Book of the Week: The Millionaire Next Door

14 Feb 2015

I forgot why I wanted to read The Millionaire Next Door. It was probably mentioned in another book. After reading Rich Dad, Poor Dad and I Will Teach You To Be Rich, I was getting tired of reading books about the wealthy. This book was written by two PhDs that study wealthy people. Some areas of the book are heavily focused on material from their research like how the wealthy buy cars. They had the data, so they shoved it into the book. This is a book about the wealthy, not a book on how to become wealthy. 7 Common Denominators of Wealthy People

• They live well below their means.
• They allocate their time, energy, and money efficiently, in ways conducive to building wealth
• They believe that financial independence is more important than displaying high social status
• Their parents did not provide economic outpatient care.
• Their adult children are economically self-sufficient.
• They are proficient in targeting market opportunities
• They chose the right occupation.

Wealthy People Defined For the purposes of the book, they give a simple rule to see if you’re wealthy. Take your age and multiply it by your pretax annual household income and dividing that by ten. This is what your net worth should be. To be wealthy is to have twice the expected level of wealth. A 40 year old software engineer making $100k a year should have $800k in net worth to be considered wealthy. A 25 year old making $30k a year should have $150k in net worth to be considered wealthy. Big Hat No Cattle

Have you ever noticed those people whom you see jogging day after day? They are the ones who seem not to need to jog. But that’s why they are fit. Those who are wealthy work at staying financially fit. But those who are not financially fit do little to change their status.

Asking a rancher how big his herd is, is like asking him how much money he has. To become rich, he puts his money back into appreciating assets. The wealthy spend well below their means, so no big hat for the cattle. Frugality is an important trait.

1. Were your parents frugal?
2. Are you frugal?
3. Is your spouse more frugal than you are?

For the purposes of the studies, most of the people interviewed were probably men and the spouse refers to the wife. The authors have been studying wealth for decades. The third question is probably one of the most important factors in determining if you will become wealthy or not. Rules For Affluent Parents and Productive Children

1. Never tell children that their parents are wealthy.
2. No matter how wealthy you are, teach your children discipline and frugality.
3. Assure that your children won’t realize you’re affluent until after they have established a mature, disciplined, and adult lifestyle and profession.
4. Minimize discussions of items that each child and grandchild will inherit or receive as gifts.
5. Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
6. Stray out of your adult children’s family matters.
7. Don’t try to compete with your children.
8. Always remember that your children are individuals.
9. Emphasize your children’s achievements, no matter how small, not their or your symbols of success.
10. Tell your children that their are a lot of things more valuable than money.

That’s a lot of rules. Usually kids of rich parents are useless money leeches. Millionaires Among Us About 2.07% of people in San Francisco are millionaires (net worth > $1M), so it is more like the millionaire on the bus rather than the millionaire next door.