Thomas J. Stanley, William D. Danko
I borrowed The Millionaire Next Door from my local library after seeing it on the must-read list of the great blogger Fabulously Broke in the City. FB wrote that this book changed her perspective on personal finance and wealth building and I couldn’t agree more. While the edition I read is outdated (1996), the characteristics of a millionaire next door remain relevant and revealing. In fact, this book could have predicted the recent real-estate crisis and recession in the
USA due to the hyper-consumption of ’s affluent. America
The biggest ‘aha’ moment for me in this book was realizing the difference between the wealthy and the affluent. They are not the same people! The wealthy are resource accumulators who invest in assets that will appreciate in value. The wealthy live below their means and focus their time on wealth creation. The affluent are high-spenders who purchase consumer goods and services at a rapid rate in order to create a rich lifestyle.
So who is your millionaire next door? I encourage you to read this book as it’s full of real-life anecdotes, but I will create an example that I’ve taken-away from this book. Let’s consider two brothers: Bert the high income earning dentist and Ernie the modest self-employed electrician. Both are approaching their fifties, married, with 2 kids.
Your gut instinct is to presume that Bert is the wealthiest of the two brothers after all, he is a high-income earner, lives in a posh neighbourhood full of other professionals of similar careers, owns a 6 bedroom home, sends his 2 kids to private school, drives a BMW while his wife has a Lexus, recently took a cruise with his family and on the weekend, frequently jet boats on the lake. Bert must be wealthy to have such an extravagant lifestyle! But let’s take a step-back for a moment and consider Bert’s path to richness.
He likely spent 7 years in dental school and accumulated $100k in student loans by the time he finally graduated. When he started his dentistry, he wanted to live in a neighbourhood of like-minded professionals and he likely maxed out his mortgage rather than building a down payment towards his house. The annual property taxes likely exceed his initial down payment. Once in the neighbourhood, Bert’s wife grew concerned that that the local public schools had poor ratings for education so she made a plea to send her kids to a private school. Chances are that their parents are funding half the private school tuition for their grandchildren so while this was initially a “great deal”, Bert is now paying out of pocket several thousands of dollars a year just so his kids can keep up with their friends. As for his lavish vacation and jet boat? Credit cards, credit credits, credit cards.
While Bert wants to build for retirement, he spends less than 1 hour a month managing his money and will only spend about $300 a year for professional financial services. He works close to 60 hours a week and believes that the more he works, the better his retirement will be. Unfortunately, he is spending his $110k income faster than he earns it and as a result, Bert is living an affluent lifestyle but is far from wealthy.
Then on the flipside, you have his brother Ernie who lives with his family several blocks away from Bert in a modest neighbourhood of semi's and apartment buildings. Ernie’s house has 3 bedrooms so his children have to share a room, and he’s been driving the same
for the last 6 years while his wife just bought a “new” second-hand Volkswagon Jetta. Ernie is self-employed and has a roster of 100 customers that regularly call on his company for plumbing services. He does excellent work in a timely fashion and is constantly receiving new referrals. Ernie wears a uniform to work and blends in with his employees. He works about 40 hours a week, and likely earned $55k last year. His children go to the local public school and perhaps next year, they will drive to Toyota for a family vacation at Disney World. But get this… Ernie is wealthy and likely has $800k in assets. How did he do that? Florida
While his brother was in dental school, Ernie spent only 2 years at college and started his business right away. He had 5 years less of student loans to pay back and as a result, a 5 year start on earning a living. As a plumber, Ernie didn’t feel the need to live in a high-income neighbourhood or purchase a BMW every 2 years. After all, what would his customers or employees think if they saw a lavish house or a stylish car? They would assume that Ernie is making too much money off them and likely take their business elsewhere. Ernie has purposely chosen to live below his means and used his income for asset creation. For instance, Ernie owns several industrial properties as investments, maxes out his RRSPs each year as well as his children’s RESPs, has no credit card debt and has never accepted cash gifts from his parents. Ernie spends 1 hour a week managing his wealth and pays close to $3000 a year for professional wealth advisors and tax attorney services. At 50, he will own his house fully and will likely retire a year or two after that.
My example of Bert & Ernie does not mean that all dentists are lavish & poor and all plumbers are modest & wealthy, but I wanted to share the difference in Bert & Ernie’s mindset. Millionaires don’t go around buying jet boats and designer suits as the The Millionaire Next Door reveals that a millionaire likely drives a used-vehicle and has never paid more than $80 for a pair of jeans. Millionaires are constantly looking for assets that will appreciate, are committed to creating wealth and eager to protect the value of their wealth while they seek to minimize frivolous spending on consumer goods. This is an informative read on America's millionaires, their lifestyles, how they created their wealth and how they invest. The material is easy to absorb and it is definitely thought-provoking. At the end of the day, I'd rather be wealthy than appear affluent.
My key take-aways from this book:
1. Revisit my goal of finding a personal financial advisor. I think I need to find a personal wealth advisor, but I’m not sure where to start looking.
2. Start evaluating my net-worth alongside my monthly budgets.
3. Continue to live below my means and avoid the pressure of keeping up to keep up with the Jones.