In my last column, I quoted Berkshire Hathaway Chairman Warren Buffett, who pointed out that households that spend less than they earn – and invest the difference smartly – “cannot help but get very wealthy.”
This is not just an aspiration but a reality for many Americans. As a nation, we have never had more millionaires.
Let me define our terms, however.
Millionaires are not people who earn a million dollars a year. Some millionaires do. But the overwhelming majority do not.
Millionaire status is determined by totaling assets – like real estate and investment accounts – and subtracting liabilities, like mortgages and margin loans.
Wealth is not what you make but what you own. Your net worth is determined by looking at a balance sheet, not an income statement.
Spectrem Group reported in March that there were more American millionaires than ever at the end of last year.
The number of households with a net worth of $1 million to $5 million increased by 600,000 to 11.6 million in 2020. And there are an additional 2 million households with a net worth north of $5 million.
With the S&P 500 up 24% this year, we will set fresh records in 2021.
However, Spectrem’s figures actually understate the true number of millionaires in this country.
That’s because the group doesn’t include real estate equity in its calculations.
Yet for many Americans, their homes are their primary source of wealth.
That’s why Credit Suisse includes home equity in its annual Global Wealth Report.
And according to the new report, the U.S. minted 1.7 million new millionaire households last year, raising the total at the end of 2020 to 21.95 million.
Think about that for a moment.
The United States doesn’t just have millions of millionaire households. It has tens of millions of millionaire households.
That’s something to celebrate. Yet many more Americans live paycheck to paycheck.
Why is this? There are several reasons.
Some folks are born into truly unfortunate circumstances that they have great difficulty rising above.
Others have serious mental, physical or emotional disabilities that make it hard for them to compete in a free-market economy that rewards high education and technical skills.
Still others experience severe setbacks along the way that limit their ability to work, save and invest.
But how do we explain the millions of financially strapped men and women who were born into reasonably good circumstances, have at least average intelligence or abilities, and have not had atrocious luck?
After all, this probably describes the vast majority of Americans.
In my experience, many of these individuals lack basic financial literacy.
For example, most Americans don’t realize that if they invest $400 a month in a Roth IRA for 40 years and earn nothing more than the 10% average annual return of an S&P 500 index fund, they will end up with over $2.2 million.
That’s tax-free, no less.
You don’t have 40 years? Then you need to save more, earn a higher rate of return or both.
Of course, this realization is worth nothing if you don’t know what a mutual fund is or why we even have a stock market.
A recent health and retirement survey concluded that most Americans “lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice and investment fees.”
Indeed, the most common response to most questions in the survey was “Do not know.”
This is a shame in a country like ours where citizens are given unprecedented freedom and opportunity to better their financial lives.
What is the solution?
Teaching basic financial literacy in every public high school in the country would be a good first step. But education reform is slow and difficult, not least of all because less than 20% of teachers polled feel competent to teach saving and investing.
That’s why – in addition to commenting on what’s happening in today’s markets – I try to regularly touch on the investment basics here.
I recently received an email from a happy subscriber who told me that my advice over the years had made him independently wealthy.
“Even though I have no idea what I’m doing,” he added.
I congratulated him on his investment success.
However, I also reminded him that he should devote some time to understanding the economic factors, business developments and human psychology that move the market.
Long-term success requires more than just entering orders in a brokerage account.
Anyone can make money in stocks when stocks are flying high – as they have for the past 12 years, excepting last year’s first quarter plunge.
Flat markets, choppy markets and down markets are harder to navigate – and can test the skill and resolve of even the most experienced investors.
It’s important to learn as much as you can about the process – and not just memorize a bunch of stock symbols.
Because some day – trust me – you’ll be called on to use that knowledge.
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