“The Millionaire Next Door” The Surprising Secrets Of America’s Wealthy
By Thomas Stanley And William Danko
According to this formula, if your age is 50, and your family income is $100,000, then your expected net worth should be 500,000. If your actual net worth is, say a million dollar, then you are a prodigious accumulator of wealth (PAW), and if your actual net worth is, say $250,000, then you are an under accumulator of wealth (UAW).
It is a great formula given by the authors of “The Millionaire Next Door” based on their interviews and research on more than 1000 millionaires whose age was mostly above 45. Thus, you can see yourself how you perform in wealth accumulation compared to your peers. You try this formula if you are over 45. For people aged below 30, this formula may not be appropriate because of student debts, and other life starts up experiences. Between 30 and 45, you can use it as a rough guide.
What is net worth?
Net worth is defined as the current value of one’s assets less liabilities
Authors of the book beautifully differentiate wealth and income. Rightly, they say, wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.
Then how do you become wealthy?
Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline. More than 80 percent are ordinary people who have accumulated their wealth in one generation, did it slowly and steadily.
A typical wealthy individual is a businessman. He has married once and remains married. He is a compulsive saver and investor. And he has made his money on his own. Eighty percent of America’s millionaires are first-generation rich. Affluent people typically follow a lifestyle conducive to accumulating money. In the course of their investigations, the authors discovered the following seven common denominators among those who successfully build wealth.
1. They live well below their means.
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.
Here are some more quotes from the book:
• We define wealthy as one who gets much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.
• Being frugal is the cornerstone of wealth-building. It means reflecting an economy in the use of resources. The opposite of frugal is wasteful.
• 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 hyper consumer.
• Millionaires became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.
• Non-Budgeter Millionaires create an artificial economic environment of scarcity for themselves and the other members of their household. More than half of the nonbudgeters invest first and spend the balance of their income. Many call this the “pay yourself first” strategy
• Always be goal-oriented. Have a clearly defined set of daily goals, weekly goals, monthly goals, annual goals, and lifetime goals. Have goals even to go to the bathroom.
• “Small change in behavior” could lead to significant wealth. For example: investing your cigarette (or coffee or any other similar) money in the stock market (index fund) during your lifetimes.
• Millionaires know that the more they spend, the more income they must realize. The more they realize, the more they must allocate for income taxes. So millionaires and those who will likely become affluent in the future adhere to an important rule: To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).
• Income tax is the single largest annual expenditure for most households. It is a tax on income, not on wealth and not on the appreciation of wealth. (Proper tax planning may again bring better wealth)
• High income low net worth individual is often either uninsured or under insured. (This can cause distress to families at times). The high net worth low-income individual often ends up paying less taxes.
• Planning and controlling consumption are key factors for wealth accumulation.
• Often, active investors spend more time trading than studying and planning their investments. Conversely, millionaires spend more time studying far fewer offerings. Thus, they can focus their time and energy the resources needed to master their understanding of a much smaller variety of offerings in the market.
• Frugal used vehicle prone wealthy group save and invest a significantly larger portion of their annual income than do any of the other types of vehicle buyers.
There are many actionable ideas in this book. And what we considered important are listed here.
• Live well below your means
• Have a clearly defined set of daily goals, weekly goals, monthly goals, annual goals and life time goals.
• Be frugal, and it means not to be wasteful of anything including time, energy and money
• Budget your expenses to control it.
• If not, invest a portion of your income first and when it creates an artificial scarcity, manage it well.
• On investing, spend more time on planning and less time on trading or buying.
• On lifestyle, avoid displaying a high-consumption lifestyle.
• Acquire more and more of appreciable assets.
• Tax planning is essential