The Millionaire Next Door - Book Summary

Unlock the secrets of millionaire's lifestyle

Is your idea of a millionaire lifestyle drenched in opulence? Do you imagine private jets, mega-yachts, exotic cars, and extravagant mansions? That might sound like a scene from a Hollywood blockbuster, but it's far from the reality of most millionaires.

Instead, it's the quiet unpretentiousness that defines America's wealthy. Surprisingly, their seemingly 'ordinary' lifestyle is what catapulted them into the realm of millionaires.

This narrative journey unravels the reality behind the millionaire myth, offering valuable insights into how careful financial planning and a dedication to modest living can pave the way to incredible wealth.

As we explore, we will delve into:

— Why the gentleman in the Bentley may not be as rich as you think,

— The crucial period for starting to save money, and

— How indulging kids with easy money could lead to a larger share of their millionaire parents' fortune.

The simple and silent lifestyle of millionaires

Who wouldn't fancy sipping champagne for breakfast, decked out in designer labels, if they were millionaires? Well, contrary to popular belief, many real millionaires prefer a more frugal lifestyle. They might even be more budget-conscious than the average person — and that is exactly their secret to maintaining their wealth.

The journey to millionaire status often begins with careful saving, especially once you start earning more than your basic living costs. It's all about restraint and resisting the lure of buying things you don't need.

The lion's share of self-made millionaires come from unassuming backgrounds. Their monumental wealth was built up slowly, by saving consistently from their monthly earnings. You don't need an eye-popping annual income to join their ranks; all you need is self-discipline and a well-maintained budget.

The power of long-term thinking and future planning is another crucial factor. A research study examining millionaire habits revealed that, for every 100 millionaires not budgeting or planning their finances, there were 120 who were diligently keeping tabs on their money.

So, if you're aiming for that seven-figure bank balance, start by setting financial goals, such as a retirement savings target. Then, build a strategic plan that outlines your expenses, living costs, and potential investments.

Take a leaf out of Mrs. and Mr. Rule's book. This millionaire couple's primary goal is financial independence by the time they retire, with a cool $5 million nest egg. To achieve this, they meticulously distribute their time and money between continuing to grow their business and saving money for strategic investments, such as real estate or home improvements.

Financial freedom trumps fancy showmanship

Contrary to popular belief, many millionaires don't yearn for a garage full of Rolls-Royces. Instead, they are more drawn to financial independence. This assurance of self-reliance and security plays an essential role in overall happiness. Indeed, amongst those with similar incomes, the ones who've achieved financial independence report higher satisfaction levels than those who haven't.

So what does financial independence entail? It's the ability to maintain your current lifestyle even after retirement and weather unforeseen financial storms with ease.

Those blessed with financial freedom are often crystal clear about their future goals. This clarity allows them to structure their household budgets in alignment with their priorities.

Let's circle back to the Rule family for a moment. Mrs. Rule's financial security means she is happy and self-reliant. Even in the face of physical adversity, she would not need to depend on anyone financially. Moreover, she has the means to set funds aside for her grandchildren's college education.

There's a common stereotype about American millionaires, encapsulated in the phrase "big-hat-no-cattle". It describes individuals who embody the appearance of wealth, akin to a prosperous rancher, without owning any assets (the proverbial cattle). They drive expensive cars, while their incomes remain average. Even with decent earnings, they find it difficult to amass significant wealth.

In simpler terms, their financial status doesn't live up to their showy lifestyle. To estimate an individual's expected wealth, you can use a simple formula: multiply the person's age by their pre-tax annual household income and then divide by ten.

Take Mr. Friend as an example. In one year, he earned $221,000. At the age of 48, his expected wealth, as per the formula, would be approximately $1,060,800. But due to his extravagant spending habits, Mr. Friend's actual net worth is less than $260,000. So, he's far from being a millionaire. He's merely a "big-hat-no-cattle" fellow or, in other words, an under-accumulator of wealth. His real net worth falls significantly short of its potential.

Investment wisdom of millionaires: Stick to what you know

Have you ever wondered how the rich decide where to put their money? The savviest of millionaires are known to prioritize spending on healthcare for their family and boosting their business productivity. These individuals are typically thrifty in most aspects of life, but when it comes to investment advice, tax consultation, or health care, they don't skimp on spending.

Similarly, they have an eye for identifying products or services that can improve their businesses — be it more office space or an advanced computer software.

Consider Mr. South, a real-life millionaire. He has no interest in a showy car like a Rolls-Royce — in his modest neighborhood, it would simply attract unwanted attention. Instead, he discerns that investing in his grandchildren's dental care is a far wiser use of his resources.

Smart spending goes hand in hand with smart planning. Millionaires devote considerable time to planning their investments, and as a result, often reap greater rewards than those who overlook this vital step.

But remember, if you aspire to grow your wealth by investing in specific sectors, you must make detailed plans and arm yourself with knowledge. Everyone possesses expertise in at least one field, so leverage that when deciding on your investments.

For instance, Mrs. Smith, an experienced auctioneer specializing in commercial real estate, would naturally fare better investing in her field of expertise. On the other hand, Mr. Long, with his extensive knowledge of antique furniture, would be well advised to steer clear of high-tech securities and stay within his comfort zone. It's always prudent to invest in what you understand best.

The millionaire's paradox: Helping their children could be hindering them

Have you ever wondered how the offspring of millionaires live? Interestingly, most wealthy parents don't smother their children with financial support.

Despite their frugality, many millionaires are generous when it comes to providing economic outpatient care. This practice involves giving their children monthly allowances, covering medical expenses, education costs, and more.

However, this generosity can be a double-edged sword. The more financial support the adult children of wealthy parents receive, the less they tend to save themselves — and vice versa.

Unwittingly, some millionaires foster financial dependency in their adult children, impairing their ability to budget and manage money wisely. In fact, over 46% of affluent Americans support their adult children or grandchildren with annual gifts or cash exceeding $15,000.

Meet Mary, for example. Since her marriage, she receives an annual $15,000 from her parents. Now in her early 50s, Mary and her husband possess all the trappings of affluence — upscale cars, a desirable neighborhood, country club membership, and involvement in multiple non-profit organizations. To outsiders, they appear to be millionaires. The reality? They've never earned more than $60,000 a year.

Your spending and saving habits profoundly influence your children's buying behaviors. Every family has its rules regarding investing and purchasing. These financial norms inevitably shape the habits of children who naturally imitate their parents.

So, educate your children on smart investing and wise spending!

Take the case of John, an under-accumulator of wealth (UAW). When he receives a paycheck, he squanders it on designer outfits — a habit he learned from his parents, who indulged in retail therapy every Saturday. They bought items just for the sheer joy of acquiring, and now, so does John.

The reality of inheritance: More financially dependent children often receive the lion's share

After a millionaire's demise, where does their wealth go? Many claim they will divide it equally among their children. Yet in reality, certain groups are more likely to inherit than others.

One such group comprises housewives. Wealthy parents, aware of the wage gap between genders, often bequeath more to their daughters — especially those who've chosen to be homemakers or haven't completed higher education. These women are substantially more likely to receive a sizable inheritance.

Take Alice, for instance. She was always daddy's little girl. After marrying a man with a modest income and leaving school to raise her two children at home, Alice's father couldn't bear to see his daughter living below his upper-middle-class standards. Thus, he began to provide her economic outpatient care.

Similarly, unemployed adult offspring frequently receive more in cash gifts and inheritance than their working siblings. Millionaires' children who are jobless or perpetual students often receive more financial support from their parents, as they are seen as needing more help than their self-reliant siblings.

Sometimes, large cash gifts come from surplus funds in college savings accounts that became redundant when a child decided not to pursue further education.

Let's consider the story of two brothers, Paul and Peter, offspring of a millionaire couple. Paul, the entrepreneur, moved far away and achieved financial independence by refusing his parents' money. On the other hand, Peter returned home after college, reluctant to hold down a full-time job. His parents started giving him money for housing, food, clothing, and transportation.

Consequently, it comes as no surprise that Peter, the more financially dependent son, was the one to inherit the wealth after their parents' passing.

Wrapping up the insights

The key takeaway from this book is:

The archetypal millionaire is often far removed from the Hollywood stereotype. They live a modest lifestyle, practice disciplined savings, make thoughtful budgets, and spend their money judiciously. If you can adopt these unpretentious habits and stay committed to them, you too could find yourself joining the ranks of millionaires.