are people magnets. They are connected to people in all aspects of life — they have circles of family, friends, colleagues, and acquaintances. One sign of a wealthy person is that others are willing to work for him or her, sometimes for less than they are worth on the open market.
Drive. The wealthy want to succeed. Some want that success to arrive in the form of money (and that’s OK). But most are quite passionate about the careers they choose to pursue. Not succeeding at these pursuits is, quite frankly, not an option.
Curiosity. The wealthy are likely to have gone to college. But it’s not just classroom education that sets them apart. They are always learning, consistently reading books for pleasure and newspapers to keep up with the world. This may be a habit learned in childhood; most wealthy individuals report that their parents read to them when they were young.
Intuition. The wealthy somehow know precisely whom they should be dealing with and whom to walk away from. And they listen to those gut instincts.
Confidence. When the wealthy take a calculated risk — such as starting a business or buying investment real estate—they don’t see it as much of a risk at all.
Four habits of the wealthy
Work hard. The wealthy work harder — and sleep less — than other people. They are more likely to mix work with their downtime, sacrificing personal time for professional success. But because they tend to be passionate about what they do, it’s less likely that they see it as a chore.
Save habitually. Wealthy people certainly have the funds to be crazy spenders, but most are not. In fact, some seven out of ten say that saving more money has been an “absolutely essential” ﬁnancial goal as an adult. They typically pay off their full credit card balance each month.
Invest soundly and aggressively. The wealthy are more likely to invest in stocks or stock mutual funds. They understand that even in down markets they need to take risks in the market in order to make their money work as hard as they do. They are also more likely to invest in real estate (above and beyond buying their own homes).
Give back. The wealthy are grateful and they show it by giving back to their communities, to organizations they believe in, and to people they care about.
Interestingly, although the PTPs and FIDs are likely to blame their ﬁnancial troubles on bad luck, the wealthy say they didn’t get there by virtue of a lucky break. They got there by landing a good-paying job and sticking with it. Or by creating, as an entrepreneur, a good paying job for themselves.
It’s also important to note that many of the truly wealthy individuals — the millionaires — in our study didn’t describe themselves as wealthy. Instead they described themselves as “ﬁnancially comfortable.” Wealth, it still seems, is relative. You’re less likely to see yourself as wealthy, even if you live in a huge home on a big plot of land with millions of dollars in the bank, if the neighbors to the left and the right of you have tens of millions in the bank. Likewise, you’re less likely to see yourself as wealthy if you run a successful small business, when the other members of your social set run successful midsize ones. Of course, the rest of America — and most of the world — indeed views you as wealthy.
With wealth, you get a greater degree of contentment with the other aspects of your life. Although study after study has shown that wealth in and of itself can’t buy you real happiness or inner peace (and my own research noted that people who believe it can are less satisfied with their lives as a result), as you climb the ladder of ﬁnancial success, you do become more satisfied with many parts of your existence: your family life, social life, health, religious life, even your sex life.
Meet the financially comfortable
Like the wealthy, the 27 percent of Americans who are ﬁnancially comfortable are standing on solid — well above average — ﬁnancial ground. On average, they have investable assets of $240,000 — a number that rises with age.
Their good habits have put them there. The ﬁnancially comfortable are even more likely than wealthy individuals to make — and stick to — a budget. In other words, they’re careful about how much they spend. They’re similarly careful about how much they borrow. Nearly 70 percent pay off their credit cards in full every month, and the rest either pay more than the minimum or don’t use cards at all. Three-quarters devote a chunk of household income each month to personal savings. That’s striking in an America that for the last decade has been saving nothing at all.
These are people who, like the wealthy, are in a good place — not just ﬁnancially but in life. In large part, money does not stress them out. A scant 2 percent — a number so small it could be a result of statistical error — say money causes headaches in their lives. Only a handful say they’d have any trouble whatsoever paying a large medical bill if it hit unexpectedly, or staying aﬂoat if they lost their household income temporarily. Although they’re not as satisfied with their social lives, health, or sex lives as the wealthy are, they’re just as satisfied with their family life, which makes sense, since they are more likely to be family focused, but less so on friends, colleagues, or neighbors.
With all of those positives, why haven’t the ﬁnancially comfortable become wealthy? They’re missing a few solid pieces of the wealthy personality. They’re less optimistic. Less likely to take a risk at an advantageous time. Less likely to reach out of that inner, familial circle to make a connection with someone who holds the keys to getting ahead. As a result, they are a little less grateful as well.
Don’t get me wrong. Financially comfortable is not a bad place to be. It’s a place most Americans should aspire to. But once you reach it, digging into your soul and unlocking The Difference will allow you to reach heights — in wealth, success, and happiness — that perhaps you never realized were possible.
Meet the paycheck-to-paychecks
A life where you can buy what you need but never what you want. Where after paying for housing, food, and clothing, you have very little left to pay for anything else. Where gas-price hikes make you ask: “What do I have to give up today to put enough in the tank to make it back and forth to work?”
This is reality for more than half of all Americans. More than half! Some 54 percent say they’re stretching it, living from one paycheck to the next. They’re making ends meet, but they’re struggling to do it. Any unexpected expenditure could tip the balance in the wrong direction. A large medical bill. A hole in the roof. And it’s taking a toll. One-third say their ﬁnancial situation is causing a lot of stress in their lives.
Why are they here? What separates the paycheck-to-paychecks from the ﬁnancially comfortable and the wealthy? Both personality and habits. But in this case, the habits are the driver. Sure, sometimes the catalyst is something out of your control, such as a health problem or job loss. But our research showed that overspending is the key reason that people slip from a position of ﬁnancial security into a paycheck-to-paycheck existence. Consider how many people are on precarious ground because they bought houses they couldn’t afford to live in or maintain. How many are on shaky territory because they bought one too many pricey cars, took yet another expensive vacation, or fashioned an image fueled by wearing the right clothes, eating in the right restaurants, or walking the right dog?
It’s a vicious cycle. Once you overspend, it’s tough — if not impossible — to tap into the habits that move people into the range of the ﬁnancially comfortable. Once you overspend, you cannot save habitually. Credit card debt is a savings killer, and only 22 percent of paycheck-to-paychecks can pay off their balances every month.
But while overspending doesn’t leave much to invest, it doesn’t leave zero. More than one-third of these people participate regularly in their company’s 401(k) or some other retirement plan. This automatic investing is clearly responsible for the somewhat surprising fact that paycheck-to-paychecks have investable assets, on average, of $83,000. If the number sounds higher than you’d expect, that’s because it’s skewed by what I like to call the “six-ﬁgure PTPs.” These are the high earners — the managers, lawyers, entrepreneurs — who still can’t seem to make ends meet. The folks who feel broke despite the fact that they’re bringing in $100,000-plus a year. Fully half of paycheck-to-paychecks, however, have less than $25,000 to put to work to grow their futures.
Being in this position does not inspire Confidence. Or happiness, resilience, risk taking, gratitude, or any of the other attributes of the wealthy personality. Even when they do have assets to invest, they’re not investing them the way you must to become wealthy: aggressively enough to beat taxes and inﬂation. Three-quarters say the stock market feels too risky for them. One-third can’t even envision a day when they won’t have to work to meet their ﬁnancial needs.
Again, this is not a life sentence. If you’re in a paycheck-to-paycheck position, learning — and then practicing — optimism, resilience, appropriate goal setting, and prudent risk taking will put you in position to ﬁnd your passion in life. Once you ﬁnd that passion, you’ll no longer feel the need to overspend to ﬁll the emptiness in your soul. In fact, because you’re more self-satisfied, you’ll be inspired to take care of yourself in other ways by saving more, investing appropriately, and annihilating that credit card debt. Likewise, saving more, building up that retirement account balance, investing it for growth, and watching the balances on your monthly credit card statements dwindle will put a smile on your face and make you feel you can conquer the world.
Meet the further-in-debtors
Finally, there are those people who can’t even tread water. They’re already in a hole, but instead of making their way out, they’re tunneling down further. Some 15 percent of Americans say they’re sinking further into debt each month.
It’s a dire picture. Less than one-quarter of further-in-debtors save anything each month or make a contribution to a retirement plan such as a 401(k), which is why 56 percent of them have less than $10,000 in investable assets to their name. Three-quarters say if they had a large medical bill tomorrow, they would ﬁnd it difficult to pay. Not surprisingly, they’re both unhappy and insecure. Nearly half get physical symptoms like insomnia, heartburn, stomachaches, or headaches when they think about their ﬁnances.
What do they blame for their situation? Bad luck.
What do I blame? Hubris.
The paycheck-to-paychecks overspend and know they’re doing something that’s not in their own best interest. The further-in-debtors overspend without a thought because they feel entitled. They deserve the nights out, the new clothes, the latest technology. How do I know? Our research gave me a peek into their budgets. A full third devote a decent chunk of their budget to entertainment or extras — nonessentials as far as I’m concerned. Far fewer devote any money at all to saving for tomorrow.
Can they change? Can they turn the situation around? Absolutely.
They need to embrace as many of the components that make up The Difference as they can. And they’ll need to use the arsenal of tools in the chapters that follow to keep themselves on the right track.
Moving on up
In my last book, “Make Money, Not Excuses,” I wrote about an epiphany I had — a good ﬁfteen years into my ﬁnance career — when I realized there are only four things standing in the way of any one individual and ﬁnancial security.
1. You have to make a decent living.
2. You have to spend less than you make.
3. You have to invest the money you’re not spending so that it can work just as hard for you as you are working for yourself.
4. You have to protect yourself and this ﬁnancial life you’re building so that a disaster — large or small — can’t come along and take it all away from you.
I am absolutely right on these four points. Absolutely. Positively. Without a doubt.
But what I have also come to realize is that these four steps are a bit of an unbalanced equation. There are two sides to living any ﬁnancial life. The left and the right sides of the ledger. The assets and the liabilities. The money coming in and the money going out. Numbers 2, 3, and 4 are all about the money going out.
Spending less than you make? Most people in this country are not. We have been, for the last two decades, living on a diet supplemented (if not on paper, then at least with a little mental accounting) by the fat values of our tech-laden stock portfolios and then, when those petered out, with the rising values of our four-bedroom Colonials. As a result, Americans have been saving an anemic one-half of 1 percent of everything we earn. That’s eight times less than the percentage of our income we spend every year eating out. Yet, it is fairly simple to right your ship by tracking your spending, cutting out needless expenditures (big and small), and reducing the interest rates you’re paying on your debts.
Investing the money you don’t spend? That’s not something most of us are doing sufficiently, either. First, of course, you have to ﬁnd the money. Then you have to deal with a convoluted system of accounts ranging from 401(k)s to IRAs to Keoghs to SEPs, ﬁguring out which is the right one for you and how to ﬁll it with the right mix of stocks and bonds once you open it. But again, this is a situation fairly easily remedied with a series of automatic monthly transfers from paychecks into retirement accounts, from bank accounts into 529 plans, from checking into savings. And once the money’s there, if you don’t care to spend your time picking stocks, you don’t have to. Find a target-date retirement fund (sometimes called a lifecycle fund) geared to the date you plan to stop working full-time and call it a day.
Protecting everything you’ve built? Strike three. To this day, two-thirds of Americans don’t have the most basic of legal documents: a will. Or enough life insurance to take care of the people they love, should something unforeseen happen. But, again, this can be remedied relatively quickly and inexpensively. (Term life insurance prices have gotten so competitive, I just replaced my ﬁve-year-old policy with a new one and am saving hundreds of dollars a year.)
What sets numbers 2, 3, and 4 apart is that although you may be fully capable of mastering these skills — and you may have one or more of them under control — they are things you can do sufficiently only after you have taken care of number 1 — that is, after you have the money rolling in. And therein, as the Bard would say, lies the rub. Try as hard as you like to follow my advice — and I’ve been told I make understanding how to accomplish 2, 3, and 4 very easy — to track your spending, save automatically, and reduce your outstanding debt. Try to allocate your assets to perfection and pick winning stocks or mutual funds with low expense ratios. Try to secure your future with the right amount of term life insurance coupled with a well-rounded estate plan, a will, durable powers of attorney, and health-care proxies. Try all of this, but if you don’t have the money—and you can’t ﬁgure out a way to get the money — you are going to fail.
A swiftly shifting paradigm
The good news, the very good news, is that this is a situation that can change — and quickly. Ten years ago, one in ten of the people who today describe themselves as ﬁnancially comfortable were slipping further into debt each month, and four in ten were living paycheck to paycheck. In other words, half of the ﬁnancially comfortable made their way not only out — but up. Ten years ago, 16 percent of the individuals who today describe themselves as wealthy were mired in debt. Only 13 percent were wealthy back then, which means that for a full 87 percent of them — nearly nine out of ten — wealth has been a recent phenomenon.
And it doesn’t always take ten years to make the leap. Those individuals who transitioned from living paycheck to paycheck into a life that’s ﬁnancially comfortable said it took an average of seven to eight years. Moving from ﬁnancially comfortable to a life of wealth took just over eight on average. And making the big leap — from paycheck to paycheck to wealth itself — took about ten. That’s the number of years Friends spent on the air. It’s about the same time that a successful president spends in the White House. It’s equivalent to the career life span of an NFL running back. In the scheme of things, it’s a blink of an eye. And most people — no matter what strata they’re living in right now — believe making that leap is possible. Are you one of them? Read on.
Your choice What do you need to do to ﬁnd The Difference in your own life? Two things. First, you have to make the decision that this is a course you are going to embrace. You have to choose The Difference, just like you choose to exercise, eat healthier, quit smoking, read nightly to your kids. You choose The Difference; it does not choose you. The power is in your hands.
Excerpted from “The Difference” by Jean Chatzky. Copyright (c) 2009. Reprinted with permission from Random House.