The Millionaire Next Door: The Surprising Secrets of America’s Wealthy – Thomas J. Stanley

Here are my comments on the book:

What are some of the 7 common traits that self-made millionaires have? According to Dr. Thomas J. Stanley and Dr. William D. Danko’s research, surprisingly they’re not big spenders and don’t live in big mansions or drive luxurious cars as the media portrays millionaires to be. In fact, it’s quite the opposite. What they’ve discovered is that a lot of millionaires live below their means and not just a little below their means, well below their means. The second common trait is that millionaires tend to spend more time looking at and reviewing their financials on a monthly basis than nonmillionaires. Thirdly, they believe that financial independence is more important than having a flashy lifestyle and high social status. Here are some of the points to the book:

 

1. To become a millionaire, having a strong offense (making money) isn’t as important as playing defense (preserving money). You don’t necessarily need to make a good annual income as that’s just one piece to the equation. The more important part of becoming a millionaire is playing keeping your money. You could be making well over six figures a year but if you spend it all, then you’re really worth nothing compared to the person who makes 50k/year and keeps 40k of it/year. This is why Forbes’ list of wealthiest people is ranked by net worth, not annual income.What is so profound about these discoveries? Just this: Most people have it all wrong about wealth in America. 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. How do you become wealthy? Here, too, most people have it wrong. It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.”

 

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2. How do you know what your current net worth should be? A good rule of thumb is to multiply your age by your pretax annual income and then divide that number by 10. That number tells you how much your net worth should be. You can then compare that number to your current net worth. To find your current net worth, find the value of your assets (cash, equitities, house, and etc.) and subtract your liabilities (mortgage, loans, credit cards, and etc.) from that number. If you’re 30 years old making 50K/year, you should have a net worth of at least 150K.Whatever your age, whatever your income, how much should you be worth right now? From years of surveying various high-income/ high-net worth people, we have developed several multivariate-based wealth equations. A simple rule of thumb, however, is more than adequate in computing one’s expected net worth. 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. For example, if Mr. Anthony O. Duncan is forty-one years old, makes $143,000 a year, and has investments that return another $12,000, he would multiply $155,000 by forty-one. That equals $6,355,000. Dividing by ten, his net worth should be $635,500. If Ms. Lucy R. Frankel is sixty-one and has a total annual realized income of $235,000, her net worth should be $1,433,500.

 

3. When it comes to wealth creation, it’s simple math. Your wealth is based on how much is coming in minus how much goes out. If you want to create wealth for yourself, you need to live below your means and use that excess to multiply it by investing. You can’t become wealthy or financially free if what you make just goes out the door and you’re living paycheck to paycheck. “Being frugal is the cornerstone of wealth-building. Yet far too often the big spenders are promoted and sensationalized by the popular press. We are constantly barraged with media hype about so-called millionaire athletes, for example. Yes, some of the members of this small population are millionaires. But if a highly skilled ball player makes $5 million a year, having $1 million in net worth is no big deal. According to our wealth equation, a $5 million earner who is thirty years of age should be worth $15 million or more. How many highly paid ball players have a level of wealth in this range? We believe only a tiny fraction. Why? Because most have a lavish lifestyle—and they can support such a lifestyle as long as they are earning a very high income. Technically, they may be millionaires (have a minimum net worth of $1 million or more), but they are typically low on the prodigious accumulator of wealth (PAW) scale. How many households in America earn $5 million in one year? Fewer than five thousand of the nearly 100 million households. That’s about one in twenty thousand. Most millionaires never earn one-tenth of $5 million in a year. Most never become millionaires until they are fifty years of age or older. Most are frugal. And few could have ever supported a high-consumption lifestyle and become millionaires in the same lifetime. But the lavish lifestyle sells TV time and newspapers. All too often young people are indoctrinated with the belief that ‘those who have money spend lavishly’ and ‘if you don’t show it, you don’t have it.’ Could you imagine the media hyping the frugal lifestyle of the typical American millionaire? What would the results be? Low TV ratings and lack of readership, because most people who build wealth in America are hard working, thrifty, and not at all glamorous. Wealth is rarely gained through the lottery, with a home run, or in quiz show fashion. But these are the rare jackpots that the press sensationalizes.

 

4. I find it interesting how the perception of buying a house as a primary residence for investment purposes differs between the rich and non-rich. A lot of rich people say that buying a house to live in is not necessarily a good investment but when I listen to non-rich people, they all think it’s a great investment. Now obviously you have to use your own discretion and filter out what people say and formulat your own thoughs but there seems to be something that rich people know or understand about real estate that non-rich people don’t. Perhaps you aren’t as wealthy as you should be because you traded much of your current and future income just for the privilege of living in a home in a high-status neighborhood. So even if you’re earning $100,000 a year, you’re not becoming wealthy. What you probably don’t know is that your neighbor in the $300,000 house next to yours bought his house only after he became wealthy. You bought yours in anticipation of becoming wealthy. That day may never come. Each year you are forced to maximize realized income just to make ends meet. You can’t afford to invest any money. Essentially, you’re at a stalemate. Your high domestic overhead requires full commitment of all your income. You will never become financially independent without purchasing investments that appreciate without income realization. So what’s it going to be? Will you choose a lifetime of high taxes and high-status living, or will you change your address? Allow us to help you in your decision making. Here is another one of our rules. If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income. Living in less costly areas can enable you to spend less and to invest more of your income. You will pay less for your home and correspondingly less for your property taxes. Your neighbors will be less likely to drive expensive motor vehicles. You will find it easier to keep up, even ahead, of the Joneses and still accumulate wealth.

 

5. Spend more time looking at, reviewing and understanding your finances. Millionaires, in general, spend more time on their finances by budgeting, planning, researching and finding quality people to help grow their wealth than nonmillionaires. One thing I’ve learned from entreprenur Tai Lopez is that anything you don’t understand, you won’t have. If you don’t understand money, you’re not going to have it. If you don’t understand how the body works, you’re not going to be healthy. If you don’t understand how relationships work, you’re not going to have good relationships. This goes back to Malcolm Gladwell’s “10,000 hour” idea of those who are great at something have spent more time on it relative to those who aren’t.Efficiency is one of the most important components of wealth accumulation. Simply: People who become wealthy allocate their time, energy, and money in ways consistent with enhancing their net worth. Although both prodigious accumulators and under accumulators of wealth state similar goals about achieving wealth, these groups have completely different orientations when it comes to how much time they actually spend on wealth-building activities. PAWs allocate nearly twice the number of hours per month to planning their financial investments as UAWs do. There is a strong positive correlation between investment planning and wealth accumulation. UAWs spend less time than PAWs consulting with professional investment advisors; searching for quality accountants, attorneys, and investment counselors; and attending investment-planning seminars.

 

By Ryan Timothy Lee

 

Thank you for reading! Please share this post with someone who you think will benefit from it. If you have any book requests/recommendations, I’d love to hear them out so please let me know through an e-mail at bookstakeaway@gmail.com. Also join my Facebook group here, to receive updates on future posts.

 

My rating:
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7 Comments

  1. Great post. Ive read the book and also gleaned some of those same conclusions. Surprised to see Tai Lopez in another post besides mine. Great recap and thanks for re-invigorating me with info.

    Liked by 1 person

    1. John, Thanks for the comment and positive feedback! I’m grateful that I’m able to help others through my site. I’m greatly appreciative of it.

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      1. I also shared it.. i think it just shares your post through my blog.. but I relay out to all my social stuff so should be a decent viewing.

        Liked by 1 person

      2. Thanks John, I’m very grateful you shared my post 🙂

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  2. […] via The Millionaire Next Door: The Surprising Secrets of America’s Wealthy – Thomas J. Stanley — […]

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  3. […] not the consumers of high end luxury items that the media portrays them to be. In the book The Millionaire Nextdoor, the authors state that surprisingly most millionaires don’t live the lavish lifestyle every […]

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  4. […] people. However most millionaires don’t live that sort of lifestyle according to the book The Millionaire Next Door where 2 Ph. Ds. conducted an extensive study of millionaires within America. Sorry to be the […]

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