The No. 1 Millionaire Myth That Needs to Die

If you spend much time learning about personal finance, you'll run into a common cliche: The out-of-touch millionaire who champions frugality.

They say, without a hint of irony, that the secret to success is not wasting money on things like lattes and avocado toast. All while they wear $20,000 watches and drive $100,000 cars. But just avoid spending money on anything you enjoy, and you're on your way to being rich.

It's advice that gets repeated often. It's also a total lie.

The myth of the frugal millionaire

The idea that you're going to save millions one day by cutting small expenses might sound reasonable. And how you spend money is important, to be fair.

But it's not the key ingredient to being a millionaire or a multimillionaire. People like to gloss over the truth, which is that the most common way to get rich is family wealth. Only 27% of multimillionaires are self-made, according to a Bank of America study in 2022. The study concluded that wealth is often (but not always) connected to prior generations.

That's not to say you should waste money, or that it's impossible to be wealthy without a rich family. The point is that extreme frugality isn't necessary, and despite what some claim, it's not how most rich adults built their fortunes.

They'll tell you to cut out small expenses because it's simple, down-to-earth advice. And it plays a whole lot better than, "Ask your parents for millions to go build your real estate portfolio." Keep in mind that the wealthy often aren't nearly as frugal as they're portrayed. For example, Warren Buffett is frequently called frugal for eating McDonald's and living in the same house for decades. He also has a private jet -- how many coffees do you need to skip to buy one of those?

Frugality alone isn't going to make you rich

The focus on frugality is problematic for a few reasons. Most importantly, frugality alone doesn't work.

I'd know -- I tried it. When I was fresh out of high school, I worked a few entry-level jobs. I did everything the rich gurus recommended. I made coffee at home, I rarely went out, and I kept my spending extremely low. And I got nowhere, because I was hardly making any money. I've been able to build my savings and investments since then, but it's all because I've significantly increased my income.

It's not just about how much you spend. Your income is even more important, because it determines how much you can save. Here's an example of the difference this makes:

• If you invest $100 a month for 40 years and get an 8% annual return, you'll have $310,868.
• If you invest $500 a month for 40 years and get an 8% annual return, you'll have $1.55 million.

Trying to cut every discretionary expense isn't nearly as effective as raising your income. It can also make you miserable, and it's not sustainable. You probably don't want to spend the rest of your life never going out for coffee with friends.

The three keys to being a millionaire

It's possible to become a self-made millionaire, and potentially even a multimillionaire. But it's hard to do by getting rid of small expenses, and that's not exactly an enjoyable way to live.

Becoming a millionaire primarily depends on three things:

• Income: The more money you make, the more you can save and invest. You don't need to be in the top 10%, but if you have a below-average income, increasing it will make the biggest difference in building wealth.
• Spending: How much you spend is important, but you're better off focusing on the big expenses. What gets people into trouble isn't buying the occasional coffee or sandwich. It's taking on a huge mortgage or car payment, or falling into a pattern of spending more than they can afford on discretionary expenses.
• Investing: It's also important to invest your money so it grows. One of the most effective options is to invest in stocks. The stock market has historically averaged a return of about 10% per year.

You don't need to go above and beyond in any of these areas. It's fine if you don't earn a large salary, cut your spending to the bone, or invest a huge amount of your income. If you do reasonably well in each of these areas, that can be enough to build wealth and retire with a nice nest egg.