The Millionaire Next
Door
About Author:
Thomas J. Stanley (1944 – February 28, 2015) was an American
writer and business theorist. He was the author and co-author of several
award-winning books on America's wealthy, including the New York Times’ best
sellers The Millionaire Next Door and The Millionaire Mind. He served as chief
advisor to Data Points, a company founded based on his research and data. He
received a doctorate in business administration from the University of Georgia.
Summary of Book:
Who are the millionaires? Is it the people living on the
Upper East Side in New York the people living on Strandvägen in Stockholm?
Well, yes, and yes, but the typical millionaire doesn't live there, they live
next door. What can we learn from these peoples so that we also one day, may
call ourselves, millionaires?
Takeaway number 1: The
twelve characteristics of a millionaire:
Contrary to many people's beliefs, it's rarely luck or
inheritance that decides whether you will be a millionaire or not. It's much
more a result of hard work, lifestyle decisions, planning and self-discipline.
Let's pretend that we can interview the millionaire population. This is what
they would tell us: We live below our means; about 50% of us have lived in the
same house for more than 20 years. Our time, energy and money are allocated
towards wealth. We spend more than twice the amount of time on financial
planning and investing as our non-millionaire friends. We think that freedom
and financial security are more important than displaying high social status.
We never received cash gifts from our parents. We are self-employed. About 2/3
of us have ourselves as our bosses, 75% of us consider ourselves entrepreneurs.
Most of us are in our 50 s and are males. We have emergency-fund, which means
that we can keep our lifestyle for 10 years or more, without bringing in
additional income. We are well educated. Only 1/5 of us aren't college
graduates. We invest a lot! On average, about 20 percent of our realized income
per year, and we make our own investment decisions. We invest in the long run.
Over 90 percent of us hold our investments for more than a year. We buy cars by
the pound. And screw those environmentalists!. We are cheapskates in a good
way, we would argue.
Takeaway number 2: Play defense.
Let's have a quick
quiz. Does your household operate on an annual budget? Do you know how much
your family spends each year on food, clothing and shelter? Do you have a
clearly defined set of daily, weekly, monthly and lifetime goals? Do you spend
a lot of time planning your financial future? Did you answer yes to all the
above? Millionaires, to a greater extent than others, do. Now you probably
think: Hold on a second! Why would someone who's a millionaire need a budget?
To that, the answer is: Because they became millionaires that way and they
maintain their affluent status the same way. A parallel could easily be drawn
to training. Have you seen all the body builders who go to the gym every day?
They are the ones who seem not to need it, right? But that's why they are fit!
Becoming and staying financially independent is not much different from that.
So how do you play great defense then? For starters, you should buy (or rent) a
house in a modest neighbourhood, not an upper-class one. The price tag of an
apartment or Manhattan for instance even though, I know, it's stunning, does
not factor in all the variables. To live there it's expected that you have a
certain lifestyle. This lifestyle might be even more expensive in the long run
than the apartment itself. Live in a modest (but safe) area instead and you
will find it easy to keep up with, and even stay ahead of, the Joneses and
still accumulate wealth In general, spend as little as possible on consumables
and spend smart on possessions that will depreciate in value. To be honest,
most millionaires do both. They have a decent offensive as well as quality defense.
But only a minority plays such good offensive that they can eat their salary
and keep it too. If you don't belong to that category, which only is 0.1% of us
do anyway, learn how to play defense.
Takeaway number 3: The true cost of consumption:
Let's disregard all the costs that a certain purchase might
result in later, as explained through the apartment on Manhattan example in our
last takeaway. The price tag still does not fully represent what you pay when
buying something. There are two reasons as to why this is not true.
1: The opportunity cost, the monetary one.
An opportunity cost is the loss of other alternatives when one of them is chosen.
Let's pretend that you had an iPhone 6 in November 2017. Now, if you like most
people, you upgrade your phone every second year or so. So now you're thinking
about the new iPhone X. Even though the price tag was hard to swallow to begin
with (seriously 999 dollars for a phone?) you haven't yet factored in
opportunity costs. If you choose to buy the iPhone X you miss the opportunity
to invest your money, for instance, in the stock market. At an annual 10% in
returns, the price of your new phone is: $2,591 after 10 years, $6,720 after
twenty years and $117,000 after fifty years. Now, do you still want to buy that
new phone? Cigarettes are an even greater example. At least your iPhone X
doesn't affect your life expectancy negatively. If you, instead of smoking 3
packages of cigarettes every day, invested the money in the tobacco company
Philip Morris, during the time period of 1950 to 1996 you would have been a
multimillionaire at the end of the period.
2: The opportunity cost of time. To acquire
and maintain large inventories of luxury goods such as fancy cars, expensive
clothing and so on, does not only require money, but also a lot of time. You
don't buy a Ferrari without first studying the market. Neither can you keep a
high profile wardrobe without investing a lot of time in understanding the
latest trends, the greatest brands, and so on. This is time that could have
been used to increase your financial intelligence, to improve your business or
to set up a proper budget for your household instead. Time and energy of finite
resources, even for high-income producers or perhaps especially for high-income
producers. Why would you spend 60 to 80 hours a week at a job trying to become
wealthy and then spend the remaining few hours of the week, ruining this same
wealth? It's like trying to build a house during weekdays, but then bringing in
the wrecking ball on the weekends. Do you think that you'll ever be able to
raise a house with that strategy?
Takeaway number 4:
Cash gifts are bear favors:
A bear favor is a
Swedish expression of someone doing another person a service that they think
will have a positive impact but which ends up being a disservice instead. Every
wealthy parent, or actually every parent, wants their children to be prosperous
and successful in life. How do wealthy parents make sure that their kids get a
head start? Well, they provide them with extra money of course! This proves to
be counterproductive though. In fact, in general, the more dollars adults
children receive the fewer they accumulate. Adults who sit around waiting for
the next injection of father and mother's money are much less productive than
their counterpart. Cash gifts teach children to live above their means. Gift
receivers have in 80% of the instances a lower net worth than their peers.
Adults who get money from their parents have a hard time to distinguish between
their parent’s wallets and their own. In fact, more often than not, they think
that they belong to the "I did it on my own club". It's much easier
to spend other people's money than dollars that are self-generated. So, in case
you're wondering, what can you give your kids that will increase their
likelihood of becoming prosperous and successful? The single most common gift
millionaires received from their parents is tuition. Apart from that try to
create an environment where independent thoughts are cherished and where
achievements, responsibility and leadership are rewarded. Yes, the best things
in life are often free.
Takeaway number 5:
How to decide if you are on the right track:
Now, are you on your way to become financially independent,
or are you actually going in the opposite direction, towards a life of credit
cards and Spotify premium accounts? Your expected net worth can be estimated
using the following formula: Age x realized yearly pre-tax income / 10 = net
worth. Exclude any inherited wealth both on the yearly pre-tax income and your
net worth. Let's take a few examples: The Swedish Prime Minister, Stefan
Löfven, earned approximately $220,000 last year at an age of 61. This means
that his net worth should be 61 x 220,000 / 10 which is ... $1,342,000. An
engineer at Volvo who recently was promoted to the rank of middle manager is
earning $70,000 at the age of 30. His net worth should be 30 x 70,000 / 10. $210,000.
A student at Stockholm School of Economics is in his last Bachelor year of
study. He's 23 years of age, but earns nothing. This means that his net worth
should be 23 x 0 / 10 .... Oh, well, I guess that the formula doesn't apply to
students, HORAY! Students can just keep on partying every night. Now, this is
just your expected net worth. But you guys aren't here to be average. Am I
right? Above the ranks of the "Average Accumulators of Wealth" are
the "Prodigious Accumulates of Wealth" if you want to be a part of
that exclusive club you must gather a fortune that is twice the amount of what
the formula suggests. But it doesn't end here. Above this exclusive group are
the "Super Prodigious Accumulators of Wealth" To join this club of
glorious elites, you must have a wealth that is 10 times higher than the
formula explained before. Now that requires dedication! If you are, on the
other hand, only worth half of what the formula says that you should be worth,
you belong to the "Under Accumulators of Wealth". Calling out to the
competitive person inside you, I have one thing to tell you: Friend it's time
for us to get you on the right track.
A quick recap:
First, becoming a millionaire is the result of hard work, lifestyle decisions,
planning and self-discipline not inheritance or luck. The second takeaway is
that you must play great defence to accumulate wealth. Takeaway number 3 is
that opportunity costs, both in terms of money and time, should be added to
estimate the true cost of a purchase. Number 4 is that cash gifts are
counterproductive to accumulate wealth, and last but not least, number 5 is
that you can decide if you are on the right track towards becoming a
millionaire by taking your age x yearly income / 10 and then comparing it to
your net worth. In takeaway number 2, I stated that financial planning, and
more importantly, financial goals, are key ingredients in succeeding with
money. A study from 2015 shows that you are a staggering 42% more likely to
achieve your goals, simply by writing them down at a regular basis. Today, I
want to challenge you to write down your financial goals for the future 5, 10
and 20 years. Note that it's not about where you are today, but where you want
to be tomorrow. You can write down anything, even things such as expensive
cars, as long as it keeps you motivated. Here's one example of what you could
write: In five years I should have built a stock portfolio, which increased by
at least 100%. The portfolio should be worth at least $30,000. In 10 years. I
should own my own apartment, meaning that I have no mortgages left to pay. In
20 years, I should have paid off all my college debt and be able to live on the
dividend that my portfolio produces. Just remember that your goals should be
reasonable for this exercise to serve its purpose. I wish all of you out there,
good luck!
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