PostHeaderIcon Important Lessons From The Millionaire Next Door

When we think of the rich, we often picture the affluent living in mansions, driving expensive foreign cars and lavish vacations as portrayed by the media, but our perception of the affluent has been distorted by high consumption driven advertisements and Hollywood. Based on years of extensive research, Dr. Thomas J. Stanley and Dr. William D. Danko, discovered that people who live in expensive neighborhoods across the United States have actually very little wealth. Their book, The Millionaire Next Door, surprisingly reveals that those with great wealth, the multi-millionaires, could be one of your neighbors who lives in the same modest house for years and drives an old sedan. How could this be? Well, looks can be deceiving and it’s unfortunate that our society associates wealth and success with appearance, but this is an ineffective indicator of a person’s net worth (assets minus liabilities).

The Millionaire Next DoorA high-income does not necessarily equate wealth. The definition of wealth to many means having material possessions, but living a high consumption lifestyle can be detrimental to building a fortune. Unfortunately, high-income professionals such as physicians, lawyers and executives must keep up with the expected affluent lifestyles – big upscale houses, foreign luxury cars, expensive suits, a yacht and so forth – therefore, they are not able to generate a high net worth because of all their expenses.

So if respected professionals such as doctors and attorneys do not constitute the millionaires, who are the true affluent? What do they do for a living? Where do they live? What do they drive? Well, you’d be very surprised. As identified by the authors, the following are you typical millionaires:

  • 80 percent are first-generation affluent and have never received any inheritance. You heard that right. Majority of millionaires are not trust fund babies or old money.
  • 66 percent are self-employed and owns a business. Surprisingly, most are in the blue-collar service. Yes, the plumber charging you $250 an hour to unclog and reset your toilet could be a millionaire especially if he has operated his own business for years.
  • $3.7 million is their average net worth.
  • 50 percent have occupied the same modest house for 20 years, is almost 60 years old, has 3 kids that are highly educated and never divorced.
  • 95 percent own stocks and invest 20 percent of their annual incomes, but only 10 percent are active investors, which means, majority of them buy and hold their investments for a length of time. Why is this? Because buying and selling stocks are expensive and millionaires spend more time studying and planning their move before investing. I suspect majority of them practices value investing. Why? Because investing is serious business and it takes time to fully analyze the true value of a company. To learn more, we have written a previous blog regarding value investing.

More importantly, according to the authors, there are seven common factors among these millionaires:

1. They live well below their means. Frugality is their lifestyle despite the media sensationalizing and portraying the rich and famous as big spenders. This simply is not true for most millionaires. Often, what we see on televisions are not reality and does not represent the lifestyles of majority of the millionaires. Although there are millionaires that lives in very affluent neighborhood and spend extravagantly; however, the super wealthy are only a relatively small fraction of the millionaires in this country. Not everyone can be Tiger Woods or Celine Dion with a net worth of over $500 million each respectively. As stated previously, the average net worth of millionaires is $3.7 million, which is an achievable goal for the average Americans.

2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth. Yes, the millionaires do budget. How do you think they are able to generate so much wealth in the first place? Planning and budgeting is an important part of their lives and they allocate 8.4 hours per month in reviewing their financial health while non-millionaires spend only 4.6 hours per month. According to the authors, “There is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future.” Also, building wealth is a team effort. The authors found that the wives are even more frugal than the husbands and actively participates in the financial management of their assets. In the book,  the wife of a millionaire continued clipping coupons even after her husband gave her a share of $8 million worth of stocks from the company he took public. You might think it’s ridiculous for anyone that rich to clip coupons, but being frugal is their key to building wealth.

3. They believe that financial independence is more important than displaying high social status. Because majority of the millionaires are in blue-collar industry, they are not expected to look the part. In a way, it’s to their advantage because it’s easier to build wealth if they do not feel the need to live a lavish lifestyles. Financial independence is their goal and could care less about looking rich. In other words, their priorities are different from the non-millionaires who are often bombarded by marketing to spend beyond their means so they are not able to save and invest for their future.

4. Their parents did not provide economic outpatient care. They never received any financial support from their parents. The authors have stated that “the more dollars adult children receive [from their parents], the fewer they accumulate, while those who are given fewer dollars accumulate more”. So the lesson learned here is to raise your kids to be financially independent.

5. Their adult children are economically self-sufficient. The less likely the parents provide financial assistance to adult children, the more successful their children will become because they are put in a situation to either “sink or swim”, which means no one will rescue them if they make bad financial decisions so the only option is to work hard and succeed. You are actually hurting your children if you provide them monetary support on a regular basis because they absolutely have no reason to succeed. Take note that sons and daughters of millionaires are more likely to become physicians and lawyers, but most of them would never reach the same level of financial success as their parents especially if they’ve adapted to the lavish lifestyle.

6. They are proficient in targeting market opportunities. The authors discuss that the best ways to make money is to sell products or services to those who already have money. “Very often those who supply the affluent become wealthy themselves.”

7. They chose the right occupation. “Self-employed people are four times more likely to be millionaires than those who work for others.”  Majority of the millionaires do not have exciting jobs in Wall Street or CEOs with golden parachutes. No, they are in the boring blue-collar business that a lot of people would view as less respectable. These are your  rice farmers, pest controllers, welding contractors, plumbers, scrap metal dealers, cattle ranchers, etc.

In summary, the media has distorted our perception of the rich. It is not about material possessions, but your net worth, which is the true indicator of wealth. Don’t judge e a book by its cover. A hobo looking man could be a millionaire although this is an extreme example. What the book implies is majority of rich people do not look the part, act the part and feel the need to display their wealth.

Nonetheless, you can still build wealth even if you are not self-employed. Besides, there is a considerable financial risk in entrepreneurship and 50 percent of small businesses fail within the first year according to the Small Business Administration. Owning and running a business is not for everyone, but accumulating a high net worth is still possible if you apply the common denominators discussed notwithstanding the profession. Be sure to live below your means by identifying between wants and needs and invest at least 20% of your income in the stock market. Don’t forget to read our previous articles especially How You Can Make Money Through Stock Market Investing. Overall, The Millionaire Next Door is certainly worth a read and highly recommended. It’s an eye opener to the lives of the multi-millionaires and as we have discovered, they certainly are not the ones keeping up with the Joneses or perhaps, nowadays, the Kardashians.

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D’ Intelligent investor is one of the first few updated value investing blogs in Asia and probably the only updated value investing blog in the Philippines where you can learn stock market investing through intelligent investing that makes business sense. The stock market investing strategies are very different from what most stock market players advocate. The strategies featured here are mainly value investing principles more specifically inclined with what are perceived to be Warren Buffett’s style of investing. Other value investing strategies by great value investors such as Benjamin Graham, Peter Lynch, John Boggle among others are also featured.