The Millionaire Next Door | Book Review
If you follow any of the popular personal finance bloggers like I do, you’ll find that most have read and recommend this book. They say it’s had a positive effect on their lives. Well, after reading it myself, I can now see why.
Becoming a millionaire is one of the goals I’d like to achieve in my lifetime. The encouraging part about this book is that it illustrates how a regular guy like me can fulfill this dream.
According to the authors, most millionaires aren’t descendants of super rich people. More than 80% of millionaires are ordinary people who achieved their wealth in one generation. They didn’t have the fortune of signing a multimillion-dollar sports contract. Or the fortune of winning the lotto. Or becoming the next Michael Jordan. They just did it slowly and steadily.
The main idea of the book is that there are seven common traits among those who become millionaires.
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conducive 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 profession.
How Wealthy Should You Be?
An interesting way that the authors define wealth is by a person’s expected net worth. This level is based on your age and income. The formula works best if you’re between the age of 25 and 65, and make $50,000 or more per year. Here’s the equation:
Expected Net Worth = (Age x Pretax Income) / 10
If your net worth is within 75% of this number, you’re what they call a prodigious accumulator of wealth, or PAW. How do you stack up? I can say that I’m fortunate enough to be a PAW, and hope to stay that way.
Do You Live Well Below Your Means?
This is the first common trait among millionaires. According to the authors,
“The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.”
Do you keep a budget? I actually don’t. And since I don’t, I thought I’d be reducing my chances of becoming a millionaire. Luckily, the authors found that for every 120 millionaires who do budget, there are 100 who don’t keep one. Instead, they became millionaires by creating an economic environment of scarcity for themselves. In other words, they invested first, then spent the rest of their income.
This is the strategy that I follow. My plan is to max out my 401k and Roth IRA every year for as long as I can. Then I’ll figure out how to live off the rest of the money.
You Aren’t What You Drive
The second common trait among millionaires is that they think financial independence is more important than displaying high social status. One story that illustrates this point really stood out to me. It involves a guy named Mr. Allan.
Mr. Allan was to be given a special birthday present after helping some friends stay in business. That special present was a Rolls-Royce! However, he felt that if he accepted the high-status car, he’d feel pressure to fill up his socially conspicuous puzzle with other status products. These things are a threat to his simple yet highly efficient lifestyle. So how did he respond?
“There’s nothing the Rolls-Royce represents that’s important in my life. Nor would I want to have to change my life to go along with owning the Rolls. I can’t throw fish in the back seat of the Rolls, like I do right now when I go fishing.”
He also said this:
“With a Rolls, I can’t go to some of the crummy restaurants I enjoy going to. . . . Can’t drive up in a Rolls-Royce. So, no, thank you.”
I love it! And while I can’t guarantee that I’d turn down a Rolls if it was offered to me, I can safely say that I’d probably turn it down too. When I got my first minor dent and semi-noticeable scratch on my car, I was pretty upset for a few days. The funny part is that I drive a car that’s nowhere near as nice as a Rolls! Imagine how badly I’d flip out if it happened to a Rolls! So the moral of the story is this:
Don’t trade wealth for high-status material possessions.
How Millionaires Buy Cars
I used to think that since millionaires were so rich, they automatically just bought new cars whenever they made a purchase. Why would they ever bother buying used?
Well, the authors found that although 63% of millionaires did purchase their cars brand new, there were still 37% that actually bought used cars. Why did they do it?
They actually got more satisfaction from acquiring used instead of new. In buying a quality used car, they felt that the original owner paid while the car was depreciating in value.
If I could do my car buying over again, I would go this route. But going forward, my plan is to be like these millionaires and buy a quality used car at a discount!
Go Where The Money Is
Another characteristic of millionaires is that they pursue business opportunities that target the affluent. As of 1996, when this book was written, there were about 3.5 million households in the U.S. with a net worth of $1 million or more.
So the authors argue that if you want to become wealthy, a logical way to do this is by serving the affluent in some way. If you supply a valuable service that solves a problem of the affluent, you’re more likely to become wealthy. This makes a lot of sense to me! Professions likely to benefit from the affluent include:
- Estate Attorneys – Acting as executors or administrators of millionaire estates can translate into high profits.
- Tax Attorneys – The number one expense among millionaires is income tax. Helping these millionaires find every option within the law to remain affluent will likely make you affluent as well.
- Marketers of cruises, tours, and other vacations – The affluent enjoy vacationing with their children and grandchildren, and many of them spend considerable amounts doing so.
Overall, The Millionaire Next Door is a great book and an easy read. Rather than thinking that most millionaires live a super lavish lifestyle, the book sheds light on who the majority of millionaires really are.
Have you read this book? How did it impact you? Are you a PAW?
This post was included in The Carnival of Personal Finance for the week of May 3, 2010. Check out the Well-Heeled Blog for a fantastic article on the origin of the piggy bank!
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