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Cover Credit: Authors Thomas J. Stanley and William D. Danko | Publisher: RosettaBooks (November 30, 2010)
The Millionaire Next Door offers a blunt assessment of how anyone with a steady job can amass at least a millionaire dollars in wealth within their lifetime. In fact, making 7 figures can be achieved by living shrewdly and sensibly. The book does this by dismissing the belief that you first need to make a lot of money before you can amass a lot of money. Making a lot of money may help expedite your goal, but as the book notes with several real-life examples, making a lot of money is not the same as having wealth, especially if you spend all the money you make.
Many people who live in expensive homes and drive luxury cars do not actually have much wealth. … Many people who have a great deal of wealth do not even live in upscale neighborhoods. … Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self-discipline.
The book differentiates between making money (salary, income, etc.) and wealth (net worth). To strengthen their point, the authors cite interviews with millionaires who have built wealth within their lifetimes. Dispelling a common myth early on, most self-made millionaires build their fortunes themselves. In fact, according to the book, self-discipline is the biggest determinate of who builds wealth regardless of how much money they earn or inherit.
The basis of their analysis is demonstrated through the profiles of two wealth accumulation types: PAWs – prodigious accumulators of wealth (sustainable); and UAWs – under accumulators of wealth (unsustainable). The seven factors of building wealth are:
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conduce to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They chose the right occupation.
According to this list, many of us need to re-program our view and understanding of making money versus building wealth. We must acknowledge that we live in a consumer-driven society, yet resist the temptation to live beyond our means. If you believe all the commercials, money is meant for spending on vacations, homes, cars, planes, trains and automobiles — and if you can’t afford the former with cash, just use a credit card!
This is a great recipe for perpetuating debt, but it is not a formula for wealth building. Most of us need to change our entire relationship with money and passing this lesson to their children is one of the gifts wealthy families prioritize (i.e. if something cost $100 and you buy it for $75, you didn’t save $25, you spent $75). Specifically, over half of the millionaires interviewed pay themselves first by investing at least 15-percent of their annual realized income before paying anyone else or spending their income on “sales.” While wealthy individuals are represented in all areas of work, “most of the affluent in America are business owners, including self-employed professionals.” Only 20-percent of affluent households were headed by retirees.
In America, fewer than one in five households is headed by a self-employed business owner or professional. But these self-employed people are four times more likely to be millionares than those who work for others.”
What does this mean? Living paycheck-to-paycheck on one salary might provide security. It may even pay good money, but it is less likely to secure wealth. It will, however, ensure you work for someone else until you retire.
Faithful to Saving While Cheating on Your Budget
In general, and especially online, we operate in extremities.
In reality, the right answer is usually somewhere in the infinite range between these polar opposites. For example, when it comes to building wealth and saving money, online debates would have you believe the only choices separating poverty and riches is your preference for gourmet coffee. This is stupid, and you shouldn’t waste yours or anyone else’s time if any financial debate you are having or are about to have comes down to similar comparisons.
The truth is both simple and far more complicated. Most people can save and spend money and build a $1,000,000 net worth on even an average salary (the median household income for a single filing individual in 2016 was $34,940) while cheating on your budget by living on 80-90% of their income and investing the remaining 10-20% even with only modest returns if they start young enough (ages 18-25) — and this assumes they never receive a raise or promotion. “Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.”
Yes, you can build wealth while still enjoying the finer things in life, like bread garnished with avocados.
They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”
The complicated part is sticking to a financial plan that may encompass the majority of your life when no one knows the exact investment returns or specific events you will face over the next 30, 40, or 50+ years. However, the absence of a plan is still a plan. It’s just not a very good one. Whether you choose to plan or not to plan, tomorrow’s future is constantly transforming into today’s present. Put another way for our Millennial readers: YOLO, but on average, most of you will YOLO for at least 28,470 Earth days.
If that’s not enough motivation to create a basic plan, then the authors’ studies also found that financially independent people are happier than those the same age who are financially insecure. Mo money, mo problems? Well, money can’t buy happiness. But, what is the purchasing power of poverty?
So You Want To Be a Millionaire
It’s much easier in America to earn a lot than it is to accumulate wealth.”
The good news: even on the median salary, most households can accumulate $1,000,000 in wealth in their 28,470 available days, on average. We discussed exactly how much you need to save each month to be a millionaire on PB6: How Much Can You Save? and the systems you need to put in place to automate wealth-building habits on PB65: The Billionaire Mindset with Tyrone Jackson.
In addition, the book recommends that we break the habit of spending in anticipation of wealth in favor of actually having wealth first. If you buy a $300,000 home because “one day” you’ll make a lot of money and your neighbor buys a $300,000 home because they already have a lot of money to afford a home, guess who is in the better financial position?
If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.”
The less than good news: “Even the best financial plans are ineffective if you don’t follow them.” Financial planning is not a very exciting story, and it is likely one that will unfold over 60-years rather than 60-seconds like the commercials and social media videos of The Lifestyle of the [allegedly] Rich & Highly-Followed.
While it’s still cited as the main goal in most analyses, there is a growing debate about whether a $1,000,000 nest egg is even enough to sustain retirement (especially for Millennials). After all, $287,000 is the new $100,000 salary, right? Plus, using the often cited “4-percent rule,” $1-million in retirement savings would equate to an annual withdrawal rate of about $40,000. As I like to say on the show, $40,000 is $40,000 more than $0-thousand, but how many of us could individually live on $40,000 this year? Can you support your current or future family on $40,000? Even if true today, this does not account for our inability to predict whether we can live on $40,000 30-years from now.
Most people will never become wealthy in one generation if they are married to people who are wasteful. A couple cannot accumulate wealth if one of its members is a hyperconsumer.”
Most never become millionaires until they are fifty years of age or older. Most are frugal. And few could have ever supported a high-consumption lifestyle and become millionaires in the same lifetime. But the lavish lifestyle sells TV time.”
The journey isn’t short, but if it was easy everyone would already be doing it.
What the book does prove is that any individual or family with a well thought out plan can accumulate a significant amount of wealth within their lifetime. To end, I’ll revisit a listener comment on the impossible odds they felt their generation faced in amassing one million dollars, or any monthly savings. That’s fair and a very legitimate concern: wages have stagnated at a time when cost-of-living has increased higher than ever. So, what would happen if you created a plan to save $1-million dollars and you missed your goal by half? You would only have $500,000 in savings. If history is any predictor of the future of most household’s savings rates, then you would still be almost 5x wealthier than the average household. I guess I sincerely apologize for your financial misfortune?
I offer this to comfort those of you who share similar concerns. If being The $500,000-Dollarnaire Next Door, which is $500,000 more than $0, is not enough to support the future lifestyle you imagine you will have become accustomed to, please feel free to hire a private investigator to find me. I will gladly reimburse you for the PI costs. Despite the great personal sacrifice to myself, I also volunteer as tribute to provide you with my updated forwarding address so you can transfer your $500,000 financial burden onto me.
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