The Millionaire Next Door one of the classical books on finance. The book can be described as a biography of American millionaires and it provides insights on their habits – what car they drive, where they shop, how they invest and how they became millionaires.
Though the book doesn’t provide a step by step program on becoming a millionaire, the stories in the book give the reader how he or she can become a millionaire as well.
The book shows that millionaires systematically saved and invested their way to wealth. They don’t live in mansions or drive flashy cars but are instead frugal people who live below their means.
The millionaires don’t chase status and live in modest neighborhoods. They rarely sell their investments, preferring to hold them for long term gain.
UAWs and PAWs
The term Under Accumulator of Wealth (UAW) is used to represent people who have low wealth relative to their income. The authors note that the UAW style is based more on consumption than savings of income.
Prodigious Accumulators of Wealth (PAW), on the other hand, accumulate a good amount of money relative to their income. Many millionaires the authors studied were PAWs.
The authors introduce a formula to define an Average Accumulator of Wealth (AAW). AAW is calculated as follows:
Net Worth = (Age x Current Total Income From All Sources)/10
Let’s take a 50-year old doctor who earns $250,000. If his net worth as calculated by the formula above is below $1.5 million, he is considered a UAW. On the other hand, if someone making just $50,000 a year has a net worth more than $250,000, he is considered a PAW.
Critics of the authors’ formula have argued that the formula ignores the fact that older people benefit from their assets compounding whereas younger people don’t.
Here are the common traits shared by the millionaires the authors studied.
Millionaires live below their means.
This makes logical sense. You cannot accumulate great wealth if you spend more than what you have.
They spend their time and money in ways leading to wealth.
Millionaires spent time planning their investments. They made it a priority to invest their time in managing their investments before spending time on other things.
They do not worry about social status. They preferred financial independence instead.
The book notes that many doctors and lawyers have low wealth relative to their income because they are trying to keep up with their peers. Millionaires, on the other hand, don’t try to keep up with the Joneses.
They did not receive financial assistance from their parents.
They accumulated wealth on their own. They rarely inherited large amounts of money. This gave them the incentive to save and invest their assets over time.
They don’t financially support their children.
Not financially supporting grown-up kids frees up money for savings and investments. This, in turn, helps them accumulate wealth to become millionaires.
They work in the right jobs. Many millionaires work for themselves
Many millionaires worked in jobs that allowed them to grow earnings over time. Many of them owned businesses, which allowed them to minimize taxes and accumulate assets.
Millionaire Next Door is a classic personal finance book with interesting anecdotes from millionaires. The book breaks down the habits that helped them accumulate wealth over the years. It’s recommended reading for anyone looking to build good financial habits.