If you think most millionaires inherit their wealth, you’re wrong

One of the most common misconceptions in personal finance is that the majority of millionaires inherited their wealth. It was pure chance.

Millionaires didn’t work to earn their millions, they believe. It was given to them by rich uncles or parents. All they had to do was be born into a wealthy family. And as a result, they are set for life without lifting a finger.

It’s a pervasive belief, and it’s also dead wrong.

Most millionaires earned their millions

While it’s popular and probably a little comforting to believe most millionaires inherited their millions, the numbers show that assumption to be untrue.

For instance, the Cato Institute has consistently proven the vast majority of millionaires earned their wealth rather than inherited it. The notion that “most millionaires inherit their wealth” is a myth, Cato says.

“A survey by US Trust found that 70% of wealthy Americans grew up in middle‐​class or lower‐​income households. Even among those with assets in excess of $5 million, only a third grew up wealthy,” wrote Cato.

The article also points out that the role of inheritance has diminished over the last generation.

Fewer wealthy people than ever on the Forbes 400 list grew up in rich households, nor did most inherit their wealth from their families. Data suggests that wages, rather than inheritance, is the predominant factor in building wealth for the majority of wealthy Americans.

A Ramsey Solutions study of 10,000 millionaires found that only 21% of millionaires received any inheritance at all. Of those, 16% inherited more than $100,000 and only 3% got more than a million.

“We gave the millionaires in our study a list of items that could contribute to someone becoming a millionaire, and then we asked them to rank them,” the study said. “What ranked number one, beating out everything else? Financial discipline.”

The late Dr. Thomas Stanley, who wrote the influential book “The Millionaire Next Door“, spent years studying millionaires in the United States from all walks of life. His findings prove just how little of an influence inheritance has on building wealth.

From Chapter 1 of his book, here are a few of his most insightful findings:

• Only 19 percent receive any income or wealth of any kind from a trust fund or an estate.
• Fewer than 20 percent inherited 10 percent or more of their wealth.
• More than half never received as much as $1 in inheritance.
• Fewer than 25 percent ever received “an act of kindness” of $10,000 or more from their parents, grandparents, or other relatives.
• Ninety-one percent never received, as a gift, as much as $1 of the ownership of a family business.
• Nearly half never received any college tuition from their parents or other relatives.
• Fewer than 10 percent believe they will ever receive an inheritance in the future.

A 2017 study from Fidelity Investments found that a whopping 88% of millionaires today are considered “self-made”, which means they did not inherit the majority of their wealth. Only 12%, the study found, inherited significant money.

The vast majority grow up in normal neighborhoods and shop at regular stores, not the exclusive country club neighborhoods and ritzy outlets you might expect.

What about the super rich? Very wealthy people with a net worth of $30 million or more showed very similar results. WealthX found that 68% of very wealthy people earned their wealth themselves, primarily through businesses and other types of investments.

About 23% had a combination of inherited and self-made wealth. Less than 10% of those surveyed completely inherited their wealth.

Millionaires use the wealth-building equation

Wealth is built along a timeline. While simple, it’s not always easy.

It looks like this: Wealth = Income + Investments — Lifestyle.

Now, I want to draw your attention to a couple of critical elements.

Notice that “saving money” is not a part of the equation.

Yes, saving money has value. An emergency fund is a great example of the benefit of saving money within the larger wealth-building timeline.

And, notice that your lifestyle is a part of the equation.

In other words:

• income and investments build wealth (over time)
• lifestyle expenses drain wealth

Whatever is left is the wealth that you truly possess.

You will not get rich by saving money alone, or assuming all rich people simply lucked into their wealth through inheritance. Wealth — and I mean serious, goal-accomplishing wealth — is built through hard work, providing value, and investing your income.

Investments are what make wealthy people wealthy.

The other critical component that most people don’t consider is lifestyle.

Your lifestyle is the “accounts payable” portion of your life. It’s not profit. Your lifestyle (such as your home, your car, the things you buy, the vacations you take, etc) all need to be funded. Your lifestyle takes away from your wealth.

And, this means something brilliantly simple: the more that we control our lifestyle, the more of our income + investments become profit.

The more money we keep.

Forget inheritance. It happens, but inheritance isn’t how the vast majority of millionaires got wealthy. The sooner you stop believing this popular lie, the sooner you’ll start building serious wealth for yourself.