The millionaire next door is one of my top books of all time. This great financial manuscript was one of the reasons which got me serious about saving and investing in 2014. Even though this was a good thing, it is a shame that I had this awakening when I was just about 30 years old.
Had I discovered this text before this, things would been a lot better financially. Since there is no point crying over spilt milk, I will lay out some of the best lessons in the book and other useful advice in this post and on this site. Hopefully, this information will help others as much as it has helped me. This stuff is like gold dust and makes me want to keep learning more and more about personal finance.
The real millionaires are not what you think
In order to think like and develop the plan to be wealthy you need to acknowledge that the perceptions which most people have of the rich are baseless and often misleading. Wealthy people are often thought to be big spenders who splash their cash at every opportunity possible, for example by driving Chelsea Tractors (huge cars in an urban environment), owning McMansions or flashing shiny blinging jewellery.
Despite what it seems, these may be cases of “big hat no cattle” with the individuals drowning in all kinds of debt, just to look the part. It is important to build a solid financial foundation by living well within your means rather than trying to keep up with the Joneses.
Playing defence is great
One of the first things that people think of when they want to become wealthier is “How can I earn more money?”. Even though it helps if more income is available it is a lot more achievable to become wealthier but cutting expenses. The millionaire next door book describes the process of earning money as “offence” while “defence” is cutting down on expenditure. Employees would have to jump through a few hoops if they concentrate on the offence side. Getting a pay rise is getting tougher these days with earnings failing to keep up with inflation. Therefore it is more effective to be frugal where necessary to free up cash for investing.
Think Net Worth rather than income
In an income focused society, you hear more of “How much does that person earn?” than how much the individual is actually worth. Governments, politicians and other authorities are well aware of this obsession and they do their best to strike where it hurts. By this, I mean that higher taxes are usually aimed at the easy pickings of higher earners’ incomes rather than at accumulated capital which would be hard for them to deal with. This is how the rich keep getting richer. Highly paid professionals such as doctors can end up struggling financially when a loss of income is experienced as evidenced in the book.
The table above illustrates the impact of taxes on income in the UK. In contrast, investments held in Individual Savings Accounts (ISA) are completely tax free. UK investors can put away up to £20,000 a year into these ISAs and therefore can build substantial assets in these accounts over time. Imagine all this being tax free for life, including capital gains and dividends! Income will appear overrated – the more you earn and harder you work, the harder you get taxed.
Avoid economic outpatient care for adult children
Other interesting insight from the book is the impact of parents providing excessive financial aid to their grown up children. This “economic outpatient care” is usually for things such as car purchase, private school fees and help to buy property (Bank of Mum and Dad). Such assistance can lead to lack of initiative and crippling the finances of the recipients.
An example cited in the book is when wealthy parents assist with a deposit on a house in an expensive area for their less well off adult children, leaving the children to struggle with high mortgage payments, fees and property maintenance costs. Living in such a neighbourhood would also leave the children to handle pressures of fitting in within a high status area. Indeed, the research presented shows that those who have not received financial handouts are more likely to be wealthier than those who did.
The millionaire next door is truly a great read and it is also available as an audiobook. The most important thing is to have a mindset of continually optimising you lifestyle choices, so that as much saving can be done to release cash flow for investing into the appropriated funds. Focus on building income generating assets and reducing liabilities. By following these steps, you may not become an actual millionaire but close to it and certainly be more prosperous than you would otherwise have been.