Why Rich People Are Cheap

It's a cotton stereotype self-perpetuated throughout history: rich people are cheap. We've seen this demonstrated and exaggerated in everything from fictional characters like Mr. Burns from The Simpsons and Ebenezer Scrooge from A Christmas Carol, all the way to real-life examples, including the famous movie star Cary Grant, who would charge his houseguests for doing laundry, or oil billionaire H.L. Hunt, who would park blocks away from his office just to avoid a 50-cent parking fee.

So why is this? Is there actually some truth to say that rich people aren't generally cheaper than most? Well, to really understand this, we have to dig deeper into the psychology of becoming wealthy and get to the source of where it all begins. What a better place to start than with the Fidelity Millionaire Outlook Survey, which analyzed the investing attitudes and behaviors of more than 1,000 millionaire households?

As I read through this, really one of the more pertinent revelations was that from the millionaires' sample, 86% of them were self-made. Even more remarkable was that 78% of them started out as middle class or poor. I really think that's an important distinction that we should emphasize so we could dispel the notion that rich people mostly come from wealthy families and inherit their money. In fact, the vast majority of them built up their wealth the old-fashioned way: through hard work, diligent saving, and long-term investing.

Now, you might be wondering just how long-term we are talking about here. Well, Business Insider found that it took the average self-made millionaire 32 years to reach a $1,000,000 net worth. What's even more astonishing than that is that fewer than one percent of those self-made millionaires were able to do that before the age of 40.

It's really from that data that we can begin to logically break down the mindset and the stereotype of why rich people are often perceived as cheap. The first logical conclusion from this research is that rich people didn't get rich by wasting money. But many people fail to realize that the personality trait of someone who diligently saves and invests their money to one day become a millionaire doesn't magically change the day they become wealthy. It's often due to that person's rather frugal characteristics that made them rich in the first place, and continuing that mindset is what actually allows them to keep that money.

Secondly, speaking of their money, to most millionaires, every little bit counts. This becomes very evident when you start breaking down these statistics. Take a wild guess at which income bracket is most likely to use a coupon. Think about that for a second and comment your guess down below. Which income bracket is most likely to use a coupon?

Okay, thanks for commenting! If your guess was people earning over a hundred thousand dollars a year, you would be correct. That's right: a survey found that people earning over a hundred thousand dollars per year are twice as likely to use a coupon than those earning under thirty-five thousand dollars a year.

Now, a hundred thousand dollars a year is a lot, but it's not necessarily millionaire levels. So, what about people worth more than five million dollars? Surely they aren't penny-pinchers, right? Wrong. A survey conducted by Millionaire Corner found that one in three people with a net worth above five million dollars shop at Walmart. That's right: one out of three people worth more than five million dollars shop at Walmart.

We can go even further than this because 50 percent of these high-net-worth individuals shop at Costco, and 25% of them shop at Target. Third, studies have shown that a person's spending habits are largely dependent on how quickly and easily they make their money. No surprise here: the faster you make money, the quicker you tend to spend it.

The National Endowment for Financial Education found that up to 70 percent of people who receive a large amount of money upfront blow it within just a few years. That statistic is seen throughout industries where money comes quick, sudden, and easy. Despite having enough money to potentially last a lifetime, 70% of lottery winners declare bankruptcy. Even more shocking than that, 78% of professional athletes in the NFL are either bankrupt or in financial stress within just two years of retiring. And 60% of NBA players file for bankruptcy within just five years of leaving the sport.

Psychologically, earning a lot of money very suddenly has a large impact on how that person is likely to spend. And when that person's wealth is derived from their own financial habits and discipline over a long period of time, they're less likely to keep it. People who receive large windfalls also have a harder time conceptualizing just how much they really have or how long it's actually going to last them because they've had no prior experience dealing with money.

Now compare that to the study mentioned earlier, where for most millionaires, it took them on average 32 years to build up their wealth. Because of that, they're more likely to keep what they've worked so long for.

Now fourth, when it comes to that, the majority of millionaires understand that their wealth isn't permanent, so they're more likely to save. According to the 2015 Survey of Affluence and Wealth by YouGov, which analyzes data from the top 10% of earners worldwide, they found that 81% of respondents were concerned about unquantified risk. That led to an overabundance of saving, knowing that their wealth can very easily be short-lived.

This is going to be further exemplified by what I'm about to share with you because this is pretty surprising. If you're in the United States, do you want to know what your chances are one day making it to the top 1% in income? The answer is one in nine. That's right, 11 percent of you are going to reach the top 1% in income for at least one year.

However, do you want to know your chances of staying there for five years or more? The answer is one in 45. And your chances of staying there for more than 10 years? The answer is one in a hundred. That's right: only 1% of people who even make it to the top 1% in income will stay at that level for 10 years or longer.

The reality is that wealth could very much be fleeting, and for most self-made millionaires, they recognize this and plan for a time when they won't be making the income they are currently earning.

The fifth thing to remember is that millionaires often recognize the long-term value of money. Saving $20 per week on groceries by going to Walmart might not seem like a lot of money when someone is worth $5 million. For the average person, $20 a week gets spent in the blink of an eye without even thinking about it.

However, what many people fail to realize is just how much $20 per week adds up when saved and invested. If you just took that extra $20 a week and invested it at a modest 6% return over 40 years, that small weekly savings would be worth over one hundred seventy-one thousand dollars. Now imagine you save another $20 a week by negotiating your insurance, then you save another $20 a week by eating out a little bit less, and then you save another $20 a week by driving a less expensive car, and then you save another $20 a week by just shopping a little bit less.

Now you're worth an extra eight hundred fifty-seven thousand dollars in 40 years, just for being cheap. Those are just a few very small lifestyle changes, and you can really see how just a few easy frugal habits early on can have a very large impact later in life.

So for anyone out there right now who indiscriminately spends without even thinking of its future value, you're really sacrificing a very large amount of future wealth for something that may not matter to you right now in the moment.

The sixth thing is that saving money becomes a habit that is very difficult to break. Like the studies discussed earlier, the majority of rich people became rich through decades of saving and living frugally and investing. Long-term habits like this are not easily broken, especially when they become ingrained in the neural networks of the brain. Time and time again, for on average, the 32 years it takes for someone to actually become a millionaire, this is why you'll often see someone worth millions but still negotiate a $10 overcharge in their account or ask for a discount when buying a small item.

But it's those very actions that led to their wealth in the first place, and without that mentality, they wouldn't have become wealthy.

So given all of this information, it's easy to see how the stereotype developed over time that rich people are cheap. As of now, there's really been enough research and data to suggest that overall this is actually relatively true: that rich people do indeed place a higher emphasis on saving money, and it's because of that that they're rich in the first place to begin with.

However, I think the bigger issue at hand is why saving money is almost frowned upon and criticized if the person who's saving is already wealthy. It really shouldn't be assumed that someone shouldn't save money just because they don't need to and can afford it. This thinking really perpetuates the idea that once you reach a certain level of wealth, money no longer matters.

Just because it becomes a smaller amount relative to your overall net worth, it's a lot like a Business Insider article that analyzed the wealth of Jeff Bezos and compared him buying a $104,000 Range Rover as the equivalent to the average American spending $77 on a car. This is true in terms of relative costs, but this doesn't excuse the fact that a hundred and four thousand dollars is still worth a hundred and four thousand dollars, no matter how much money you have.

I really think that at the end of the day, from all the data that we've discussed, calling a rich person cheap is no different than criticizing a bodybuilder for not wanting to eat a chocolate-covered donut. Wealth isn't made without careful discipline, understanding of opportunity cost, and seeking the best value possible. If that's what you call cheap, then I recommend you check your bank accounts and let me know how you're doing.

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