Today I’d like to introduce you to my awesome best friend Katie. In addition to being one of my best buddies and very first guest blogger (yay!), she was also the witness to the infamous shark tank incident on the high school aquatic science summer trip of 2003 (You remember, the chick rolling in the aquarium laughing so hard she was crying? Yeah, that one). We share an undying love for reading, snowcones, and alligators. She’s crazy smart and is an immensely talented writer. Back in college (before I even knew what blogging was!) she’d write a column called “Katie’s Kronicles” and email it out monthly. Boy, was that some good reading! Today she’s in grad school and the mother to a sweet little toddler. So, please welcome my friend Katie! She’s a real gem – I’m sure you’ll think so too!
Ever played the board game “Life”? You know, the one where you put your little blue or pink person into your free car, take a free $10,000 from the bank, and spin the wheel of opportunity that will decide your fate? While this game clearly represents real life to a T, it was often surprising at the end of the game which players could retire at Millionaire Estates and who shuffled off to the less cushy Countryside Acres. The person who drew the $100,000 salary card could land on all the wrong spaces, while someone with only half that salary could get lucky and end up with the most money at the end.
I was reminded of this game this week as I read “The Millionaire Next Door” by Thomas Stanley and William Danko. This book completely debunks the myth of what the life of a millionaire looks like. Most of us assume that only the Bill Gates and Tim Duncans of the world will ever see seven digits in their financial portfolio, but this is far from the truth. More than 80% of the country’s millionaires are ordinary people who have accumulated their wealth in one generation. These are the 7 common denominators among those who successfully build wealth:
1. They live well below their means. I think it’s important to emphasize here that they still live nice lives – we’re not talking Ramen noodles, rags for clothes, shivering in a cardboard box. They live comfortably. But they shop the sales and buy used cars. They live in middle-class neighborhoods. They track expenses, budget, set financial goals, and spend time planning for their financial futures. Sound familiar? Not so different from most of us (as-of-yet) nonmillionaires. Also, most of the wives of these men are planners and meticulous budgeters. My favorite quote from the whole book is “I can’t get my wife to spend any money!” Love it! My hubby can definitely relate to that one. Why would I buy a tea kettle when I can just boil my water in a pot? Who says I can’t get a toddler in and out of the backseat of a 2-door car? Let’s try eating vegan for awhile, babe – meat is so expensive! ;)
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth. They spend less time spending and more time investing, less time shopping and more time researching and managing their assets.
3. They believe that financial independence is more important than displaying high social status. The authors draw a distinction between those with high income and those with high net worth. Often, the driver of the Rolls Royce is one with high income/low net worth and high consumption habits. The one with high net worth is driving a 3-year-old Ford.
4. Their parents did not provide economic outpatient care. This goes back to the fact that most millionaires are first-generation wealthy. So while some may have received help with tuition, most did not receive any financial help from their parents once they reached adulthood.
5. Their adult children are economically self-sufficient. Even though they are wealthy, this population does not provide a life of leisure for their children. They teach their children to be independent, frugal, and achievement oriented, as opposed to the high consumption “one earns to spend” motto.
6. They are proficient in targeting market opportunities. With wealth growing nearly six times faster than the household population (at the time this was written in 1996), opportunities to serve the wealthy will be greater than ever.
7. They chose the right occupation. You can’t predict whether someone is a millionaire by the type of business they are in – people from ALL career fields are included in this population. But self-employed people are four times more likely to be millionaires than those who work for others. And education is valued by the wealthy, because in a worst case scenario, “They can take your business, but they can’t take your intellect.”
A couple rules of thumb from the book: If you’re not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income; set aside for investing purposes at least 15% of your pretax income each year; buy vehicles that are at least 2-3 years old, since they depreciate most quickly in those first couple years.
You may be asking, “Why do I want to become a millionaire if I don’t get to live the high life?” I love the fact that the authors use the term “financially independent” to describe the wealthy. This means that these people will never have to depend on anyone else for anything financial. If they become disabled; if their children require expensive medical care; if the government raises income taxes to 98%; if a volcano destroys their every possession; and if they are lucky enough to live to the ripe old age of 140 – they will always be able to care for themselves and their families. What a dream, huh?
Overall, this book was absolutely fascinating and hugely practical, as well as being a surprisingly quick, fun, and easy read. And since it’s not brand new, you probably won’t have to be number 227 on the hold list at the library for it. So Ms. Lara, shall we agree to meet for some underwater basket weaving at Millionaire Estates in about 50 years? I’ll see you there! ;)
– Katie
