The pseudo-affluent: If you look rich, you probably aren't

One of my favorite authors, Dr. Thomas Stanley, made the term "pseudo-affluent" popular by arguing that most rich people are covert operators within society. They don't live in high-class neighborhoods, drive expensive cars or wear gold watches. In other words, they don't look rich.

Instead, they act and dress just like you and me. They drive Toyota Camrys and Honda Civics, not Porsches and Ferarris. Most have never owned a boat or a second home, are more likely to wear a Timex than a Rolex and have never paid more than just a few hundred bucks for a suit.

Most rich people achieve their wealth through a relatively simple combination of earning an income, saving for retirement and spending wisely. How do we define rich? The rich have a net worth of at least $1 million. Meaning, their collection of assets, minus liabilities, equals $1m - or more.

The rich get rich by earning and saving, not earning and spending.

The pseudo-affluent are a different breed

The pseudo-affluent is a breed that fancies our material world by buying things that convey success. Dr. Stanley calls these items "prestige products". And, the majority of these people want us to know just how much stuff they have by displaying their success (apparently, that's like half the fun!). The expensive cars, big homes, and assorted collection of Guuci-acquired clothing present a chosen facade, one that supposedly portrays wealth and success. Intelligence. Status.

In The Millionaire Next Door, Dr. Stanley lays out a remarkable reality: Those of us who appear the richest generally fall into one of two categories: They are filthy rich with a net worth north of $10 million, or they earn a high income but have very little wealth to show for it because they spend the majority of what they earn.

Unfortunately, the latter is much more common than the former.

"The pseudo-affluent are insecure about how they rank among the Joneses and the Smiths. Often their self-esteem rests on quicksand. In their minds, it is closely tied to how long they can continue to purchase the trappings of wealth. They strongly believe all economically successful people display their success through prestige products," Stanley wrote.

The implication? The pseudo-affluent believe that those of us who don't wear the latest fashions or choose to drive around in "consumer" cars, live in normal neighborhoods and shop at regular grocery stores, are not rich. We are not rich because we don't act rich.

Characteristics of the pseudo-affluent

The pseudo-affluent generally:

• Earn a high-income, but spend the majority of what they make
• Wear expensive suits or carry Louis Vuitton purses
• Drive high-end luxury or sportscars like BMWs, Porsches, and Mercedes
• Genuinely believe that rich people act rich

Naturally, this does not mean that everybody who drives a BMW is pseudo-affluent. The world isn't black and white enough to make such a concrete statement. However, those who do spend the vast majority of high incomes DO tend to drive these cars and live in wealthy neighborhoods to display their wealth.

"Many are good people, well-educated and perhaps earning a six-figure income," writes Alexander Green, author of the book Beyond Wealth: The Road Map to a Rich Life. "But they aren’t balance-sheet rich because it’s almost impossible for most workers – even those who are well paid – to hyper-spend on consumer goods and save a lot of money."

Challenge: How do you know if your neighbor is secretly wealthy ($1m+ net worth)?

If you believe a word of this article (or Dr. Stanley's words in books like The Millionaire Next Door or Stop Acting Rich), you probably realize most rich people don't live conspicuous lives full of opulent spending, maxed out credit cards and rock star parties every night.

Your neighbor might be one of these secret millionaires, if:

Above average understanding of finances: Your neighbor might talk, but not obsess, about finances and the market. He or she isn't concerned about a looming recession, but more calmly chats about general atmosphere data points that would be lost on the average person. I'm talking about keywords like HSA, 529, 401ks, etc. Also, "get rich quick" is never uttered, at least seriously.

They read: Inside their home, the space is prioritized more toward education than centered around the boob tube. I know very few truly wealthy people who can instantly recall the latest game show winner or plot twist in a sitcom. For the record, we no longer own a television and haven't the foggiest idea about anything that's on television these days. We don't even watch the news -> a habit that has made us demonstrably happier.

They cook: Nice kitchens, clean appliances and an organized collection of cooking utensils are all characteristics of wealthy people I know. They enjoy the art of cooking and entertaining. It is clear that a portion of their high income went toward a capable kitchen, built to facilitate not only the cooking of food, but conversation, relaxation, and companionship.

Uncluttered lifestyle: Most rich people I know do not have a lot of "stuff". Their homes are not cluttered with landfill-bound things. Everything has a purpose and a place. Their homes may not be spotless, but they are put together in a meaningful and constructive way. Cars, too. Back seats tend not to be used as additional storage, much like their garages. Their garages are used for their cars!

They care about their health: Rich people understand their wealth cannot be enjoyed if their health declines. Exercise (especially yoga, cycling and running - and yes, even weight lifting) is common, and many believe their health directly enables their ability to enjoy their wealth for as long as possible. In other words, rich people know that it is in their best interest to stay healthy.

They never brag: I've found that those who don't outwardly talk about the things they have are more confident, authentic and successful. Your neighbor may have nice things, but they don't strut around their cars and take notice of people looking at (admiring?) them. They do their thing using items that best support their lifestyle.

They don't care what other people think: Alongside confidence, ignoring fashion trends and pop culture is a tell-tale sign of someone who is focused and dedicated. To those people, it's okay to be seen driving a Civic, or wearing a normal t-shirt or living in a modest home in a normal neighborhood.

For more insight into spotting a secret millionaire, check out this Quora thread. It's super interesting and well worth the read.

Are you affluent, or pseudo-affluent?

You might be affluent, rather than pseudo-affluent, if:

You pay yourself first

Paying yourself first means we fully fund our retirement accounts before paying anyone anything…yes, even the government. And best of all, there is nothing illegal about it. It’s called a 401k (or a 403(b), or SEP IRA) plan.

Read more about paying yourself first.

You live in a reasonably-sized house

The median size new home is now 2,687 square feet, an increase of nearly 1,000 square feet in the last four decades. Perhaps more interesting is the average household size – meaning, the number of people living in the home – has actually decreased from 3.01 persons per household 40 years ago to 2.54 today. Fewer people for bigger homes?

Read more about a remarkable home-size study.

You understand good debt vs. bad debt

I do not believe “good debt” exists. I do accept that some debts – like student loans for the right degree, can improve our financial position over the long run. But, we Americans also need to be keenly aware of exactly what we’re doing and understand the gravity of our choices before debts can turn into a positive.

Personal loans should really only be used in cases of absolute emergency. Those instances should be incredibly rare—and precisely the reason that an emergency fund is highly recommended for anyone pursuing financial independence.

Read more about good debt vs. bad debt.

You live a sensible lifestyle that's within your means

The truth is you can live well – in fact, in the lap of luxury, and still set yourself up to achieve financial independence and retire super early. The key is living a more sensible lifestyle by making smart decisions with your money. Think about your happiness, first and foremost. Forget adequacy. That’s boring.

Read more about how a "sensible" lifestyle is superior to minimalism.

You are humble, yet confident

Being humble means that we understand the world that surrounds us. I acknowledge that there’s a lot in my life that’s simply gone right – and, I had very little control over that. Then again, there’s also a lot that’s gone right…that I DID (and DO) have control over.

Read more about how I mix these two traits together.

Honestly, are you pseudo-affluent? Check out my Kill It! article series for more on removing the "pseudo" part of that statement from your life!