Most of us think about our finances in terms of our top line — in other words, how much money we earn. We pursue big incomes and then we spend those incomes on the right clothes, the right cars, the right home. Isn’t that what wealth is all about?
Not at all. What really matters in building net worth isn’t how much we make, but how much we keep. That’s the bottom line on a financial statement. It’s also the key to accumulating wealth.
Self-made millionaires know the importance of the bottom line. 
Thomas Stanley and William Danko, a pair of business professors, spent years studying households that had net worths of more than $1 million. Their research, outlined in their landmark work, “The Millionaire Next Door”, contradicts nearly all the stereotypes surrounding wealth.
Most millionaires, it turns out, accumulate wealth by living below their means. They avoid status objects such as big cars, huge homes and designer clothes. They do their own yard work, drink beer instead of champagne, and stock up whenever laundry detergent goes on sale. They put the emphasis on building up their bottom lines: the amount of money they have left over after taxes and living expenses.
You don’t have to be a genius to adopt the same lifestyle.Â
Jay Zagorsky, an economist at Ohio State University, tracked down 7,000 American baby boomers who wrote a standard IQ test in 1980. He caught up to them in 2004 and asked them about their financial status. Much as you might expect, the people who had higher IQs tended to earn more.
But — and this is a shocker — there was no correlation between higher IQs and higher net worth. Smart people may earn more, but they appear to be just as vulnerable as anyone else to spending as much as they make and neglecting their bottom lines.
One reason we get dazzled by a high income is that we forget the bite that taxes take. If you’re a middle-class Canadian, you’re probably losing close to half of each additional dollar you make to income taxes, GST and PST.
Think about what that means: the latte that costs you $4 in after-tax dollars costs you $8 in pre-tax dollars. (Makes you think twice about that morning treat, doesn’t it?)Â The dinner at a fancy restaurant that costs you $250 in after-tax dollars costs you $500 in pre-tax dollars. (Gee, and the chateaubriand wasn’t even that good)
Of course, the positive way to look at this is that if you pass up the latte and the dinner, you’re giving yourself the equivalent of a $508 raise in your pre-tax salary. That’s a good thought to keep in mind. After all, it’s how millionaires think.
Barbara Hawkins
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Don?t be too smart
