Sometime in the last year or two I finally got around to listening to the audiobook of The Millionaire Next Door.
I’d come across the book and also heard from one of my favorite authors, that one of the key takeaways was the importance of managing your money. After hearing that, I actually felt less motivated to read the book but it would still cross my mind. Eventually I took the plunge and I’m glad that I did.
While this book is not one that I would necessarily recommend to someone who is just starting to learn about money (The Automatic Millionaire is a better starting point, look for the newer edition that came out around 2015). Still, this book has some key ideas that are incredibly helpful for each of us to understand.
Let me illustrate one of the important takeaways the same way that I would do it at one of my presentations.
Here are 2 people:
Bob, is a contractor, drives a Ford pick-up, makes about $80,000/year and lives in a middle-class area
John, is an attorney, drives a Lexus, makes over $150,000/year and lives in an upper income area
Of these 2 people, who do you think is wealthy?
Most people think that John is the wealthy person. While both people are made up, this example is based on research conducted by the book’s authors, Thomas J. Stanley and William Danko. And their research revealed a number of surprising things.
- Many wealthy people don’t live in fancy homes, drive fancy cars or wear expensive clothes.
- Many people who wear fancy clothes, drive fancy cars and live in ritzy neighborhoods are actually in debt.
This brings me to another important point – what is wealth?
That might seem like a crazy question because we think we know what wealth is. Wealth is money and we can tell when someone has money, right?
Wrong!
What we’re seeing are outward symbols that many people think show wealth. But those outward symbols don’t tell you what’s in their bank account.
Back to wealth. The way to measure wealth is a formula (don’t get scared by that word) called net worth. And it’s basically the value of what you own (assets) minus what you owe (debts/liabilities).
So, if you have a house that’s worth $300,000 but you owe $250,000 on it and you also have credit card debt of $10,000 and other debts of $12,000, then put together what you owe (250,000 +10,000+12,000=272,000). Then subtract that from the value of what you own (300,000-272,000= Net Worth of 28,000) (Want a short video explanation? Watch: What is Wealth?)
So, the person with the symbols of wealth (the car, the house, the clothes, etc) may not be wealthy after all (some are, some aren’t).
Meanwhile, you don’t see these outward symbols of wealth on people who are actually wealthy. They’re not building their wealth to impress you or anyone else. And not spending money on fancy clothes, cars and houses is part of how they save their money and get their money working for them.
In short they manage their money well. Even after they become wealthy, most of them continue to budget. Why? The book makes a great point on this by using the analogy of it being like the fit person who works out. They got fit by working out and now it’s part of who they are and how they continue to stay fit.
So, managing our money and avoiding spending on outward symbols of wealth and success are foundational to growing our wealth, instead of looking wealthy but walking around with maxed out credit cards in a high end designer bag.
Hmm…maybe it’s time to borrow that dieting expression and make it our new money mantra: “Nothing looks as good as wealth feels”
But, is there anything that the millionaires next door do spend money on?
Yes, they are willing to spend on education and services such as financial advisors.