Per my 2018 goals, I have decided to start reading more. This led me to sign up for Audible since I enjoy consuming books through audio instead of physically reading them. Additionally, they are cheaper this way and I am able to store all of them digitally instead of taking up shelf space. It seems to make driving go much quicker too, as I am able to hook up my iPhone to my truck’s stereo system.
My first book of choice was The Millionaire Next Door by Thomas Stanley and William Danko. The book was originally published in 1996. I chose this book because I had heard great things about it from friends and relatives. I knew the premise of the book was saving money. Moreover, how simply saving and investing one’s money instead of spending it on unnecessary things, like a $6 Starbucks coffee or other frivolous items, can help make a person wealthier. Both my parents have always been very frugal with their spending. During the past twelve months, I have not done so well with my spending. Thus, I figured this book may enlighten me. I was right.
The authors’ research was conducted mainly through focus groups. They invited people of affluence (net worths of $1+ million) as well as high-income earners who should have higher net worths but do not because of aggressive spending habits to participate in various questions and theoretical scenarios. The results of this research are explained in the book. Below are the four main points I took away from The Millionaire Next Door. Abiding by these principles may just be the simplest way to become a millionaire.
High-Income Earning vs. Wealth
The authors start the book by clarifying the difference between earning a high income and being wealthy. There are many people which do not earn high incomes by today’s standards but are wealthy. Likewise, the inverse is true. Many high-income earners are not considered wealthy because they do not save their earnings; they spend it. So what is the balance between earning and spending? There has to be a middle ground. If high net worth individuals never spent their incomes, they would never be able to enjoy the finer things in life. However, the best way to becoming a millionaire is to save rigorously, according to the authors. What’s the right combination? I’ll let you decide.
Want to determine your net worth? The authors give the formula to help you determine the exact number. Multiply your age times your realized pretax annual household income from all sources (except for things like inheritances). Divide this number by 10. This, according to the authors, should be your net worth.
Economic Outpatient Care (EOC)
The crux of this acronym is giving money to others in hopes it helps them flourish. Stanley and Danko suggest this intent is great, but the effect is reversed. They suggest that by letting others rely on your money and resources, it gives them a false sense of confidence. Thus, these reliant individuals are less likely to venture out themselves in an attempt to be self-reliant. Although it may seem like this form of donation is beneficial, the authors say this could be a surefire setup for failure.
Selective Spending – PAW vs. UAW
Another overarching point made by the authors is the two types of people in regards to finance. There are Prodigious Accumulators of Wealth (PAWs) and Under Accumulators of Wealth (UAWs). The difference between these two types of people is their spending habits. PAWs tend to save money while UAWs typically spend their paycheck as soon as it hits their checking account. I think we all, at least at some point, are guilty of UAW behavior.
Part of this comparative observation is the fact that wealthier people tend to buy, not lease, used or “new to me” vehicles instead of driving brand new vehicles off the lot. In fact, at this time among the surveyed group, it was found that the most popular vehicle for millionaires to drive was the Jeep Grand Cherokee, not a foreign sports car. PAWs shop around for the best deal and are patient in their buying. The study found that only a fraction of a percentage of millionaires buy brand new, foreign cars.
So what is the point of all this? Why am I simply reiterating a popular book’s top points? I find these points very powerful. It is important to note the impact of compounding interest when saving and investing across time. The sooner a person can get money into a savings account or in the stock market (max out that tax-free Roth IRA!) the better. Starting to save and invest even a few years down the road can result in a loss of potentially thousands of dollars. The only effort needed to earn this potential income is to start saving and investing as soon as possible. For this reason, I greatly enjoyed this book and would recommend to absolutely anyone 16 and over. It gives incredible insight into the behaviors and perspectives of America’s wealthy and actionable advice on how anyone can achieve great wealth.