The Millionaire Next Door contains great insight into the habits of wealth builders. This article studies those insights and gives application suggestions for the reader.
Is it a coincidence that I came across the classic book, The Millionaire Next Door, twice in the past 24 hours? This classic book, written by Thomas J. Stanley, Ph.D. in 1996, has achieved “classic” status due to it’s unique analysis of the financial habits of those who are able to accumulate a net worth in excess of $1 million vs. those who are not.
The reality today: we all need to achieve a net worth in excess of $1 Million in order to be able to retire. We can all learn from the timeless lessons in this book.
Think about it: using the 4% withdrawal rate (see the “Income” article from my “When Can I Retire” series), a $1M investment portfolio would produce a $40,000 annual income in retirement. Even with social security, I suspect many are expecting a richer retirement.
One of the two connections I made to this book this week came via an article on CBS Marketwatch, which gives a good summary of the lessons contained within the book, and reminds us all that we will all need to become millionaires before retirement. The second was a comedic podcast done by The Money Guy show, whereby they did a musical montage for each of the “Seven Factors” of millionaires.
In today’s article, I’d like to highlight the seven factors identified by Dr. Stanley’s research that seperate the “accumulators”, and challenge you to incorporate as many of them as possible into your own life. It’s been interesting to me to see how similar many of my musings on this blog have been to the “Factors”. Perhaps we’re on to something here……
The Millionaire Next Door: The Seven Factors
1. They live well below their means.
The song “You Can’t Always Get What You Want” by the Rolling Stones is a great summary of this mindset. As I mentioned in my “Building Wealth” series, the key to building wealth is to spend less than you earn, and do it for a long time. The bigger the gap between earning and spending, the greater the savings and the shorter period of time you need to do it before you achieve financial independence. Straightforward math, but so few people really do it effectively.
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
As a reader of this blog, you realize the importance of studying the elements that lead to a great retirement. Congratulations – you’re allocating time in a way that’s conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
In our increasingly materialistic society, you must make a personal choice to avoid chasing the Jones’. You’ll never catch them, and it’s not worth the chase. There is, however, one way to beat them to the retirement finish line. Personally, I think this is one of the most important elements in financial planning to achieve early financial independence, and I focus on it consistently. I like Dave Ramsey’s quote:
4. Their parents did not provide economic outpatient care.
I like the term “economic outpatient care”. Today, we may call it “boomerang” living. Bottom line – those who realize they need to stand on their own two feet, are often the future millionaire next door. If you want to increase your children’s long term chances for success, don’t be overly willing to support them when it’s time for them to become independent. I’ll never forget my father’s words when I was in my late teens: “We’ll pay for your college as long as you chose to go, but once you’re done you must be out of the house within 90 days”. Sounds harsh, but I truly appreciate the clear guidance, and have done the same with my daughter.
5. Their adult children are economically self-sufficient
Interesting. Not only did the millionaires leave the nest when they grew their wings, but they’ve insisted on the same for their children. There’s a lesson here. I know it can be difficult, but at this point my wife and I have every intent to enforce self sufficiency. I think it’s critical as a building block for life long success. See my post: “College – For Life” for more on this topic.
6. They are proficient in targeting marketing opportunities
When you’ve spent less than you’ve earned for a few years, you build a stockpile of cash and investments that can begin working for you. Brian Preston at The Money Guy calls this an “army of dollar bills that work for you”. You’re the General over that army, and the millionaires know how to use that army to good effect. In time, that army can get big enough to generate enough investment income that you no longer need to work (which, by definition, is when you’ve achieved the point of financial independence, and may chose to retire).
7. They chose the right occupation.
There are three levers to financial freedom: earn more, spend less, invest wisely. While all three can have an impact, there is a natural limit to how much less you can spend (you do have to eat, after all). There is a natural limit to how much your investments can earn. Income, however, is theoretically unlimited. A big factor is chosing a profession where you can maximize your potential. The Money’s Guys choice of song for this factor: “Momma, don’t let your babies grow up to be Cowboys. Let ’em be doctors and lawyers and such…..”.
I realize that perhaps not all 7 of these factors are within your ability to control at this point in your life. No excuses. Pick 2 to focus on over the next 30 days. For example, I believe #1 and #3 can be an easy focus for any one, at any time. If your goal is to achieve a great retirement, there’s no time to waste.