The Millionaire Next Door
The Surprising Secrets of America's Wealthy
I've heard about this book for several years but never bothered to pick it up. I found it at a garage sale this weekend and decided to spend the $1.00. I wasn't disappointed.
The Millionaire Next Door is based on research by Thomas J. Stanley, Ph.D., and William D. Danko, Ph.D. They studied American millionaires to determine what sets them apart. After all, if you want to be good at something, study those that are successful, right?
First, they define what "wealth" really is. It's not how much money you make. We've all heard of lottery players winning $20 million only to be broke five years later. What happened? They had a lot of money, but they consumed it. Likewise, a doctor or lawyer making $200,000 a year could give the appearance of wealth by living in a nice home, joining the country club, wearing $1,000 suits, and driving a luxury automobile. But if they spend what they make, they are no more wealthy than the school teacher down the street.
True wealth is not defined by material possessions. It's defined by how long you could sustain your lifestyle without working. That's different for everyone but they include a rather simple formula to help determine what you would need to consider yourself "wealthy."
Multiply your age times your realized pretax annual household income from all sources except inheritences.
Divide it by ten.
This, minus any inherited money, is what your net worth should be.
My problem with this is "net worth" can't always buy you a stick of gum. For example, if your net worth is tied up in real estate, you can't buy groceries with it or pay the doctor bill unless you sell it. I prefer to look at a combination of net worth and cash flow. For example, I am investing in real estate that provides a monthly income. The net value of that real estate doesn't matter but the monthly income does. If I own ten single-family homes outright and they each rent for $1,000 a month, I would have $10,000 a month to live off of. It doesn't really matter that the houses are worth $2 million!
It was an easy book to read with dozens of tables from studies conducted. The edition I read was written in 1996 so an updated version would be better. It wasn't earth-shattering but was a nice reminder of things I already knew with a few surprises mixed in.
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