I bet the typical millionaires that you meet in “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko are very different than you think…
Who are Millionaires and Where are They?
Millionaires are everywhere! You can find millionaires in the poorest countries as well as the richest countries. You might not be able to spot one because they might not really fit the stereotype you may have. Authors suggest that the typical millionaire doesn’t live where you think they are… doesn’t do what you think they do. And does not look like what you think they do. In fact, they suggest most of the millionaires live your next door.
What can we learn from these people so that we also one day, may call ourselves, millionaires? There are 4 key takeaways and let’s dive in!
Key Takeaways
- Know the characteristics of a typical millionaire — people who went on the path before you
- Play consciously and defend fully by being smart about your spending
- The true cost of consumption is higher than you think
- A simple framework for you to check if you are on the right track
Please check out my article about typical millionaires in this article: 7 Lessons from Portfolios of Financially Free which explores 3 portfolios of average Joe’s who achieved financial independence by becoming millionaires.
1: 12 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.
Authors have interviewed a good sample of the millionaire population and tried to generalize what the typical millionaires would tell us:
1. We live below our means.
2. About 50% of us have lived in the same house for more than 20 years.
3. Our time, energy and money are allocated towards wealth.
4. We spend more than twice the amount of time on financial planning and investing as our non-millionaire friends.
5. We think that freedom and financial security are more important than displaying high social status.
6. We never received cash gifts from our parents.
7. We are self-employed. About 2/3 of us have ourselves as our bosses. 75% of us consider ourselves entrepreneurs.
8. Most of us are in our 50s and are males.
9. We have a go-to-home-fund, which means that we can keep our lifestyle for 10 years or more, without bringing in additional income.
10. We are well educated. Only 1/5 of us aren’t college graduates.
11. We invest a lot! On average, about 20 percent of our realized income per year, and we make our own investment decisions.
12. We invest in the long run. Over 90 percent of us hold our investments for more than a year.
13. We buy cars by the pound. And screw those environmentalists! Ha ha ha ha! We are cheapskates.
2: Play Conscious; Play Defense
- 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.
Why would someone who’s a millionaire need a budget? It’s the same reason by all the bodybuilders who go to the gym every day. They are the ones who seems not to need it. But that’s why they are fit! Becoming and staying financially independent is not any different!
How do you play defense in your day-to-day life? For your house — you should buy (or rent) a house in a modest, but safe neighborhood, not an upper-class one. Note that your neighborhood is a key driver in to your lifestyle. Trying to keep up with the Jones in a high-class neighborhood can cost you dearly!
You will find it easy to keep up with, and even stay ahead of, the Joneses in a modest area and still accumulate wealth. 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.
3: The True Cost of Consumption is Higher than You Think
Do you think the price tag still fully represents what you pay when buying something? Do you see the following when you buy something?
1. The opportunity cost (money)
An opportunity cost is the loss of other alternatives when one of them is chosen. Let’s pretend that you had an older version of the iPhone. Now, like most people, you upgrade your phone every second year or so, and the latest iPhone is released. Even though the price tag was hard to swallow, to begin with, you haven’t yet factored in the opportunity cost. If you choose to buy the latest iPhone (iPhone 13 Pro costs $999) you miss the opportunity to invest your money, for instance, in the stock market with an annual 10% return in the long term. Considering the opportunity cost, the price of your new phone is:
- $2,591 after 10 years
- $6,720 after 20 years
- $117,000 after fifty years.
Now, do you still want to buy that new phone?
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 can’t keep a high-profile wardrobe without investing a lot of time in understanding the latest trends, the greatest brands, right?
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 are finite resources, especially for high-income producers.
Why would you spend 60 hours a week on a job trying to become wealthy and then spend the remaining few hours of the week, draining it all?
4: How Do you Know if You are on the Right Track?
Now, are you on your way to becoming financially independent, or are you actually going in the opposite direction, increasing the dependency on your paycheck? Authors suggest there is a simple enough formula to estimate one’s Net Worth to compare with the actual Net Worth:
Net Worth = Age x Realized Yearly Pre-Tax Income* / 10.
* Exclude any inherited wealth both on the yearly pre-tax income and your net worth.
Let’s take an example:
- An engineer earning $70,000 at the age of 30.
- His net worth should be 30 x 70,000 / 10 = $210,000.
Note that this is just your expected net worth; i.e., the average. But who wants to be average? Above the ranks of the average is the Prodigious Accumulates of Wealth(PAW), which has twice the amount of what the formula suggests. from our previous example, if our engineer has assets worth of $450,000, he is a PAW.
Above this exclusive group are the Super Prodigious Accumulators of Wealth(Super PAW) the real wealth champions have as much as 10 times higher than the formula explained before.
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 a calling out to the competitive person inside you!
What are your thoughts? Let me know in the comments below! If you enjoyed this article, please share it and follow for more content like this. Thank you for reading! Part of this content is inspired by the works of The Swedish Investor youtube channel.
Note: Please note that this is not investment advice, the information given above is presented for financial education purposes only.
Written by Lilan Priyashantha