All that glitters ....

I was recently given a copy of a book titled "The Millionaire Next Door" by a friend. It is not a new book but it was one that he had read when it came out in 1996 and he felt was still relevant, particularly in the current climate.

It details the results of a survey undertaken at that time to determine the traits of millionaires in America compared to others who, despite their higher incomes, had accumulated nothing like as much wealth. There were a number of differences between the wealth growers, called Prodigious Accumulators of Wealth (PAW) and the spenders, Under Accumulators of Wealth (UAW). To me the most striking was that in all cases the PAW's had been long term investors never trying to second guess the market. They had also avoided high levels of debt, and had far fewer "high end" store credit cards than the UAW's. On the whole they also tended to avoid living in the very high scale neighbourhoods and if they bought a new car they would keep it for a number of years. Basically they had little outward appearance of being very wealthy.

The UAW's on the other hand looked the part wearing expensive clothes, driving new cars and living in the top neighbourhoods. However, on scratching the surface these people often had little in the way of accumulated wealth, often spending far more than they earned. They did not believe in long term investing, and had three times as many credit cards as the truly wealthy. They obviously preferred the perception of being wealthy than actually making the sacrifices involved in achieving real wealth. My mother used to call these people "all fur coat and nae knickers" which I still prefer to the Texan version "big hat, no cattle"!

As long as the UAW's are earning a high income and the banks are willing to fund them, then they are able to continue with this appearance of wealth, but at some point, unless they change their ways before they stop working, they will have to face a day of reckoning.

Although the book is fifteen years old, I could not help be struck by its relevance whilst watching Panorama last night which detailed the bursting of the Irish bubble. It was an example of a whole nation acting as UAW's, giving every appearance of being successful but in reality having nothing behind it. Is it only four years ago that the Scottish Government held up Ireland, the "Celtic Tiger" as it was dubbed, as a role model we as a nation should aspire to follow?

For those that did not see it, the programme showed some of the 600 "ghost" housing estates that exist in Ireland, and spoke to some of the thousands of people that got sucked in to the idea that property prices could only go one way. My heart went out to the young teacher who appeared to be the only one living in a large estate of unfinished houses, paying a forty year mortgage on a house that was now worth just over half what she paid for it. Most admitted that, on reflection, they had borrowed way beyond their means, but at the time, since everyone was doing it, there seemed no way it could go wrong.

The book suggests as a rule of thumb that to become a PAW you need to save at least 15% of your annual gross income and avoid unnecessary borrowing as paying interest only makes the lender rich. How many of the population in the UK today would be able to say they do this? Very few is my guess, although it is never too late to start.

The book makes great play of the fact that although only 1.7% of households in the US have Scottish ancestry, they make up 9.3% of Millionaire households. The book praises Scots for their frugality and planning. I have mentioned before how the actions of the Scottish banks in the last few years have tarnished the reputation we had acquired over generations but maybe now is the time for us to regain our natural instincts. Who knows, if we do we may be regarded as the "Tartan Tiger" of the future.

Steven Forbes

Managing Director