Years ago my wife gave me a worn paperback book titled “The Millionaire Next Door”. Little did I know that reading that book would change my life, validating the way I chose to live. The Millionaire Next Door gave me a deep understanding of the millionaire mindset and fact-based detail on how millionaires live their lives. Understanding the millionaire mindset enabled me to shape and change the way that I approach earning, saving, investing and preparing for the future. This article isn’t a typical book review. I primarily focus on what I learned from The Millionaire Next Door and how reading it helped me.

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

The Millionaire Next Door - Understanding the Millionaire Mindset - Levered IncomeThe Millionaire Next Door: The Surprising Secrets of America’s Wealthy is a compilation of research into the profiles of millionaires and their behavior. Originally published in 1996 by Dr Thomas J Stanley and William D. Danko, The Millionaire Next Door focuses on households with net-worths in excess of 1 million dollars. The book uses statistics to focus in on the habits of actual millionaires, and gives you a fact-based analysis of how millionaires behave. The book also compares the behavior of millionaires to that of consumers.

The authors coined the terms “UAWs” (Under Accumulators of Wealth) and “PAWs” (Prodigious Accumulators of Wealth) in their differentiation of people that were truly wealthy versus the typical consumer. The book contains the classic advice to spend less than you earn (something that I have always followed) as well as analysis of the comparison lifestyle (also known as “keeping up with the Joneses”).

It was interesting to read the hard facts about how your environment can influence your spending choices. The authors expanded the environment to include your childhood, your parents’ wealth, your neighborhood, your neighbors and your friends. Consumers feel compelled to compete with their neighbors or their friends. If their neighbors buy a new Porsche, they feel the need to buy a Mercedes to compete.

Conspicuous Consumption Blocks Wealth Creation

Unfortunately, our society focuses on conspicuous consumption. Companies try to enhance this competitive behavior because it drives their profit margins. Mercedes strives to sell more cars each quarter. Unfortunately for Mercedes, the quality of their cars enables them to run for years. So what do they do to stay in business? They constantly upgrade the cars, making them better and better each year, while at the same time the marketing department sells you on the latest model.  Their best customers upgrade each 1 or 2 years to the latest model.

This consumption focus has led to increased personal debt, and places the typical American consumer on the wrong side of the income lever. The average American household debt has become an income lever for lenders (mortgage lenders, credit cards, short term loans). One of my income levers (Real Estate Crowd Funding) uses capital for real estate-backed loans to individual borrowers.

How The Millionaire Next Door Solidified My Understanding of the Millionaire Mindset

I am a big fan of coaching and training. You are leveraging others' knowledge into actionable steps to get up to speed faster. I try to read and learn from others' research and previous trial and error every day. The reason for the Levered Income blog is to provide me a way to give back for all of the things I have learned from others, as well as my mistakes (there have been a lot) along the way.

When reading the The Millionaire Next Door, I realized that many people I perceived as “successful” were in fact faking it. I didn’t realize that I was following the path of other millionaires, nor did I think that I was even being frugal. I would always invest heavily in ways to enhance my work and my business, trying to learn something new each day. I would save and invest in the stock market, real estate, technology and most importantly my learning. I was in effect living the millionaire mindset without understanding the millionaire mindset.

Spend Less Than You Earn

Basically, I would just spend less than I earned. Since I was self-employed, my income would fluctuate dramatically, based on how the business was doing. Some months the business would make a lot of money, some months break even, and in some tough months I would have to float the business. Because of this, I learned to live on a small fraction of my earnings. This just became a habit, and later as some of my other businesses took off, I would just live on one of the income streams, and invest the others. I chose the most stable business income stream (real estate) to live on, which incidentally was one of the smallest at the time.

I remember one of my CPAs jokingly called me a “transient” since I had no car, lived in different places around the world, and wore a t-shirt and jeans every day. I would wear a black t-shirt and jeans to company meetings, client meetings and even television interviews. Actually, my wife and I refer to our clothes’ brand-name as “Costco”, since that is where we buy the majority of our clothes.

The Pressure to Buy and Consume More

There is unbelievable pressure to consume more in our society. I didn’t have a car for years, sharing a car with my wife. It had nothing to do with money, but I thought that messing with a car (repairs, maintenance, insurance, gas, etc etc) was just a waste of time. I remember back in the late 90’s a conversation that I had with an acquaintance (I forgot his name – lets call him Carlos) in Miami about cars. At the time, I had an old Toyota truck that I had just purchased used with about 40,000 miles on the odometer. Carlos asked me what my monthly loan payment was on my Toyota was, because in his opinion I should think about upgrading.

Carlos was driving a brand new top of the line Lexus, and I just assumed that he had paid cash for his vehicle just as I had. He seemed very successful, went out to all of the South Beach clubs, drove a Harley Davidson and wore very expensive suits. Once he found out that I paid cash for my used Toyota, his first suggestion was to sell the car and get a lease on a new Porsche since I could put so much cash down on the lease. Carlos said that he could hook me up with someone that would give me a great lease on a car. I came to realize that Carlos leased his car and later learned that he still lived at home. He was financing his lifestyle with debt, and owned virtually nothing except for rapidly depreciating assets (clothes, jewelry, etc.).

Truly Successful People Aren’t Flashy

After reading The Millionaire Next Door, I realized that truly successful people aren’t flashy. They are solid people that work hard preparing for life’s inevitable curve balls. Understanding the millionaire mindset and realizing that I had been following that mindset for years gives me a sense of validation.