The Millionaire Next Door Personal Finance Book Review

How to become a millionaire?

“The Millionaire Next Door” is one of my favorite books.

It taught me that making a lot of money is not always about spending a lot of money and that no matter what your income is, you should always live below your means.

 For example, if you observe the streets early in the morning, you will always find this one paradox: the only people who jog arethose who don’t need to jog.

The book teaches that it’s the same thing with money.

Most of the time, the ones who save their money and live frugally, don’t actually need to do that, but if they stop doing it, they quickly find themselves having money problems. For the analogy, they grow fat if they are not jogging!

The book is filled with golden nuggets and brutal truths based on data by doing research on millionaires.

If you’re serious about becoming a Millionaire, you need to read this book.

The premise is that the authors have done one of the largest surveys among Millionaire households in the US, and found some common traits, and if you already have them, or apply them to your life, then you are well on your way to financial independence, so let’s see how close you are to being a future Millionaire:

1. Live below your means:

It’s a popular myth that Millionaires drive fast cars, travel the world, and have huge mansions in ultra-rich neighborhoods.

Only in cases where a person has extreme wealth, in the billions, can they sustain the kind of lifestyle the common public thinks rich people have, but not for a long time because that’s a bottomless hole.

One tip to remember if you want to apply this trait of most millionaires to your life is to ask yourself whenever you purchase something if you absolutely need that thing.

If you feel a big urge to buy something that you really don’t need, you can instead take a photo of it. That way you can take a piece of it home with you and get the thrill without the bill.

The urge to buy something rarely lasts more than a few days, so every weekend you can browse your photo gallery and pat yourself on the back for not having bought all that useless stuff.

Many households do earn a six-figure salary, but they still won’t ever be financially independent, because so many Americans live their life spending money they don’t have.

There are so many households in America which are entirely debt-dependent, living pay-check to pay-check, digging into savings and over-drafts.

These are the people, that spend their money on possessions that they believe will give them the wealthy image, possessions to essentially lift their ‘success.’

When in fact, the reality is that it’s purchasing these very possessions, which is detrimental to their wealth.

2. Becoming rich by Budgeting:

Millionaires always budget. As is written in the book, “They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”

When surveying, the authors uncovered the fact that most ‘millionaires’ had less than 7% of their total wealth as total annual realized income.

The incredible result of this is that whatever the figure is under 7%, that’s all that they have subjected to income tax. The lesson from this is that to build wealth, you should minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).

Often, a household may be considered asset-poor, regardless of their high income. The key reason that this happens, is that they lead a high-consumption lifestyle, and in order to do this, they are required to maximize their realized income.

”Such people might wish to ask themselves a simple question: Can I live on the equivalent of 6.7 percent of my wealth? It takes much discipline to become affluent.”

In their research, the authors came across people and households whose total realized income is under $80,000, yet they are worth $2-$3 Million.

3. Economic outpatient care:

Helping adult children financially is the most important factor that clarifies why the adult children of the wealthy are less productive.

Although the gifts of money are perceived as temporary, they tend to permanently affect the recipient’s way of thinking and diminish their initiative and productivity. That is how consumerist habits are formed.

Giving leads to more consumption than saving and investing.

Wealthy parents often help their children buy a home. Their intentions are good, and most often they think that, after that occasion, there would be no further need to help their children financially.

Equally often, they are wrong.

The receivers of economic outpatient care [money from parents to kids] achieve less and spend more than the ones who never received such help.

Notice that luxury homes are usually located in high consumption neighborhoods, while the income of the help receivers can hardly support fitting in such neighborhoods. Overall, this leads to continued dependence on wealthy parents.

Even though they are dependent, the receivers of financial help typically think they are financially well-off, and tend to spend carelessly.

They are also dependent on credit, and typically have a habit of spending tomorrow’s economic outpatient care today.

Instead of gaining wealth, they are focused on the expectation of the generous inheritance coming their way.

I want to add an old Indian story at this point. A lion was once released from the circus and into the jungle. Many animal-lovers were happy as they thought the lion was being treated harshly in the circus and would find freedom in the open jungle, it’s a natural habitat. A few days later the news came out that he was no more. A couple of wild dogs managed to kill him. Everyone was baffled. How can some dogs kill such a big lion? But they quickly realized that because the lion was being cared for by the circus almost all its life, it never learned how to hunt and defend itself. It never knew how to act like a lion, because it didn’t need to in order to feed itself. He was getting everything for just doing a few silly tricks.

There is a better way of spending money on your children.

The most frequently mentioned gift that millionaires received from their parents were tuition. This is what you can give your children to boost the possibility that they will become economically productive individuals.

The next best thing you can do for your children is to create an environment that honors independent thoughts and deeds, appreciates individual accomplishments, and rewards responsibility and leadership – and these gifts are free.

4. Buy a slightly used car:

If you buy a used car, someone else pays for the initial car depreciation.

I know, new cars are very hot and beautiful, but a new car depreciates the moment it is driven off the car lot. Is the pride of new car ownership worth such a huge amount?

From the millionaires surveyed for the book, 50% never paid more than $30,000 for a vehicle.

Think: how much did I pay for my last vehicle?

Let’s take an example. Nick drove a brand new Mercedes. He leased it for $500 a month. After driving such a status symbol, screaming “I’m rich, peasants!” for over three years, he gave it back to the dealer. Let’s do the math: $500 for 36 months. $18,000. Now he has nothing. What a waste of money.

Buying status artifacts, such as expensive cars, can prevent you from becoming financially independent.

That’s why only 23.5 percent of millionaires own new or recent models, while 25 percent of them have not bought a car in 4 years.

Fifty percent of most millionaires never spend more than $29,000 in their entire lives on motor vehicles. About one in five never spend $19,000.

Car-buying behavior serves as an excellent explanation of why some people are wealthy, and others are not.

Ironically, individuals who are not wealthy devote less time and energy trying to find the best deal, and they spend more money.

Affluent people, on the contrary, take time and energy to plan and negotiate. It is interesting that the wealthy individuals who usually buy used vehicles are the ones with the lowest average incomes, yet they have the highest ratio of net worth dollars for each dollar of income, and they are able to accumulate substantial wealth.

There is a strong set of beliefs behind this kind of behavior by the wealthy. They are not willing to compromise financial independence. They understand that the key factor in achieving independence is frugal behavior.

It’s easier to earn a lot than to accumulate wealth. The main reason for this is the fact that we are a consumption-oriented society, and the greatest spenders among us are non-millionaires with high income.

I remember one thing my father said once “ Don’t expect every one to like you. People usually like others when others spend time or money for them.

5. Find your niche:

Most of the affluent are business owners, including self-employed professionals.

You can’t predict whether somebody is a millionaire by the type of business he is in. The character of the business owner is more important in predicting his level of wealth than the classification of his business.

The US tax code favors those who do business. There are lot of deductions that you take as business expenses, thereby, decreasing tax that you pay.

But most businesses do not succeed.

The other way to become wealthy is to become a self-employed professional. But you need to be careful that you don’t spend too much on stuff you don’t need.

So, you can calmly ignore those Instagram posts that say the only way to become rich is to become a high-flying entrepreneur.

So, those were five of the most important and eye-opening nuggets of wisdom I picked up from reading this book.

This post has offered the most important points, but I highly recommend you read this one for yourself.

 It’ll change your perspective on your finances, and make you realize that there’s a lot of joy to be found in life that doesn’t come from high-tech gadgets, fast cars or fancy clothes.

It’s a paradox that we only value things we pay money for,and don’t value things we’ve gotten for free, even though they’re our biggestpossessions. Our health, our wishes, our dreams, our family, peace of mind, ourfriends etc.

I highly recommend that you read this book. You can get a copy for yourself on Amazon.

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