This article was published on 5 June 2004. Some information may be out of date.

QRecently a reader commented on “The Millionaire Next Door” by Stanley/Danko, a fascinating study of Millionaires and Millionaire families in North America, which has parallels in New Zealand.

It is a good read for the majority of Millionaires who do not accept or practice conspicuous consumption and who will realise that they are normal after all. Essential reading for those who aspire to be Millionaires and need some coaching on good money habits.

If you enjoy this book, try also “The Millionaire Mind” by Stanley. Yet another good read.

In addition I recommend “Your Money or Your Life” by Dominguez/Robin. This book is about “enough”, and achieving financial integrity/independence.

The three books are a good dose of money reality. Pity that most of this stuff is not taught at school. Happy reading!

AMy first two responses to your letter were:

  • Have we now elevated millionaires to God-like status, so that they get a capital M?
  • You write as if Millionaires were ten a penny (as Mum — with a capital M because she’s a specific mum — used to say).

Then again, perhaps millionaires have indeed become pretty common, thanks to the recent housing boom.

The other day I was walking with a friend in her inner city neighbourhood. She pointed out some pretty ordinary-looking houses that had recently sold for more than a million dollars. I was amazed. But she was equally surprised when I told her of the similar situation in my “outer city” neighbourhood.

Many of the buyers must have taken on pretty big mortgages, which is a worry in itself. But those who bought after selling another high-priced house may have low enough mortgages to qualify as millionaires (assets minus debts, including mortgages, equalling $1 million or more).

And many of the people with small or no mortgages sitting in unsold houses that are better than the one down the road that sold for $1 million-plus must be readjusting their thinking, and their spending, to their new financial status.

Much the same would apply to those who used to think they were pretty average financially, and now find themselves half-millionaires, or a-third-millionaires.

Economists call this the “wealth effect”, which is defined by Investopedia as, “The propensity of people to spend more if they have more assets.

“The premise is that when the value of equities rises, so does our wealth and disposable income. Therefore, we feel more comfortable about spending.”

It doesn’t just apply to equities, a.k.a. shares, though, but also to equity in houses. People living in houses that have soared in value are less hesitant than they used to be about spending more on a car, trip or whatever. “I’m a millionaire,” they figure. “Surely I can afford it.” Is this wise?

Not necessarily. Your house value has risen, but as long as you keep living in it, that doesn’t mean much. And if you sell, you’ll probably pay more than in the past for the replacement house.

You could argue that, if all houses have doubled in price and you trade down, you free up more money.

Example: Five years ago, your house was worth $500,000. If you sold and bought a smaller $400,000 house, you’re left with $100,000.

Now, the two houses are worth $1 million and $800,000. By trading down, you get $200,000.

On the other hand, many experts are now expecting house prices to fall. If that happens, higher priced houses, and those in faster-growth areas, might fall more. It’s happened before.

There are some people, however, who would benefit from responding to the wealth effect. I’m talking about those who are overly cautious about retirement savings. They give up too much consumption now for the sake of higher consumption later.

If becoming a millionaire or half-millionaire causes such a person to spend a bit more and save a bit less — with no borrowing involved — that might boost their happiness over their lifetime.

Other bigger spenders, though, will tend to get new or larger mortgages or, much worse, run up credit card and similar debt.

It may not be bad if you use mortgage borrowing to finance a business or investment. If the return is higher than the mortgage interest, you’ll come out ahead.

Take care, though. Any investment expected to generate higher-than-mortgage returns must be risky.

Work through some worst-case scenarios, including: your house value plunges, mortgage interest rates soar, your business or investment performs badly and you lose other sources of income. Could you cope?

And if — on the strength of your newfound property wealth — you borrow to spend on items that lose value, or on travel or entertainment, you are making yourself worse off.

I haven’t read the second and third books mentioned above, but I do heartily recommend “The Millionaire Next Door”, especially if you’re tempted to borrow for spending on fun.

It might help to prevent you from becoming the former millionaire next door, now living much more humbly.

QIf you publish this, I hope you will get some angry responses.

A recent correspondent complained about real estate agents’ fees — $17,000 on a house. In my opinion, real estate agents’ fees are disgracefully high for the modest work done.

A house effectively sells itself. The time spent conducting open homes including erecting signs is probably less than 15 hours per dwelling. Add negotiation time and preparing adverts and other paperwork and the total time spent is probably less than 25 hours.

At $100 per hour the fee should be $2500. Add the cost of dozen newspaper adverts and the total fee should be $5000 to $8000 for any property.

In Adelaide in 1993 one innovative agent offered to sell any property for $2000. He said the price of a house had no bearing on how much work he put into selling it.

He sold our house and a section, at our asking prices, in under four weeks.

The likely reason that the fees are so high is that are too many agents. The salesperson’s qualification is a mere two-week training course, so almost anyone can do the job.

Hence there are far too many agents chasing clients, and that’s where they spend their time. High fees are required so they can all make a living.

Second email: Having sent you an email this evening I perused the first pages of the real estate section of the Weekend Herald. My case was proven. So-called shining star Mary Burke in Nelson said it all:

“All I worry about is getting the vendor’s signature on the listing authority…”

That sums up the whole profession. She is successful at capturing vendors, most agents aren’t.

During one year, she sold 94 properties (plus another 25 sold with others) — about two a week, which comes to 20 hours per property if she works a 40-hour week! She works alone — proof of my time estimate in email 1. She would do quite nicely on $3000 per sale = $300,000 a year.

What really annoys me in my dealings with agents is that they know so little about what they are selling and often are economical with the truth, sometimes without even knowing that they are!

As your correspondent said, it is not easy to sell your property yourself. We tried in Adelaide before employing the flat fee agent. The ultimate buyer of our house was a golfing acquaintance of mine who didn’t want to face us in negotiations!

AIt’s all very well for you to want angry responses. You don’t receive them all!

But I’ll be brave about it, because you raise some good points.

It’s fair enough that agents make good money in the good times, to make up for the bad times. But your numbers do get me wondering.

Are there any agents out there who are keen to defend themselves? Or, better still, to announce that they will sell houses for $2000 a pop?

Tell you what: If you’re prepared to do it for even $4000, I’ll give you a free ad by publishing your name and contact info.

QIs it possible to download or buy a computer programme that can keep track of investments?

I would like to put in the amount invested and then track its history, to obtain percentage increases or decreases etc over a period of time.

I have Microsoft Money installed in my computer, but it does not give the results in dollar terms, and does not show the percentage changes over the long term. I do find it real helpful though with personal budgeting etc.

AI don’t know of any programmes, and this is not the sort of thing you can judge easily from a quick search of the web.

But I’m sure there are other readers who have used such programmes for a year or more and found them really useful. I’d love to hear from you.

Please note, though, I’m not looking for people who run websites. Everyone who offers a programme thinks it’s great. Long-term users are the ones who can judge objectively.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.