The millionaire next door

[ringmastery]

Anyone read this book?

I found it very interesting. I'm not a millionaire, but I have accumulated much more wealth than my peers and because of that have a much higher standard of living. My dad grew up in the depression and instilled on me at an early age fiscal responsibility. Save and accumulate wealth. Do not "rent" your lifestyle through excessive consumer debt to keep up with the Jones'. It seems like common sense to me, but so many people fail to take it to heart and get sucked into the consumerism cycle.

http://www.washingtonpost.com/wp-srv/style/longterm/books/chap1/millionairenextdoor.htm

PAWs versus UAWs

PAWs are builders of wealth--that is, they are the best at building net worth compared to others in their income/age category. PAWs typically have a minimum of four times the wealth accumulated by UAWs. Contrasting the characteristics of PAWs and UAWs is one of the most revealing parts of the research we have conducted over the past twenty years.

A good example of the difference between PAWs and UAWs is revealed in two case studies. Mr. Miller "Bubba" Richards, age fifty, is the proprietor of a mobile-home dealership. His total household income last year was $90,200. Mr. Richards's net worth, as computed via the wealth equation, is expected to be $451,000. But "Bubba" is a PAW. His actual net worth is $1.1 million.

His counterpart is James H. Ford II. Mr. Ford, age fifty-one, is an attorney. His income last year was $92,330, slightly more than Mr. Richards's. What is Mr. Ford's actual net worth? His expected level of wealth? Mr. Ford's actual net worth is $226,511, while his expected level of wealth (again computed from the wealth equation) is $470,883. Mr. Ford, by our definition, is an under accumulator of wealth. Mr. Ford spent seven years in college. How can he possibly have less wealth than a mobile-home dealer? In fact, Mr. Richards has nearly five times the net worth of Mr. Ford. And remember, both are in the same income/age cohort. In trying to answer the above question ask yourself two simpler questions:

* How much money does it take to maintain the upper-middle-class lifestyle of an attorney and his family?

* How much money is required to maintain the middle-class or even blue-collar lifestyle of a mobile-home dealer and his family?

Clearly, Mr. Ford, the attorney, must spend significantly more of his household's income to maintain and display his family's higher upper-middle-class lifestyle. What make of motor vehicle is congruent with the status of an attorney? Foreign luxury, no doubt. Who needs to wear a different high-quality suit to work each day? Who needs to join one or more country clubs? Who needs expensive Tiffany silverware and serving trays?

Mr. Ford, the UAW, has a higher propensity to spend than do the members of the PAW group. UAWs tend to live above their means; they emphasize consumption. And they tend to de-emphasize many of the key factors that underlie wealth building.

[leftyandproud]

1. I read it...interesting stuff

real millionaires don't live like we think they do...They live like normal middle class Americans...Sacrifice...live on less than you make...don't go into needless debt...never buy a new car...common sense stuff

That's how they got rich in the first place.

[Warpy]

4. A million aint what it used to be.

It's now a middle class amount, adequate to keep one spouse in a nursing home should the need arise, but not enough to float a lavish lifestyle upon.

To be considered among the truly rich, you'd have to index that million to inflation. What was rich in 1950 now takes ten times as much to accomplish, or $10 million dollars in net worth.

[Overkil]

2. Rich Dad, Poor Dad......

is another good book on this subject. The line between what what we need to survive versus what we think we need to survive has become very blurred in this country.

[SheilaT]

3. I have also read the book and like it a lot.

It's difficult to live in this country and accumulate wealth, surrounded as we are by constant reminders to spend. Turning off the TV is one way to reduce some of that.

[kittykitty]

5. Great Book + Common Sense

That's how my parents did it--live below your means. I sent it to my son, but I'm sure it has fallen on deaf ears. But I would encourage everyone to read it and heed it!

[Nikia]

6. What good does it do to have money and not spend it?

I do think that many people live above their means and I want to try to save more money. Personally though, my maternal grandparents lived below their means, accumulated lots of money, had the convience of letting some money go because they didn't want to be bothered (like not suing the guy that caused the accident that cost my grandparents over $300,000 woth of medical bills and not moving into a house that they bought with cash and gave to my uncle), and never bought anything that they could have afforded or traveled. What good does having a couple millions dollars at the end of your life do? Why did you make lifestyle sacrafices to save money that you never use? Sure there are people that give it to their kids, but perhaps their kids would have appreciated new clothes, a nicer house, dance lessons, vacations, or other luxeries that you could have afforded while they were growing up and you were alive. I don't think that they necessarily made the best decision. Balance is key.

[ringmastery]

8. safety net

Your grandparents probably experienced the great depression. What saving does is give you peace of mind. You know that if everything goes to hell, you lose your job, whatever, that you won't be hungry or homeless and you'll still be able to maintain a reasonable lifestyle.

[Paranoid_Portlander]

13. You might need it for the nursing home.

My aunt accumulated almost $300,000 and refused to spend any of it on non-essentials. She did the right thing. She is now in a nursing home and the money will be wiped out in about 4 years.

[Yupster]

16. One thing to spend it on is

nursing home (long term care) insurance. Usually people of that generation are very good about buying the insurance they need. That would have been a good use for $ 100 per month or so.

[Yupster]

7. I'm a stockbroker, and I've learned

that the book is very true.

When I go to someone's house for the first time, I've learned that the address and look of the house has absolutely nothing to do with how much money the family has to invest.

Over 13 years, it has become routine to go to an average middle-class neighborhood and visit a family who rings out their financial forms and shows me that they have $ 800,000 in investments, no debt, and save $ 1,200 a month.

On the other hand, I also routinely go to very upper class neighborhoods and visit families who make $ 135,000 per year and have $ 5,000 in investments, $ 30,000 of credit card debt and don't save a dollar a month.

It doesn't even surprise me anymore. Some people always save no matter what they make, and other people never save no mattter what they make.

PS -- one of the worst cases of family overspending was by a budget director of a local government agency. Didn't make me feel too good about things.

[0rganism]

9. Makes assumptions galore, ignores exigencies of circumstance

> Clearly, Mr. Ford, the attorney, must spend significantly more of
> his household's income to maintain and display his family's higher
> upper-middle-class lifestyle

Perhaps Mr. Ford is paying off a significant college tuition debt from his "seven years in college".

Perhaps Mr. Ford is paying for two children to attend private colleges themselves.

Perhaps Mr. Ford has had to pay for a family member's long-term illness not covered by his HMO, followed by an expensive funeral.

Perhaps Mr. Ford has been the payer of a lawsuit penalty, or had to pay off his son's fine for cocaine posession.

Perhaps Mr. Ford gives a significant share of his salary to a favorite charity.

The reasons for Mr. Ford's lower level of wealth accumulation are not clear at all.

Similarly, Mr. Richards could be the inheritor of an estate, or the regular recipient of trust fund money. He may have less children, or see little value in supporting tertiary education for the children he does have.

We are LED to believe that their levels of accumulated wealth are due solely to lifestyle choices, but such a conclusion does not follow from the evidence presented here. Furthermore, we are assuming that wealth accumulation in itself is a desirable effect. By purchasing suits and cars and silverware, Mr. Ford has recirculated money through the businesses of those who sell suits, cars, and silverware. He has added to the economic multiplier of those dollars and, thus, the economic health of the nation.

Also, it's worth noting that both Mr. Ford and Mr. Richards have salaries well above the median, putting them both into the top 10% of income earners nationwide.

[mistertrickster]

10. I agree--it's the American "disease" to assume that people are

rich or poor based on personal decisions and "choices."

But on the other hand, it is certainly true that a lot of people could be a lot better off if they would just SLOW DOWN their spending.

I had an office mate that was all stressed out about 10K of credit card debt she had racked up by pure irresponsibility. So I tell her, you've got a two-year old Yukon and no kids at home. Sell the tank and buy a used econo-box and pay off your debt.

Good idea, she says. She unloads the gas guzzler for 25K, well done! First step complete. Then she goes out and buys a foreign sports car for 33 grand.

I rest my case . . .

[0rganism]

15. True enough

Some people are less-wealthy than they could be because of irresponsible consumption.

Some irresponsible consumers are less wealthy than they could be.

Niether set completely contains the other.

I know many people whose wealth has been compromised by "choices" that would be very hard to refuse. Do you pay for the expensive surgery, or let your child/spouse/sibling die? At what point does one say, "Well, keeping this person alive is outside of what we can reasonably afford to do..."

And even some of Mr. Ford's consumption given in the example could be seen as "an offer he can't refuse". Let's say he doesn't buy a few suits, for instance, and shows up at work in the same clothes day after day. He might well lose the prestige and respect of his peers that would get him the good cases otherwise. That could lead to his eventual layoff, instead of a senior partnership. We just don't know.

Some expenses aren't merely "for show", they're the opportunity cost of doing business.

[Yupster]

17. U used to recommend to people

to borrow against their retirement plans (401k or 403B) to pay off credit card bills.

I don't do it any more because I'd come back a year later and they'd have the retirement loan, and the credit cards will be right back to where they were.

Most people who spend too much are just going to spend too much. It really doesn't have much to do with income or education or anything. Some people just overspend.

[prariedogging]

11. so you believe in trickledown economics?

interesting viewpoint for being on this board

[0rganism]

14. Absolutely not! What I've mentioned is the OPPOSITE of trickle-down

Trickle-down is the notion that tax cuts given to rich capitalists will filter down to the median and below through employment and charitable giving. Supply-side stimulus is a bankrupt ideology, as it neglects the effects of overseas investments.

I'm talking about the DEMAND side multiplier effect, where a buck spent locally circulates locally, trickling UP to the rich capitalists. Such effects are stimulated by giving tax cuts and wage-increases to the non-investors.

[beyurslf]

12. Some of this is very true.

I underwrite mortgage loans and have declined people with income in excess of 300,000 a year on mortgages that are only 150,000. Why? Debt to income. They have literally 200k+ in credit card debt. Scares the shit out of me to think about that much. I often see people with credit card debt equal to annual income. They will never ever pay it off.

On the other hand, as 20something consumer, it is so hard to save. There is so much thrown at you to buy buy buy and we live in this culture that just thrives on it. Being young, professional, urban, gay... the cards are stacked against me. I try, but I sure don't have assets worth what is said I should by that formula.

[spotbird]

18. Gay is a savings plus.

Children suck money like you wouldn't believe. It gets worse as they age.

[Yupster]

19. Wow -- 200k !!!

The worst I've seen is 70 k. And the worst part is you can't even see where the money went.

If someone makes 100k a year and has 40 k in credit card debt, you should at least see neat things for the money. Usually not. The money was just pissed away.

[Fla_Democrat]

20. Yep, read it

recommended it and even given copies as gifts, along with The Wealthy Barber. :thumbsup: