Main lesson of the book: Wealth is built at a slow but constant pace
This was a very enjoyable read. This book doesn’t profess to have some kind of magical method to gain wealth. Nor does it claim to know the exact steps one needs to follow to become rich. All this book states is its research that comes with the perspective of the writers included. They went out of their way to conduct interviews and meet with millionaires. During their research they found several similarities that most if not all of the millionaire’s share. They have found 7 factors that are extremely beneficial to accumulating wealth.
Factor 1 – This might come as a surprise to you, but they also advocate frugality. You will have to spend less than you earn and build up your wealth over time. A very common theme in most books about finance.
Factor 2 – Spending time on your finances is the key to increasing your wealth. Which means that you will have to budget. You will have to know what you’re spending your money on, on a weekly, monthly and yes yearly basis. By controlling your spending and minimizing useless purchases you can increase what you save and use that to invest. Using your time to actually think about how you use and spend your money is a big step in accumulating wealth.
Factor 3 – The wealthy have this understanding that having money doesn’t equal displaying you have money. Displaying you have money or creating the illusion of it, requires a lot of time and well, MONEY. Which means that instead of building money to actually be rich, most people are spending it to look rich. Which is a very twisted way of doing things, but in this world it’s the common path most people tend to take. That is why this factor is about the importance of financial independence and how it is more important than showing those around you how well off you are.
Factor 4 – Most millionaires or at least self-made millionaires are extremely independent. Which means they never received their parents help financially. The book calls this parental financial help “Economic Outpatient Care”. Which is a very fitting term. The book also makes sure that the reader understands the consequences of said Economic Outpatient Care. But most millionaires never received any help from their parents.
Factor 5 – Not wanting help doesn’t always equal not needing help. By making sure that they are self sufficient financially, they have a higher chance of building their fortune. The reason for this is that money made is a lot more valuable than money given. Using your own money and living off of your own money will instill a sense of responsibility for your own actions and life.
Factor 6 – The wealthy are very capable of finding good market opportunities. This of course is coupled with their time and effort spent on making proper budgeting choices and researching the best possible investments.
Factor 7 – They are doing a job they love.
This book states a lot of great things about the value of money and how people tend to use or abuse it. The Millionaire Next Door divides people into 3 categories. PAW – Prodigious Accumulator of Wealth. AAW – Average Accumulator of Wealth and UAW – Under Accumulator of Wealth. The book of course focuses on the PAW and UAW group to show the biggest differences. PAW’s are always frugal in their spending. They don’t spend more than 500 USD on a suit or anything else they might wear for that matter. A very interesting point the book makes is that most millionaires are self-made within one generation. Which means they got their wealth within their own lifetime. But that is not the interesting point in itself, the book states that all their wealth will be gone by the next generation or the one after that. The reason for that is because most PAW’s are wealthy because they are PAW’s. But they forget to instill this quality in their children. Because the rich will often want to give their children all the beautiful things they didn’t have when growing up. So their children will grow up accustomed to a certain lifestyle. They are used to getting everything they want and of course what they want is of the highest quality with the matching price tag.
Consumption of high-quality luxury goods is the biggest destroyer of wealth for most people. This habit is often formed at childhood because of the environment they reside in. Another great point the book makes is that where you live and your occupation have a huge impact on your accumulation of wealth. Some profession requires you to look the part. And the part is never cheap. And if you live in a rich neighborhood you will need to drive what your neighbors drive, wear what your neighbors wear and go where your neighbors go. That is why most millionaires live in a middle-class neighborhood where they can control the cost of living either consciously or subconsciously.
Since a lot of people tend to live paycheck to paycheck they aren’t able to save. What is eye opening is that this goes for those who earn a lot of money as much as it does for those who don’t earn a lot. If you want to know where you stand on the wealth scale according to this book you can use the following calculation:
“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.”
So for example, if you are 35 and you make $100.000 a year you do: 100.000 x 35 = 3.500.000. And then 3.500.000 / 10 = 350.000 and that should be your net worth. If you have double this you are a PAW if you have this, you are a AAW and if you are below this number, you my dear friend are a UAW. I can promise you right here and now that most of us are UAW’s. The reason I started this whole journey of reading all these books is to get out of the UAW category. This was a really nice book to read and it really tackles the concept of looking rich versus being rich. The impact parents have on their children’s financial future can not be overstated enough. Just keep in mind that becoming wealthy isn’t about how much you make, its all about how much you keep. Playing defense when it comes to your money might just be more important than playing offense.