Twin brothers walk into the Wealthy Accountant’s office. One brother is as smart as a whip with an IQ of 147 and a wiz with numbers. The other twin, while looking identical to his brother, is a bit short in the mental category. The less bright brother is hard working, but knows he can’t outthink his twin brother.
Which twin do you think has the greatest financial advantage? Which one is likely to become a millionaire?
Would you believe me if I told you the super-smart twin is orders of magnitude less likely to amass a financial fortune? Yet time and time again I see it in my office: smart people underperforming and average people hitting it out of the park.
Here’s the funny thing. Both brothers are probably equal in intelligence. Life experiences caused one brother to think of himself as average. Perhaps the less intelligent brother preferred working outside with his hands while the high IQ brother pursued a profession.
Doctors and attorneys are awesome at playing financial offense. Many professionals share this quality. But high levels of intelligence don’t correlate well with high levels of financial wealth.
Big Hat, No Cattle
Thomas J Stanley argues in his 2001 book, The Millionaire Mind, that many professionals with a high income don’t have a corresponding level of net worth. Decamillionaires (people with a net worth north of ten million) have a term for people with high levels of income and little to show for it: big hat, no cattle.
These high earning professionals are also extremely intelligent. So intelligent, in fact, they start to believe they can outsmart the markets by timing them. They also have another weakness. Professionals need to maintain an outward appearance of affluence to convince other they are really good at what they do. Who would ever believe an accountant driving around in a bank reposed beater or attorney living in an 800 square foot home?
Average people in average income jobs are more suited to seven and eight figures of wealth! You read that right. The salvage yard owner is far more likely to have a serious level of net worth than a doctor, attorney or (gulp) accountant. Stock brokers and other financial advisors should have an inside track, but spending levels and a high level of understanding of how markets work causes many of these professionals to trade or time the market. The only traders with a snowball’s chance in hell of winning long-term are the market makers and financial newsletter publishers.
My Side of the Desk
Swing around, if you will, to my side of the desk. From my perspective you can see things clearer.
Every day people from all walks of life wander through my office. I have law firms, doctors and even accounting firms as clients. By and large this group enjoys a higher income than average. They also have a low level of net worth compared to what they earn. Worse, I’ve seen more than a few of these professionals pulling in upwards of a half million annually with only a low six figure net worth to show for it.
Before we continue, re-read the last sentence of the last paragraph. For some reason I find it vaguely important to our discussion.
There are plenty of excuses as to why these people are worth only slightly more than their last paycheck. None of them resonate with me.
High spending coupled with high income leaves you just as poor as if you never earned a dime in your life! It’s not the level of income; it’s the level of spending!
Don’t leave my side of the desk yet. I have a few more clients to introduce you to.
Oh, here comes Sam. He worked in the mill his entire life. Not the smartest guy in the world, but a helluva family man. He goes to church every Sunday. His wife died a few years back. Worked in the paper mill his entire life before retiring with $4.7 million. By looking at him (or his car or his home or his . . . ) you would never guess he is rich. (Sam is a real client with a different name.)
Here comes another wonderful client. Jack has a landscaping company. He clips and maintains lawns for businesses and rich people, you know, the doctors, attorneys, financial advisors and accountants. Don’t say anything, but the guy maxes out his retirement accounts before adding more to his non-qualified accounts. Oh, and he is a millionaire too. Didn’t expect that considering the rust bucket he’s driving, did you?
The same pattern holds for farmers (they’re not all poor!), truckers, salvage yard dealers and guys laying concrete.
Don’t bite your tongue so hard. They aren’t all rich. Yes, I know guys in the military (or retired from) who are pretty darn rich. Many are pretty darn poor, too.
Not every doctor and attorney is net worth poor compared to their income. Many people in average jobs struggle. What I’m getting at is the people you expect to be rich are putting on a show. They have a big hat, but no cattle. They spend all their money putting on a façade. There’s nothing left to fund real wealth!
People with average incomes in jobs where there is little to no expectation of wealth have an easier time hiding their financial accumulations. A worn pair of jeans is more than fine to wear to work at the salvage yard or auction house. It’s expected!
When I first started investing in micro-loans on the Prosper platform I was able to see a few details on the borrower. Prosper provided a credit score and income range along with the borrower’s occupation. For some reason accountant’s needed loans in May. This blew me away for two reasons. First, an accountant should be flush with cash after tax season.
Second, some accountant’s work outside the tax field so they could need additional funds. Prosper also listed the reason for the loan request. When an accountant requests a loan to pay bills in May I’m dubious. Online lending platforms are not the cheapest way to borrow money! Any accountant worth his salt would never make such a poor financial decision. I say “his” because no woman would ever do something so foolish. (Yes, that was a joke.)
Prosper confirmed what I suspected from serving my clients. High income professionals frequently are poor handlers of money.
There is a lesson for the wise in this tale. You do NOT need a high income to be wealthy or financially independent! Average people in average jobs with average income can excel financially. The statistics are clear.
Sure, a high income can get you to seven figure net worth status faster if you can avoid the siren call of excessive spending to play the role. Even a below average income can grow into a tidy nest egg if handled properly. Minimum wage is a hard racket, for sure. But once your income climbs to a level even below the national average you have plenty of resources to fund an early retirement!
Excuses will show up in the comments. It goes with the territory on blog posts with this topic. They are still only excuses. Income level plays a role in your net worth. By age thirty you should have at least two years income invested. Once you reach 40 your net worth should exceed at least 10 times your annual income. If you are pulling down a $50,000 annual salary you should have a half mil tucked away in an index fund by your 40th birthday. As each decade passes the net worth report card should grow larger.
This is where the rubber touches the pavement. Really smart people want to trade stocks and bonds. They want to time the market because they did all the research. Of course the market makes a fool of the well educated.
There are only two ways to accumulate money in the market. The first is to drop the money into an index fund, or, if you are so inclined to engage an actively managed fund, a growth and income fund. Forget about aggressive funds and other crazy ideas. Your goal is to be rich!
The other way to get rich investing is to research listed companies for undiscovered value. Buy these gems and hold them for somewhere in the neighborhood of forever. Then go out and find another undervalued business to invest in.
Remember, you don’t want to be the smartest guy in the room. The smartest guy is often broke!
I want to be smart. Just not that smart.
It’s been a while since I showed you my working papers. Below are my unedited notes for this post. It should also be noted the working title of this post was Attributes of a Wealthy Individual; or The Smartest Guy in the Room isn’t the Richest was added at the last minute as a tribute to the Rocky and Bullwinkle cartoon. Hope the insight into my writing style helps you with your writing.
What characteristics are most common in the wealthy? High intelligence doesn’t guarantee wealth, it actually hurts! Smart people think they can outsmart the market and time it. Professionals have an appearance to keep. Doctors and sales people need to look the part. The massive spending required to “look good” reduces savings and all the profits those savings generate.
Average people have a much better chance. The salvage yard owner has nothing to prove so she socks away a massive percentage of her income and puts it into index funds because she know she can’t do better,.
I see it in my office all the time. A recent client picked up his return. He is retired with a serious seven figure retirement account before looking at non-qualified monies or other assets. He is an average guy from an average family retired from a mill job. And he’s rich.
Don’t be so smart to talk yourself into poverty. Intelligence can only dig you out of so deep a hole.
Raising FI Children in a Media Insane World | The Wealthy Accountant
Thursday 5th of July 2018
[…] creates habit. Habit will take you through the stressful times when the majority fails financially. Remaining calm when the world around you panics is muscle memory. Start early and stay […]
Monday 4th of June 2018
Thank you for this article. As you said earlier "The FIRE community has been teaching people frugality from day one." I found the community a couple years ago and it has changed my life. Have gone from barely making it sizable savings and investment accounts, with a long way to go.
I am very grateful for the entire community and all the wisdom it shares.
Tuesday 10th of April 2018
I think highly paid professionals are getting better now too. There are sites like White Coat Investor and Physician on FIRE. They are waking up to the fact that you need to keep more of what you earn. The FIRE movement is great for everyone. My dad is like the smart brother. He never had any problem making money, but he can't really keep it. He takes too much risk. I think smart people think they can outsmart the system/other people and take more chances. Ordinary people like me take it slow and keep at it.
Tuesday 10th of April 2018
I think the difference isn't actual intelligence but perceived - the person who feels like they are the smartest one in the room probably behaves the most this way and is least likely to be the wealthiest. As you say with the twin brothers, they probably are around the same level of intelligence but one doesn't feel that way and one does. With so many inputs, the perception of intelligence may just be a precursor to a more important factor/trait (observation, perseverance, etc).
Saturday 31st of March 2018
This is so true. I'm a private banker and have seen the financial statements and tax returns of hundreds of affluent individuals over the last 14 years. It's endlessly fascinating to see how much people REALLY make and how much of it they manage to convert to assets.
-The folks in the flashiest cars and with the most expensive clothes/accessories almost always have a net worth below what their income would lead you to expect.
-Some professionals - the docs, lawyers, etc. - make a lot less than you'd expect. Many physicians barely break into the 6 figures in some specialties for example. Some attorneys never earn 6 figures.
-By contrast, some people make an astounding amount of money with made up sounding jobs (often self-employed consultants of some kind), bloggers or freelancers, and blue color employees (not even business owners). You really cannot tell by what a person does whether they earn a lot of money.
-Most people have credit card debt and car loans. I swear I have a client who is worth over a hundred million dollars who has a freaking $75k car loan on the books with me (a Tesla, in case you're wondering - the loan was in the low six figures to begin with). I asked my boss why on earth we have it and he couldn't remember doing it. The guy has 7 figures in checking. It totally blows my mind. And this isn't some easy car loan from the dealer - we have to underwrite this stuff manually and issue loan docs and courier them back and forth and the whole shebang. Ugh. I once ran a credit check on an attorney who was applying for a small loan to pay his property taxes. He had $250,000 in credit card debt. They lived in a $2 million home and were members at an expensive club. His income had dropped over several years, but the lifestyle didn't. His wife had no idea; she'd come in from the club to sign docs without looking at them, happy as a clam in designer duds. When they couldn't make the house payment anymore we had to threaten to foreclose and they sold the house and divorced. That story still sticks with me.
Saturday 31st of March 2018
THESE kinds of stories are why I love this MND subject so much. I could read crazy financial stories like this all day. I'm super fascinated by it.