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 how 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 how 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 in understanding the millionaire mindset.
Initially published in 1996 by Dr. Thomas J Stanley and William D. Danko, The Millionaire Next Door focuses on households with over 1 million dollars net worth. The book uses statistics to focus 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 Millionaire Next Door: The Surprising Secrets of America’s Wealthy
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy is a compilation of research into the profiles of millionaires and their behavior. Initially published in 1996 by Dr. Thomas J Stanley and William D. Danko, The Millionaire Next Door focuses on households with over 1 million dollars net worth. The book uses statistics to focus on the habits of actual millionaires and gives you a fact-based analysis of how millionaires behave and a look into understanding the millionaire mindset. 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 genuinely wealthy people 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 an analysis of the comparison lifestyle (also known as “keeping up with the Joneses”).
Reading the hard facts about how your environment can influence your spending choices was interesting. The authors expanded the environment to include your childhood, your parent’s wealth, neighborhood, neighbors, and 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 vehicles 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 the latest model. Their best customers upgrade every 1 or 2 years to the newest 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).
How The Millionaire Next Door Helped Me With Understanding 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 read and learn daily from others’ research and previous trial and error. 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 Millionaire Next Door, I realized that many people I perceived as “successful” were faking it. I didn’t know that I was following the path of other millionaires, nor did I think that I was even being frugal. I would invest heavily in enhancing my work and business, trying to learn something new daily. 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
I would 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 company 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 live on one of the income streams and invest in the others. I chose the most stable business income stream (real estate) to live on, one of the smallest at the time.
I remember one of my accountants jokingly called me a “transient” since I had no car, lived in different places worldwide, and wore a t-shirt and jeans daily. I would wear a black t-shirt and jeans to company meetings, client meetings, and even television interviews. My wife and I refer to our clothes’ brand name as “Costco” since that is where we buy most 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.) was a waste of time. I remember back in the late ’90s, a conversation that I had with an acquaintance (I forgot his name – let’s 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 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 assumed he had paid cash for his vehicle just as I had. He seemed very successful, went out to all 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 money down on the lease. Carlos said he could hook me up with someone who would give me an outstanding lease on a car. I realized that Carlos had leased his vehicle and later learned that he still lived at home. He financed his lifestyle with debt and owned virtually nothing except rapidly depreciating assets (clothes, jewelry, etc.). It was all fake.
Understanding the Millionaire Mindset – Truly Successful People Aren’t Flashy
After reading The Millionaire Next Door, I realized that successful people aren’t flashy. They are solid people that work hard to prepare for life’s inevitable curve balls. Understanding the millionaire mindset and learning that I had been following that mindset for years gives me a sense of validation.
