The Millionaire Next Door
Are millionaires the people living lavish lives in big houses, fancy cars, and all the fine things in life?
You must have them confused with high spenders. The people who look rich are usually not as wealthy as they seem and the people who are rich aren’t generally flaunting their wealth as much. That’s one of the main points of The Millionaire Next Door; your next door neighbor could be a millionaire and you wouldn’t necessarily notice.
Millionaires are actually frugal
How do you think they got rich in the first place?
Something that shocks and annoys me is that many students will think that the dumb student in the class is the one asking questions. In actuality, it’s often the smartest students that ask a lot of questions, because that’s how they got so smart! The best minds are the curious ones. It actually takes a lot of intelligence to ask really good questions.
Similarly, why would high spenders be wealthy when they are spending, or getting rid of their money? You become wealthy by saving. If you are frugal, you preserve your income, which paves the road to wealth.
The Seven Factors (common factors in being a millionaire)
They live well below their means.
They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
They believe that financial independence is more important than displaying high social status.
Their parents did not provide economic outpatient care.
Their adult children are economically self-sufficient.
They are proficient in targeting market opportunities.
They chose the right occupation.
Are you a PAW, AAW, or UAW?
“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”
Compare this number with your net worth and you will see where you are:
PAW - Prodigious accumulator of wealth - This means you are well above the given number.
AAW - Average accumulator of wealth - This means you are near the given number.
UAW - Under accumulator of wealth - This means you are well-below the given number.
Please note this is a little more trustworthy calculation for people over 30. Obviously, if someone is 22 and making $40,000 per year, it would be pretty challenging for them to have already accumulated a net worth of $88,000 when they are just starting a career.
But it’s not as unreasonable for that person to have $120,000 in net worth by age 30.
Fun fact: it was found that a surprising percentage of doctors and lawyers in the UAW category, because they tend to be high spenders.
Net worth (It’s not about your income!)
Wealth is not about how much you make (that helps a lot though), but about your savings rate. If you make $250,000 a year and spend all but $2,000, you’re not as well off as the guy who makes $60,000 per year and saves $6,000. (The math here is obvious.)
Dave Ramsey says that the biggest factor in someone becoming a millionaire is the savings rate.
The Millionaire Next Door is a bit antiquated now, since a bigger study done by Ramsey personality Chris Hogan was completed recently. I haven’t read this one yet, but I’ve heard a lot about it, and it sounds amazing. There are similar principles in both books, but Everyday Millionaire is more modern and covers a much larger crowd (over 10,000 American millionaires surveyed).
I’d recommend either book! They are inspiring and they show you what it takes to build amazing wealth.