The Millionaire Misconception
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There’s a misunderstanding when it comes to the term “millionaire.”
If I say, “I’m a millionaire,” some people assume that I have $1 million dollars in my checking account, or between my checking and savings account, or in some liquid form (easily accessible and spendable). The truth is, that’s rarely the case.
When I say, “I’m a millionaire,” what I mean is my net worth is valued at or over $1 million.
What is net worth?
Put simply, net worth is the total value of my assets minus my liabilities. Assets are things of value, like cash, investment positions, real estate, etc. Some consider vehicles assets, others do not. Liabilities are debts, like mortgages, credit card debt, personal loans, school loans, bills, etc.
What this means is that most millionaires have most of their assets in things or wrapped up in businesses.
Take my first home, for example. I bought it for $85,000 in 2017. Today, the principle remaining on the mortgage is around $60,000 (I’ll use whole numbers for easy math). Assuming there has been no appreciation (increase in the value of my home), my asset is worth $85,000 and the liability of $60,000 brings the net value to $25,000. If this was my only asset and liability, my net worth would be $25,000. I cannot spend that money without selling the house, and selling the house will cost money in terms of closing costs, taxes, agent commissions, etc.
Put another way - most millionaires have their net worth tied up in their home, business, or investment accounts.
“Millionaires — those who have a net worth of at least $1 million —are, perhaps not surprisingly, on the older end. They’re predominantly 55 and older; just 2.4% are under the age of 35. . . Millionaires are also predominantly homeowners, with about 95% owning houses. The average value of a millionaire’s home is $982,938, suggesting many are real-estate rich.”
Thomas J Stanley and William D. Danko published a The Millionaire Next Door in 1996 that essentially revealed a “profile” for the average millionaire (at that time, the median millionaire was worth $1.6 million, today the average millionaire is worth $3.5 million). This profile has been updated by his daughter, Sarah Stanley Fallaw, in her book The Next Millionaire Next Door.
Folks will assume that they will never reach millionaire status because it means they need $1,000,000 in the bank to qualify. It isn’t true. The average millionaire has about 20-30% of their wealth in the stock market. They also generally have a large portion of their wealth tied up in home equity (see quote above from the Business Insider).
If you’ve never calculated your own net worth, you should. Even if you are not anywhere close to being a millionaire, it will give you a much clearer picture of where you are financially.
Start by listing out all of your debt - all of it. Car loans, personal loans, credit card balances, mortgages, outstanding bills, student loans, lines of credits - all of the things you owe money on.
Then list out your assets: your savings account, your checking account, cash in your wallet, your investment accounts, you retirement savings, home equity, etc.
Assets - liabilities = net worth
Do some simple math and you’ve got your networth.
The hardest part of this exercise is gathering up all the information, especially if you haven’t done it in a while (or ever).
So, no. Millionaires are not swimming in cash. They just have more assets than liabilities. . . by about $1,000,000.