It's not what you make, but what you keep.

The consumer spending patterns of millionaires go a long way toward explaining how wealth is accumulated. Here's how the rich get that way.

THERE HAS NEVER BEEN MORE PERSONAL wealth in America than there is today (over $22 trillion in 1996). Yet most Americans are not wealthy. Nearly one half of all wealth is owned by only 3.5% of U.S. households.

That's why the authors of The Millionaire Next Door began studying how people became wealthy 20 years ago. What was so profound about their discovery is that most people have wealth in America all wrong. Wealth is not the same as income. The authors, Thomas J. Stanley and William D. Danko, have discovered who the wealthy are and are not. And in this book they share how ordinary people, too, can become wealthy. Here's an excerpt from their book that can shed some light on this fascinating topic.

Building wealth takes discipline, sacrifice and hard work. If you are willing to make the necessary trade-offs of your time, energy and consumption habits, you can begin: building wealth and achieving financial independence.

Years of surveying various high-income/high net worth people have helped us develop several wealth equations. A simple rule of thumb, however, can help you to compute your expected net worth: Multiply your age times your realized pre-tax annual household income from all sources except inheritances. Divide by 10 (age x pre-tax annual income / 10 = net worth). This, less any inherited wealth, is what your net worth should be. Given your age and income, how does your net worth match up? If you are in the top quartile for wealth accumulation, you are a PAW, or prodigious accumulator of wealth. If you are in the bottom quartile, you are a UAW, or underaccumulator of wealth. PAWs are builders of wealth--that is, they are the best at building net worth compared with others in their income/age category. UAWs tend to live above their means; they emphasize consumption and de-emphasize many of the key factors that underlie wealth building. AAWs (average accumulators of wealth) fit in between the two extremes, neither being big spenders nor big accumulators.

Being frugal is the cornerstone of wealth building. Yet far too often the big spenders are promoted and sensationalized by the popular press. It's unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles and the like. To them, superior people have excellent tastes in consumer goods. But it is easier to purchase products that denote superiority than to be actually superior in economic achievement.

We've found that the affluent tend to answer yes to three questions we include in our surveys:

1. Were your parents very frugal?

2. Are you frugal?

3. Is your spouse more frugal than you are?

This last question is highly significant. Not only are the most prodigious accumulators of wealth frugal, their spouses tend to be even more frugal. Consider the typical affluent household. Nearly 95% of millionaire households are composed of married couples. In 70% of these households, the male contributes at least 80% of the income. Most of these men play great offense in the game called income generation. Great offense in economic terms means that a household generates an income significantly higher than the norm, which in America is an annual realized income of approximately $33,000. Most of these households also play great defense; that is, they are frugal when it comes to spending for consumer goods and services. One frugal high-income producer within the married couple category, however, does not automatically translate into a high level of net worth. Something else must be present. A couple cannot accumulate wealth if one of its members is a hyperconsumer. This is especially true when one or both are trying to build a successful business. Few people can sustain profligate spending habits and simultaneously build wealth.

BUILDING A GOOD DEFENSE

Why aren't you wealthy, you ask? Well, let's examine you lifestyle. Is it one of great offense? Are you in the $70,000, $100,000, $200,000 income category? Congratulations, you play wonderful offense. But how is it that you keep losing the game called wealth accumulation?

Be honest with yourself Could it be that you play terrible defense? Most high-income earners are in the same situation, but not most millionaires. Millionaires play both quality offense and defense. And quite of en their great defense helps them outscore/outaccumulate those who outearn/have superior offenses. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.

Let's ask the typical American self-made millionaire about her defense. We will refer to her as Mrs. Jane Rule. Mrs. Rule and her husband own a small business, an auctioneering/appraising company. They also invest in several categories of items they appraise. Mr. Rule is the visible manager of their business. He gets much of the credit for its success. After all, he speaks very well and very quickly. But it's actually Mrs. Rule who is the true force, the real leader, of this enterprise. It's her planning, designing, budgeting, bill collecting and marketing that has made this auctioneering company successful.

Why are Mr. and Mrs. Rule millionaires today? Because Mrs. Rule plays tremendous defense! She is responsible for budgeting and spending for both her household and their business. Is anyone in your household responsible for budgeting? All too often the answer is "not really." All too often people allow their income to define their budgets. When we tell our audiences about the budgeting and planning habits of the affluent, a predictable question is asked: Why would someone who is a millionaire need to budget? Our answer is always the same: They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.

THE ROAD TO WEALTH

Mrs. Rule is like most millionaires. She's disciplined and she takes time to plan and budget. This translates into wealth. Mrs. Rule's household income varies from year to year, since it is typical for auctioneers to have ups and downs in their cash flow. Over the past five years her annual income averaged around $90,000. But her net worth keeps increasing. Today Mrs. Rule has a net worth of more than $2 million. In our survey, she answered "yes" to four questions about planning and budgeting. If you want to become affluent and stay affluent, your goal should be to one day soon answer "yes" candidly and honestly to the following questions.

* 1. Does your household operate on an annual budget? Do you plan your consumption spending according to a variety of food, clothing and shelter categories each year? Mrs. Rule does, and so do most millionaires. In fact, in our latest national survey of millionaires who don't budget, there are about 120 who do.

What about those millionaires who don't budget? How did they become millionaires? How do they control spending? They create an artificial economic environment of scarcity for themselves and the other members of their household. More than half of the nonbudgeters invest first and spend the balance of their income. Many call this the "pay yourself first" strategy. These people invest a minimum of 15% of their annual realized income before they pay the sellers of their food, clothes, homes, credit and the like.

What about those millionaires who don't budget or create an environment of relative scarcity? Some inherited all or most of their wealth. Another minority, accounting for fewer than 20% of millionaires, typically earn such high incomes that to some extent they can eat their income and still have a seven-figure net worth. In other words, their extraordinarily good offense compensates for a lack of defense.

* 2. Do you know how much your family spends each year for food, clothing and shelter? Almost two-thirds of the millionaires surveyed (62.4%) answered "yes" to this question. So did Mrs. Rule. But only about 35% of high-income-producing nonmillionaires answered "yes" to this question. Many of these high-income/low net worth types have no idea how much they spend each year for such items as food consumed at home, food consumed away from home, beverages, birthday and holiday gifts, babysitters, day-care fees, financial advice and other daily expenses.

We did not, however, include mortgage payments in our list. Often high-income/low net worth respondents boast about how much money they save on taxes via their mortgage deductions. Certainly most millionaires who have mortgages outstanding also take advantage of this provision. But most millionaires also account for their other categories of domestic expenditures. Ask typical high income/low net worth people about their goals. What will they tell you? A major goal they often name is t minimize their tax burden; they use the mortgage deduction as a way to accomplish this. Then why don't these same people compute their other domestic expenditures? Simply because they do not perceive any value in doing so. As they see it, most of their domestic spending is not deductible in computing one's taxable income. But Mrs. Rule sees things differently. Her goal is to become financially independent--in her case, to have $5 million by the time she and her husband retire. She believes that budgeting and accounting for domestic consumption is directly related to achieving this goal. In her view, tabulating helps control consumption. It also reduces the probability of allocating too many dollars to product and service categories that are not really important. Mrs. Rule has always tabulated expenditures for her business. She realizes that the same system she used for business accounting can be used for domestic purposes. This is an advantage of being a self-employed business owner.

* 3. Do you have a clearly defined set of daily, weekly, monthly, annual and lifetime goals? For every 100 millionaires who answered "no" to this question, there are 180 who answered "yes." Who are the "nos"? High-income and inherited-wealth types. Many senior citizens and retired millionaires who have already reached most of their goals also answered "no." In addition, only two millionaires of all those

Prices Paid By Millionaires for Clothing & Accessories

                SUIT OF CLOTHING

                Most ever   % That paid this
Self-made         spent     amount or:
                            Less   More

millionaires    $ 195       10%    90%
pay less          285       25     75
for high          399       50     50
status items      599       75     25
than do those     999       90     10
who inherited   1,400       95      5
their wealth    2,800       99      1

PAIR OF SHOES

                Most ever   % That paid this
Self-made         spent     amount or:
                            Less   More

millionaires    $ 73        10%    90%
pay less          99        25     75
for high         140        50     50
status items     199        75     25
than do those    298        90     10
who inherited    334        95      5
their wealth     667        99      1

we interviewed ever told us that their goal was to "spend my last dollar the day that I die!" Mrs. Rule doesn't have such a goal. Mrs. Rule plans to leave educational trusts for all her grandchildren. She also wants to enjoy life now and after she retires. She wants to be financially secure.

Her financial goal is to accumulate $5 million. Mrs. Rule knows how much she needs to set aside each year to attain her goals. But is she happy? That's a question very often asked of us regarding frugal millionaires. Yes, she is happy. She is financially secure, and enJoys being part of a close-knit family. Her life and her goals are simple. Mrs. Rule does not need a CPA to do her goal-planning for her, although she does seek his counsel in regard to both her domestic and business-related needs. Financially independent people are happier than those in their same income/age cohort who are not financially secure. Financially independent people seem to be better able to visualize the future benefits of defining their goals. Mrs. Rule, for instance, visualizes all her grandchildren graduating from college. She never sees herself being financially dependent on others, even if she is disabled in the future. Her goals are congruent with those of most millionaires in this regard.

* 4. Do you spend a lot of time planning your financial future? For every 100 millionaires who answer "no," there are 192 who answer "yes." Many who answer "no" are either high-income types with relatively low levels of accumulated wealth, those who inherited all or most of their wealth or wealthy seniors/retirees.

People such as Mrs. Rule accurately label themselves as planners. In fact, the responses to this question are highly correlated to the actual hours the respondents allocate to planning their financial futures. On average, millionaires spend significantly mote hours per month studying and planning their future investment decisions, as well as managing their current investments, than high-income nonmillionaires. Millionaires like Mrs. Rule not only spend more time planning their finances than nonmillionaires, they also seem to get more out of their planning hours. Remember, Mrs. Rule is not only in the auctioneering business. Her fob includes appraising the value of what her company auctions. Often Mrs. Rule invests in those same areas in which she has considerable expertise. In this regard she is like many millionaires. They astutely allocate their time so that they can plan their business and personal investing at the same time.

How much time do nonmillionaires allocate to planning and managing? Not enough! And much less than millionaires. Although millionaires have much more experience in making investment decisions, they allocate significantly more hours than do nonmillionaires in an effort to become even better investors. That is one of the main reasons that millionaires remain wealthy.

Business owners like Mrs. Rule certainly have more freedom than people who are not self-employed. She can and does leverage her business knowledge with her personal investing habits. She can pick her area of business and the one she wants to study. Often employees don't have this luxury. But even among those who do have significant knowledge about excellent investment opportunities, many do not leverage this knowledge. Consider these examples:

A highly productive sales professional has had Wal-Mart as a client for more than 10 years. All during this time, Wal-Mart was exploding in growth and value. How many shares of Wal-Mart did the six-figure earning sales professional ever purchase? Zero, even though he had considerable first-hand knowledge of his client's success and an annual six-figure income. But he did purchase a foreign luxury car every two years during this time.

Another example involves the owner of a printing business, who enjoyed having one of the leading beverage companies in America as a customer. The customer bought millions of dollars worth of printing from him annually. But how much money has the printer invested in his customer's equity offerings? Zero.

In all cases, the person makes a higher income than does Mrs. Rule. Yet none is a millionaire. Too many high-income/low net worth types live from paycheck to paycheck, fearing a sudden downturn in our economy. One factor to consider is that many underaccumulators of wealth (UAWs) allow "significant others" to determine their financial lifestyle. Parents can often teach the ways of being a UAW, if they spent nearly all of their income despite having a modest income. Their consumer behavior can have an impact on the child and send the message that one earns to spend. When you need to spend more, you need to earn more. But small expenses become big expenses over time. Similarly, small amounts invested periodically become large investments over time.

It's often useful for UAWS to be told the naked truth: "You're worth less than one-half of the expected amount for those in your income/age group." Such news can spur on UAWs who are competitive. Many want to change but are uncertain how to transform themselves. How can someone change when they have more than 20 years experience as a UAW?

First, they must really want to change. Second, they will likely need some professional help. Ideally, they need to find a certified public accountant who provides financial planning. In extreme cases, a CPA/financial planner actually takes control of his client's purchasing behavior.

TAXING PROBLEM

The typical millionaire in our surveys has a total annual realized income of less than 7% of his wealth. So, millionaires and those who will likely become affluent in the future adhere to an important rule: To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).

Income tax is the single largest annual expenditure for most households. It is tax on income, not on wealth and not on the appreciation of wealth if this appreciation is not realized; that is, if it does not generate a cash flow.

Even many high-income producing households are asset poor. One reason is that they maximize their realized incomes, often to support high-consumption lifestyles. It takes much discipline to become affluent. We have interviewed many people worth $2 million or $3 million who have total realized annual household incomes of less than $80,000.

How much does the typical American household realize in income each year? About $35,000-$40,000, or nearly the equivalent of 90% of its net worth. The result is that the typical household in America pays the equivalent of more than 10% of its wealth in income taxes each year. How about the millionaires whom we surveyed? On average, their annual income tax bill is an amount equal to only a bit over 2% of their wealth. That is one of the reasons they remain financially independent.

GAINING YOUR INDEPENDENCE

We once asked a high-income/low net worth corporate manager a simple question: Why is it that you never participated in your corporation's tax advantaged stock purchase plan? He reported that unfortunately, he could not afford to participate. It seemed that all his income went toward his $4,200 monthly mortgage payment, two leased vehicles, tuition bills, club dues, a vacation home that needed to be fixed up and taxes.

Ironically, he wants "eventually to become financially independent." But like most UAWs, he is not realistic in this regard. He has sold his financial independence. What if he had taken full advantage of the tax-advantaged benefit from the time he was first employed? Today he would be a millionaire. Instead, he is on the perpetual earn-and-consume treadmill.

How can well-educated, high-income people be so naive about money? Because being a well-educated, high-income earner does not automatically translate into financial independence. It takes planning and sacrificing. Your plan should be to sacrifice high consumption today for financial independence tomorrow.

Each year you are forced to maximize realized income just to make ends meet. You can't afford to invest any money. Essentially, you're at a stalemate. Your high domestic overhead requires full commitment of all your income. You will never become financially independent without purchasing investments that appreciate without income realization. If you're not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's total annual realized income.

Living in less costly areas can enable you to spend less and to invest more of your income. You will pay less for your home and correspondingly less for your property taxes. Your neighbors will be less likely to drive expensive motor vehicles. You will find it easier to keep up, even ahead, of the Joneses and still accumulate wealth.

So what's it going to be? Will you choose a lifetime of high taxes and high status living, or will you change your ways? It's your choice.

Excerpted from The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Copyright [C] 1996. All rights reserved. Used by permission of Longstreet Press.

RELATED ARTICLE: How the Wealthy Charge it

The results form a national survey of millionaires reveal some interesting credit card preferences.

Some highlights:

* Like most American households, most wealthy households have a MasterCard and a Visa card.

* The millionaire household is four times more likely to hold a Sears card (43%) than a Brooks Brothers card (10%).

* Both Sears and Penney's cards are significantly more popular among the wealthy than the cards of status retailers.

* Only 21% of the wealthy households in America hold the Neiman Marcus card; 25%, Saks Fifth Avenue; 25%, Lord & Taylor; and only 8.1%, the Eddie Bauer card.

* Only 6.2% of millionaire respondents hold the American Express Platinum card; 3.4% hold Diners Club; and fewer than 1% own Carte Blanche.