The new millionaire next door

The new millionaire next door

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The idea of the ‘millionaire next door’, whose lifestyle seems to be similar to our own but who turns out to have accumulated a net worth which their neighbours do not suspect, is not new.  Indeed, there is even a formula which supposedly tells us what our net worth ‘should’ be:

Age x annual gross income from all sources except inheritances

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Thus a 40-year old with a salary of £50,000 would have a theoretical net worth of £200,000 while someone of 50 earning £100,000 would work out to £500,000.  The key assumption behind this, of course, is that the millionaire next door has built their wealth gradually by careful saving and shrewd investing, making them an accumulator.  While this approach to financial planning is sound (the first rule, of spending less than you earn, forms the foundation for all effective plans), it is not how every high net worth individual got there.

At this stage we can ignore those who got lucky with the lottery or some other gambling enterprise, as well as those who inherited or were the beneficiary of the proceeds of crime.  They either entail something outside the individual’s control or they fail on ethical and/or practical grounds.

However, one of the phenomena which appears to be on the increase these days is that of the entrepreneur who got rich relatively quickly from the proceeds of a business which they started.  This is particularly the case with technology-based enterprises.  With startup costs for such businesses lower than for traditional models (remember Microsoft?) and many founders much younger than was typical in the past, the opportunity to acquire wealth early is being realised for a different demographic.

However, while many dream of becoming wealthy overnight, the reality is that if it happens, it can bring about a number of changes in your perspective on life.  Not least is the fact that it can be difficult to talk about, even (or particularly) to people who are already close to you.

Part of this may be that money is one of the subjects that British people are naturally reticent to discuss with their friends and family.  We somehow feel as though they might be offended if we tell them about our success and it might jeopardise our future relationship with them.  Either way, like the lottery winner who omits to tick the ‘no publicity’ box, once the cat is out of the bag, we can’t go back and untell them.  As we don’t know how they react, it can seem better not to tell them at all.

This can particularly be the case where they come from modest financial circumstances.  A recent article in an American magazine contained a tale of an entrepreneur whose mother became bitter about the fact that he was going to have more money than she and her husband had accumulated from working their whole lives.  If this is how his mother felt, isn’t difficult to imagine how someone with a less strong connection might react.

Although surveys often show that friends and family are a popular source of financial advice, this may therefore be one of those occasions when that source is unavailable.  Indeed, even if they were consulted, it is one thing to talk about the benefits of a repayment mortgage or shopping around for the best cash ISA rates and quite another to deal with the implications of a life-changing amount of cash arriving in their bank account.

With so much emotion involved, it is unsurprising that many people in this situation opt to hire a professional adviser, possibly for the first time in their life.  A good adviser will often have experience of working with people in similar situations and therefore appreciate the challenges which come with sudden wealth.  The element of detachment which they bring can help you to focus on what is truly important to you rather than to someone else.

Although there is no universal solution, if you are trying to avoid your circle being aware of your change in fortunes, engaging in conspicuous consumption is unlikely to help, regardless of how tempting it might be to buy your first Ferrari.

Indeed, the first step may be to pause.  Even if there has been a prolonged process leading up to a business sale which creates the cash, no transaction is ever certain until it is signed and the sudden arrival of the cash proceeds can still be a shock.  Taking a period to adjust, in which you do nothing to draw attention to your wealth, can make it easier to get used to and to appreciate that you are still the same person.

It is often said that the way to become rich is to take a large undiversified risk and be lucky.  The way to remain that way is to diversify heavily.  It is easy, in the euphoria of the aftermath of a big ‘win’ to think that what worked last time will work again.  There are certainly some people who have had serial successes with businesses but many more who had a different experience.  Someone who sunk the majority of the proceeds of a successful venture into another which failed tends not to be the one who writes a book about it and they disappear from history. 

There may be merit to investing a proportion of the proceeds in one or more other businesses, particularly in a sector of which you have experience.  However, a good adviser will be able to provide guidance as to the proportion of your wealth that this should represent so that even if it all goes horribly wrong, your essential financial security will not be compromised.  They can also help you to ensure that your wealth is deployed in ways which are consistent with your own values and your goals, not those of others.

While an adviser cannot make you rich, they can stop you from being poor.  If the line between rich and poor can sometimes be a relatively easy one to cross going upwards, it can be even easier to do so on the way down.