The Millionaire Next Door Summary
The Millionaire Next Door is definitely worth your time to read, it shows you the major distinction between two groups of people. One group will lead your way to financial independence, the authors define as Prodigious Accumulators of Wealth (“PAW”). The other group will contribute your way to become a big-hat-no-cattle-type, in the book, the authors call them as Under Accumulators of Wealth (“UAM”).
I think repeatedly through the whole book, the authors try to make their points crossed loud and clear, a high-income earner does not equate to bring a high net-worth individual. In fact, often those that are in the highest income earning positions are the least likely to become millionaires due to the lifestyle and spending habits.
Nowadays becoming a millionaire is not really hard for everyone, our goal is becoming multi-millionaire. As this book points out, they are not rocket science, just planning well, living below your means, avoiding a few stupid mistakes, and disciplining with the rules, without highest income, you still can become a millionaire or even a multi-millionaire. Are you interesting to know how?
Here are the major lessons that should be taken away from this book:
- Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self discipline. If you are willing to make the necessary trade-offs of your time, energy, and consumption habits, however, you can begin building wealth and achieving financial independence. The PAWs have the following traits:
- They live well below their means
- They allocate their time, energy, and money efficiently, in ways conductive to building wealth
- PAWs allocate nearly twice the number of hours per month to planning their financial investments as UAWs do
- They believe that financial independence is more important than displaying high social status
- Their parents did not provide economic outpatient care
- Their adult children are economically self-sufficient. The more dollars adult children receive, the fewer dollars they accumulate, which those who are given fewer dollars accumulate more
- They are proficient in targeting market opportunities
- They chose the right occupation. Self-employment is a major positive correlate of wealth
- Being frugal is the cornerstone of wealth-building. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning
- They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way
- To build wealth, you need to minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow). How would you minimize your tax bill? By investing heavily in tax-free municipals, tax-sheltered real estate, and stocks with unrealized gains. When it comes to the allocation of their time, They place the management of their own assets before their other activities
- Once you’re in a high-income bracket, say $100,000 or $200,000 or more. It matters less how much more you make than what you do with what you already have
- 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
- Begin earning and investing early in your adult life
- They know that planning, budgeting, and being frugal are essential parts of building wealth, even for very high-income producers who must live below their means if they intend to become financially independent
- Planning and wealth accumulation are significant correlates even among investors with modest incomes. Planning is only one of many key ingredients in building wealth. They tend to have a greater percentage of their wealth invested in privately held/closely held businesses, commercial real estate, publicly trade equities, their pension plans/annuities and other tax-deferred categories. These types of investments require planning
- Being frugal is a major reason members of the used vehicle-prone group are wealthy. Being Frugal provides them with a dollar base to invest. In fact, they invest a significantly larger portion of their annual income than do any of the other types of vehicle buyers
- It’s much easier in America to earn a lot than it is to accumulate wealth
- This book also provided a formula on how to calculate your net worth
- Multiple your age times your realized pretax annual household income from all sources except inheritances/10, is what your net worth should be. To be well positioned in the PAW category, you should be worth twice the level of wealth expected
- Select the right CPAs will help you to accumulate wealth. Some CPAs are better than others at helping clients accumulate wealth. Interview several. Choose the one who has the highest concentration of PAWs as clients. The follow are the two criteria when PAW select the CPAs:
- First the CPAs were recommended by professors of accounting
- Second, the CPAs were initially hired out of college by major accounting firms and later started their own successful accounting firms. They find that many of the very best CPAs and financial planners follow this career path
One last point is that financially independent people are happier than those are their same income/age cohort who are not financially secure.
I recommend this book to young adults who just start their first job after college, or someone settled well into their career, but now realize they are not as well on their way as they would like to be.
Let me know what you think about this book from the comment area below!
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