One of the hallmarks of a millionaire-next-door client is that they use their resources wisely. The “frugality chapter” of The Millionaire Next Door highlighted how frugality was part of the millionaire journey of small business owners, c-level millionaires, and others. If you’re familiar with the books, many continued those practices even after they passed the $1 million mark.
The Science of Frugality
In general, the more frugal you are, the more likely you will transform income into wealth. The science related to personality when it comes to accumulating wealth (versus generating income, which is a different criterion) is relatively clear. Those who tend to be conscientious with their finances and other aspects of their lives tend to be better at amassing wealth and sustaining it for the long-term. Certainly, that was the case when we compared those prodigious accumulators of wealth (PAWs) to the under accumulators of wealth (UAWs) who essentially had the same level of income and age but were quite different when it came to their net worth. The PAWs consistently demonstrated thoughtfulness in using their resources (money, time). UAWs were more apt to spend any income that came in the door. We see this at high-income levels (e.g., $400,000/year) and when we study those who generate much less (e.g., $95,000/year).
Becoming More Frugal
Frugality, and its cousin, conscientiousness, are relatively stable personality traits, groups of characteristics that define who we are and how we relate to the world and behave. Personality is typically thought to be stable over time. So, what hope is there for those who aren’t quite frugal or are less than conscientious? Can clients become more frugal? There are three general ways the answer is “yes” to this question.
- Personality can change as we get older. Most research has demonstrated that personality is stable over our lifetimes. Still, it is also the case that research has shown that our personality can change through the influence of those around us and our experiences.
- Personality can change when we go through a significant life event. Experiencing an unexpected or extremely stressful life event can lead to changes in how we interact with others and generally live our lives. Losing a loved one, being on the front line in the military, or experiencing a significant job loss can set in motion changes in our personality. To make matters more confusing, our personality can impact how and if we experience certain life events and how those experiences lead to changes in our personality. Since we experience more life events as we age, this also lays the groundwork for personality change.
- Personality can change through an intervention. In the past few years, scientists have begun to examine the influence of direct, concerted efforts to change personality. These kinds of interventions include ongoing education and coaching. To be effective, the intervention has to be significant in terms of time devoted to the training and the coaching experience’s efficacy. Note here that we’re not talking about habit formation, which is also challenging but not nearly as challenging as altering our personality.
The Benefit of Building Frugality
The benefit of becoming more frugal can far outweigh even the best investment returns. This is especially true when clients are accumulating wealth: savings rate can accelerate achieving financial goals. Frugality is at the heart of saving money. Financial professionals can influence #3 and help clients adopt a more frugal mindset and potentially influence personality over time. To understand if your client could benefit from a dose of frugality, first identify the client’s money-related personality characteristics. Armed with this knowledge, financial professionals can design specific plans for each client, including educational experiences, coaching plans, or ongoing counseling. Working side by side with those in the financial therapy, counseling, or coaching fields can help ensure the likelihood of success when creating a plan to increase frugality for those in the building wealth stage of life.