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Most Millionaires are like the X-men: Superhumans among regular people

Updated: Oct 4

In this post we are going to take a break from stocks and discuss a book I reviewed for my school project.


The book is called The Millionaire Next Door by Thomas J. Stanley and William D. Danko. It was originally published back in 1996 and was very popular. The book is very relevant today and I recommend people read this book this summer.


“These people cannot be millionaires! They don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires--they don’t even have millionaire names.”


The book explains in detail that the popular concept of a millionaire is false and that most millionaires live very simple lives among regular people. It also details that many high income professionals such as doctors, lawyers, executives and engineers are not rich. These people fail to accumulate any lasting wealth. They look rich and might feel rich but they are not wealthy.


Most millionaires in the book live below their means. They wear regular clothes, save and invest their money. Many people who have a great deal of wealth do not live in upscale neighborhoods. They don’t spend $5,000 on watches or drive new luxury cars. They budget and watch where they spend their money. They believe that a $100 watch tells the same time as a $5,000 one. They believe being frugal is the key of wealth building. They always live below their means and don’t care what other people think of them.


The big takeaway from the book was that these Millionaires blend in with everyone else, they don’t stick out. They remind me of the X-men movies where the mutants blend in with regular people. The mutants have superpowers but they don’t want regular people to know, afraid of what regular people might think of them once they find out. I can see that. The millionaires in the book like to be left alone.


“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. Wealth is what you accumulate, not what you spend.”


The book focuses on Net Worth which is defined as the current value of one’s assets (house, stocks) less liabilities (mortgages and credit card bills). The banks will look at your net worth before giving you a loan. The millionaires in the book are focused on increasing their net worth. That is why they avoid loans to buy things that may have no value in a few years.


Most of them live in a modest home for decades but have no mortgage. They view a new car as a depreciating asset, it decreases in value each year. A brand new high end Mercedes might be $100,000 but might only be worth $30,000 after five years. That is why these people don’t like to buy new cars, they prefer used cars and have no car payments. The millionaires know exactly how much they spend every month. This all increases their net worth.


Many high income/low net worth people, such as doctors and lawyers, have no idea how much they spend each month. Their expenses are basically out of control which makes it difficult to increase their net worth. They don’t have much in assets but many liabilities such as huge mortgages, car payments and credit card bills.


How can well-educated, high-income people be so naive about money? They don’t want to sacrifice high consumption today for financial independence tomorrow. This requires patience, planning and of course sacrifice.


Successful doctors, lawyers, accountants, executives believe they are expected to live in expensive homes. They also are expected to dress well, drive nice cars, go on exotic vacations and send their kids to expensive private schools. If they didn’t then people might think that they were not successful. The book details that they constantly need to convince others of their success. I guess it makes sense to some degree. Would you hire a lawyer for an important case if he showed up in an old pick up truck in ripped jeans with a baseball hat?


The book also details that nearly 95% of millionaires they talked to owned stocks that they held for the long-term. They didn’t constantly buy and sell stocks. While people who display high consumption lifestyles have little or no investments or appreciable assets like dividend paying stocks. They keep whatever money they have in savings accounts so they can access it quickly if they need to pay for something, like a vacation.


“Self employment plays a major part in building a higher net worth.”


The book states that self-employed people are four times more likely to be millionaires than those who work for others. A person who owns a small plumbing company will most likely have a higher net worth then a Vice President of a local credit union.


The book details that people who are self employed end up paying less taxes overall then someone working full-time at a company, even if they earned the same money. Income tax is high, depending on income it could be as high as 50%. So a lawyer making $200,000 a year could end up paying up to $100,00 in just income taxes alone. Entrepreneurs have more flexibility with taxes because they can write off expenses such as new vehicles and pay themselves a smaller salary reducing taxes they would have to pay. People who work full-time at companies or government jobs can’t do that. That is why entrepreneurs account for a large number of the millionaires in this book. They keep more of the money they earn.


The book states that after some basic post secondary education, the relationship between higher education and wealth accumulation is actually negative. Entrepreneurs generally begin earning money earlier in life (enabling them to start saving earlier) than professionals who go through many years of higher education without earning money. Most doctors and lawyers could spend up to ten years in school before they start working. Most business owners had “some” college level education.


The millionaires in the book did not get rich overnight. They worked on their businesses for decades, saved and invested. They used compound interest to their advantage.


This book changed my views on who millionaires are and how they manage to keep their money. They watch where they spend money, acquire assets like stocks that grow, don’t try to show off by buying expensive houses and cars and really don’t care about what people think about them.


 

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