Book Review – The Millionaire Next Door
The Millionaire Next Door is the result of a 20-year research conducted in the United States on how millionaires became wealthy. This book stayed in the New York Times Best Seller list for 179 consecutive weeks and describes the conclusions of the data collated from interviews and surveys to over 14,000 millionaires. The study shows how they make decisions on how they spend their money, time, energy, their choice of spouse, career, how they educate their children and various habits.
Below are some of the key points that their findings revealed:
Budgeting
Most of millionaires dedicate time to plan and budget their money. Their planning includes various categories such as food, clothing, housing, etc. They understood that to achieve financial independence they needed to optimise the use of their money to achieve their goals. Budgeting can help to control consumption, gain awareness on whether too much is being allocated to specific categories unnecessarily and increase the surplus that can be invested.
This is a practice that businesses use to maximise their profits and it’s equally applicable to individuals.
“They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way”
I think budgeting is not about buying the cheapest of everything, it’s about being intentional with our spending and being fully aware about the value we get from everything we pay for.
Frugality
Some people purchase products to portray a social status that often results in inferior economic achievement, the authors state that being frugal is the cornerstone of wealth-building. The media have a strong influence on the spending habits of the population, they show a version of what a wealthy lifestyle is as a way to sell their products or services.
In the study, many of the millionaires surveyed don’t live in high-status neighbourhoods because maintaining that lifestyle would have left them with less or no money to purchase investments that appreciate in value. The book presents case studies of families who lived in high-status neighbourhoods and their spending in housing, schools and the lifestyle associated with living in those areas kept them quite far from achieving financial independence.
The data also showed that most of millionaires spend surprisingly less money on clothing, shoes and watches than we think. Many people who buy really the expensive brands of these items do it because they need to give the impression that they are making a lot of money.
The spending habits of the spouses of the millionaires surveyed played a key role, a married couple cannot accumulate wealth if one of its members is a hyper consumer. This is also applicable if they’re trying to build a business.
I personally believe that as a society we have learned to correlate entertainment with spending money and this is habit that if we think about carefully and question is not always true.
Setting Goals
Most of millionaires answered ‘yes’ when they were asked the question Do you have a clearly defined set of Daily, Weekly, Monthly, Annual, and Lifetime Goals?
Some of them even have goals on what they want to leave beyond their lifetime. They know the benefits of visualizing future benefits of defining their goals in detail.
The case studies confirm that millionaires did not limit their goals to a dollar value, what was truly important was what achieving those goals would allow them to do regarding: family, career, etc. These other areas of their life may become more important as they grow older.
Planning time
Most millionaires allocate more time planning their finances than nonmillionaires do. This includes planning their future investment decisions and managing their current investments to become better investors.
Three examples in the book show that just having a high income does not make a person a millionaire. Dedicating time to studying and investing increases the probabilities of achieving financial independence.
Investing Style
The majority of millionaires surveyed invest long term and that’s what they study. They don’t do active trading where people buy and hold for short time, they don’t follow the ups and downs of the stock market and are not reactive to the financial media.
It’s been found active investors spend more time trading than planning their investments. Most millionaires focus their time and energy in understanding a smaller variety of offerings in the market and choose stockbrokers who prefer to buy and hold.
When they hire a financial advisor, they know that the more intellect, time and energy they dedicate to this process they’re more likely to find a suitable one. The book provides the example of finding a job in General Motors, IBM or Microsoft, these big companies conduct serious background checks and in-depth interviews during the recruitment process and this is something that we, as individuals, could do when we hire financial advisors.
If we operate our household like a productive business we need to hire the best professionals, in which case financial advisors are our employees. Therefore, we may need to learn how to hire high-grade financial advisors if we want to accumulate wealth. One of the findings of the research was that business owners tend to me more successful in accumulating wealth because they have more experience evaluating suppliers and employees.
Self-employed vs. Employees
The study showed that there was a strong correlation between being self-employed and planning investments. The self-employed spend more time planning their investments than those who work for others, the self-employed don’t take their economic position for granted.
The self-employed, especially in the high-income category, have financial independence as one of their goals. Employees tend to be more dependent on their jobs, less dedicated to planning their investments and are more likely to have cash than investments that appreciate in value.
Economic Outpatient Care (EOC)
They call EOC to the economic gifts that some parents give to their adult children and grandchildren. The research found that those parents who provide EOC have significantly less wealth than those parents within the same income, age and occupation who don’t do it. The more EOC adult children are given the fewer wealth they accumulate themselves and the less productive they are, but those who are given fewer dollars accumulate more wealth.
They also found that statistically the more wealth parents accumulate the more economically disciplined their adult children are likely to be.
Something quite interesting the data showed was that even within the same occupation receivers of EOC tend to have lower net worth and income than nonreceivers. When they combined all occupations receivers of EOC have 81.1% of the net worth and 91.1% of the income of nonreceivers.
When millionaires were asked about the gift they received the most from their parents they responded: Tuition. They said that to increase the probability of children becoming economically productive adults they provide them, in addition to education, with an environment that honours independent thoughts, individual achievements, and rewards responsibility and leadership. They teach them to live on their own.
In summary, although this book was written a couple of decades ago the findings state the test of time, after it was published the authors continued to do studies that confirmed the principles they had discovered. Keeping track of expenses, living below your means, studying the science of wealth building yourself and being very wise about who you get advice from are key component to achieve clearly defined financial goals. One last piece of advice but not least important is doing something you love and getting financially rewarded for it, this will make the journey to financial independence more fulfilling.