FIRE

The Millionaire Next Door (Book Review)

What’s up fellow Samuraites!

Hope you’re nice and rested for the coming week!

MrsFrugalSamurai and I enjoyed a wonderful day out with our friends in the sun on beautiful Sydney Harbour.

Surely there are worse places in the world than a relaxing lunch in the late Autumn sun by the water?

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Yay! Autumn sun!

Seems like half of Sydney thought the same thing, because the sidewalks and restaurants were filled to the brim full of couples, families and friends all enjoying good times and great food.

Sometime during our conversations, I looked around me and couldn’t help but notice the amount of bling and designer names adorned across the multitudes of individuals.

My thoughts instantly turned to the book I’ve just finished and how apt it was to that occasion.

The Millionaire Next Door

A personal finance classic and a must-read for all followers of FIRE.

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“Honey, something fishy about the guy next door”

Written in 1996, it is a result of research from the co-authors, academics Thomas Stanley and William Danko (incidentally both became millionaires via writing this book) who initially were commissioned by big corporate to determine how best to market products and services to America’s wealthy.

What they found however, tipped the notion of “millionaire” and “financial success” on its head.

You see, most of us grew up on the notion that a wealthy or financially well-off individual lives a certain way, dresses a certain way, talks a certain way and even has their name a certain way.

However, in the vast majority of cases – those who we perceive to be “millionaires” are anything but, they have high incomes but are asset poor.

Who then were the “wealthy” in this study?

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Yes strange man who’s movie I’ve never seen, WHO indeed?

Turns out they are normal, everyday people.

You wouldn’t be able to spot them in a crowd, you wouldn’t be able to tell by looking at them, in fact they are probably one of the last people you would think is deemed “wealthy”.

The study highlighted seven key denominators common to all wealthy individuals:

  1. They live well below their means (Duh! So obvious)
  2. They allocate their time and money efficiently, in ways conducive to building wealth (makes sense, nothing ground-breaking here)
  3. They believe financial independence is more important than displaying high social status (Coco Chanel would disagree)
  4. Their parents did not provide economic outpatient care (say what now?), i.e. minimal parental assistance in the form of financial aid, inheritances etc.
  5. Their adult children are economically self-sufficient (aha! No leeches kids to fend off, great)
  6. They are proficient in targeting market opportunities (good for them, but who has time for all that nonsense!)
  7. They chose the right occupation (what! You mean chimney sweeps aren’t in vogue anymore?)
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Millionaires targeting market opportunities

My personal take-aways

Although the book was written over 20 years ago, I still think that there are elements which are true today and which will stand the test of time.

Here’s three which got me thinking…

Play a Good Offense and a Good Defense

In the book, the researchers found out that to accelerate your wealth, you needed to earn a higher income (offense) as well as live frugally within your means (defense).

My opinion is that all personal finance and investment revolves around one sentence:

“Spend less than you earn and invest the difference”.

That’s it.

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Best line ever!

Nothing ground-breaking or mind-blowing.

Everything in finance is a derivative of that sentence.

But how many of us live by that rule?

Financial Potential Equation

A simple formula is introduced to us and, depending on which side of the equation you sit labels you as either a UAWs (Under Accumulator of Wealth) or PAWs (Prodigious Accumulator of Wealth).

The formula calculates what your net worth should be given your income and your age.

“Target Net Worth = Age X Annual Pre-Tax Income / 10”

So if you’re a 30 year old earning $100k p.a. then your net worth should be $300,000.

Mind you it’s not set in stone.

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This sword however, is set in stone – not by choice however, it sold itself to a life of servitude to a Trojan merchant who consequently bequeathed it to an English stonemason who named it Excalibur which is olde English for “The Trojan Horse”.

Some of us who started working later in life, due to post-graduate schooling, personal circumstances etc. would be very hard-pressed to fall into the PAWs category.

But it does provide a very general benchmark – if you’re into that sort of thing.

The Status Trap

This one I felt was most applicable and one which I have encountered time and time again.

What the book states is that the higher your income level, the more susceptible you are to the status trap. I call this the perception fallacy.

From buying new European luxury cars vs used domestic models.

From eating out all the time vs cooking at home.

From expensive haircuts vs cutting your own hair.

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“Oh dear”.

All of this stems from the need, want and feel to portray an image of success. It’s especially prevalent amongst the professional working class.

But if you scratch beneath the surface, there’s not many real assets there.

Yet higher income earners such as doctors, bankers, lawyers and accountants are caught up with having to portray a perception of success.

Sometimes, it’s because of social norms – how would you react if your banker arrives at your house in a beat-up Ford?

But too often, higher income earners feel the need to portray their status and position in life, to the detriment of their own finances.

“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like”.

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Nice quote TheFrugalSamurai!

Conclusion

There are more of course, but those are the three which struck out most with me.

I’ve been fortunate through my personal and professional networks to meet a vast array of people both UAWs and PAWs as family, friends, associates and clients.

Categorically the book resonates with me because what was spelt out is for the most part, who they are.

The wealthy are wealthy but you’d shake your head looking at them.

The non-wealthy are non-wealthy but you’d incline your head towards them.

Which one are you!?

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