Wednesday, July 20, 2016

The Millionaire Next Door

I read the The Millionaire Next Door by Thomas Stanley in 2006. I wasn’t a millionaire then. I wasn’t too interested in investing with the exception of my 401. But, I was curious. Back then, I worked in my job for around 10 years. I was wondering how to get to the next level. I wondered what it would feel like to be a millionaire.


So, I read the book back then...


Instead of just net worth to classify wealth, Stanley coined the terms Under Accumulator of Wealth (UAW), Prodigious Accumulators of Wealth (PAW) and Average Accumulator of Wealth (AAW). The calculation is very simple. You take your age and multiply it by 10% of your pretax earnings to get your AAW. If you can get 2x or more, then you are a PAW. If you get ½ or less, then you are a UAW.


The main points of the book is to spend less than you earn, to avoid buying based on status/lifestyle, how PAWs take risks and Family and Generational Wealth. The biggest difference between the rich and the poor is that the rich save today’s cash for tomorrow instead of spending tomorrow’s cash for today.


The under achievers are obsessed with possessions and measure  their success by comparing to their nearest neighbors/relative. This is the  classical “Keeping up with the Joneses”.


They are not frugal, and make bad choices, like smoking which prevents them from being millionaires. PAWs tend to buy used and reliable cars. PAWs also spend their time investing, rather than spending time looking for cars/new clothes etc.The interesting thing is that the UAWs are afraid of and do not trust the stock market.


The section that interested me the most to how to UAWs/PAWs teach the kids about wealth. PAWs try not to over-indulge the kids with high consumption whereas high-income UAWs who grew up poor tend to buy their kids everything. They wanted their kids to have the things they didn’t have when they were young. This is the biggest thing about General Wealth, and why the wealthy worry about saving and investing money for the future, and the poor worry about saving for the weekend out.


More than anything, millionaires are big fans of Stealth Wealth - hence the title Millionaire next door - since you have no idea that they’re actually millionaires.


While I didn’t formulate any action plan / steps to follow etc, somehow, subconsciously, I absorbed the key-points. My wife has always been frugal, so saving more than we spend is nothing new. We buy our cars new, but then we keep them for 10-15 years. But we took the the main points about not keeping up with the Joneses and trusting the market somehow stuck with us. We continued to invest in the stock market using my 401k.  2008-2009 were brutal - but we held on. In 2014, I started buying individual dividend growth stocks.


Just last week, I found the book tucked away in storage. It was good reading it again and contrasting it with my first read 10 years ago. Sure, we follow more of the habits. But, a million is just a number - meaningless really. There are no changes in your life once you reach this milestone. Your happiness level, your time you have left are just as important.


My focus now is generational wealth - and how my son and perhaps his future kids can continue the accumulation of wealth.


Have you read The Millionaire Next Door? What do you think of the book?


D4s

8 comments:

  1. I have never read the book but have heard quite a bit about it. I am glad that you were able to absorb plenty of useful information from the book.

    I have spoken with some friends about generational wealth. To them I sound bat shit crazy but I can see plan.... and I know that I am just laying the foundation now. I will live comfortable and so will my family that I leave behind. Thanks for sharing this!

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    1. Thank you More Dividends. With dividend stocks are complementary to generational wealth. Time and compounding are your friends here. And yes - building the foundation is the key.
      D4s

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  2. Thanks for the reminder D4S. Love this book and will read it again one day. I will pass on this book to my kids.
    Keep hustling hard bro. Cheers!

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    1. Dividend Hustler,
      It's really a good book. Definitely mandatory reading for my son :)
      D4s

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  3. I read it about 6 months ago and that was what made me actually calculate my net worth. I have always saved and/or paid down things like student debt but really had no idea how much I had accumulated over the last decade since being out of school. A very good book to read to get your mindset right about what truly builds wealth.

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    1. Papa Div,
      I started tracking my daily spending and net worth calculating before reading the book. It was way back in the late 90s. But I wasn't really saving enough. So when I read the book, I realized that I had to save. I realized that a car is just a car. I also met a lot of 'closet' millionaires. You would never know that they were wealthy based on their lifestyles. Definitely, it is a mindset thing.
      D4s

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  4. Hey D4S,

    I really enjoyed reading the book and it affirmed the type of life that we want to live. You have lots of money by not spending all your money, essentially, lol. It will help our mindset throughout our lives.

    Tristan

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    1. Tristan,
      Yes - not spending. But also spending wisely. You don't need a large house. You don't need a flashy cars. You don't need to spoil your kids. And then, you invest wisely - and don't be scared of the market - though it's very scary now if you ask me :)
      D4s

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