One of the reasons that millionaires are economically successful is that they think differently.
Who are the millionaires? Is it the people living on the Upper East Side in New York the people living on Strandvägen in Stockholm? Well, yes, and yes, but the typical millionaire doesn’t live there, they live next door. The Millionaire Next Door is rated as one of the best business books to earn fundamentals of business. In this summary of the millionaire Next Door by Thomas J. Stanley and William D. Danko. Lets start reading the millionaire next door.
Learning 1: Millionaires don’t live the high life. They budget wisely
- Tip : The 12 characteristics of a millionaire.
Contrary to many people’s beliefs, it’s rarely luck or inheritance that decides whether you will be a millionaire or not. It’s much more a result of hard work, lifestyle decisions, planning, and self-discipline. Let’s pretend that we can interview the millionaire population. This is what they would tell us: We live below our means. About 50% of us have lived in the same house for more than 20 years. Our time, energy, and money are allocated towards wealth. We spend more than twice the amount of time on financial planning and investing as our non-millionaire friends. And think that freedom and financial security are more important than displaying high social status. Also, we never received cash gifts from our parents. We are self-employed.
About 2/3 of us have ourselves as our bosses, similarly, 75% of us consider ourselves entrepreneurs. Most of us are in our 50s and are males. We have go-to-h**l-fund. This means that we can keep our lifestyle for 10 years or more, without bringing in additional income. We are well educated. Only 1/5 of us aren’t college graduates. We invest a lot! However, on average, about 20 percent of our realized income per year, and we make our own investment decisions. We invest in the long run. Over 90 percent of us hold our investments for more than a year. We buy cars by the pound. And screw those environmentalists! Ha hahaha! We are cheapskates. In a good way, we would argue. This was the first lesson from the book the millionaire next door. now move on to the second point
Learning 2: True mogul believes financial independence is more important than flashy social status.
- Tip : Play defense.
For instance, let’s do a quick quiz. Do you know how much your family spends each year on clothing and shelter? Do you have a clearly defined set of daily, weekly, monthly, and lifetime goals?. Did you answer yes to all the above? Millionaires, to a greater extent than others, do. Now you probably think: Hold on a second! Why would someone who’s a millionaire need a budget? To that, the answer is: Because they became millionaires that way and they maintain their affluent status the same way. A parallel could easily be drawn to training.
Have you seen all the You Tubers who go to the gym every day? They are the ones who seem not to need it, right? But that’s why they are fit. Becoming and staying financially independent is not much different from that. So how do you play great defense then? For starters, you should buy (or rent) a house in a modest neighborhood.
The price tag of an apartment or Manhattan for instance even though. I know, it’s stunning, does not factor in all the variables. To live there it’s expected that you have a certain lifestyle. This lifestyle might be even more expensive in the long run than the apartment itself. Live in a modest (but safe) area instead and you will find it easy to keep up with. And even stay ahead of, the Joneses and still accumulate wealth. In general, spend as little as possible on consumables and spend smart on possessions that will depreciate in value.
To be honest, most millionaires do both. They have a decent offensive as well as quality defense. But only a minority plays such a good offensively that they can eat their salary and keep it too. If you don’t belong to that category, which only is 0.1% of us do anyway, learn how to play defense. Also, this was the second lesson from the book the millionaire next door. Now move on to the third point
Learning 3: Millionaire(s) know where and how to spend their cash. Invest in what you know!
- Tip : The true cost of consumption.
Let’s disregard all the costs that a certain purchase might result in later. As explained through the apartment on Manhattan example in our last takeaway. The price tag still does not fully represent what you pay when buying something. There are two reasons as to why this is not true.
Reason 1: The opportunity cost, the monetary one.
An opportunity cost is the loss of other alternatives when one of them is chosen. In other words, let’s pretend that you had an iPhone 6 in November 2017. Now, if you like most people, you upgrade your phone every second year or so. So now you’re thinking about the new iPhone X. If you choose to buy the iPhone X. You miss the opportunity to invest your money, for instance, in the stock market. At an annual 10% in returns, the price of your new. Phone is. $2,591 after 10 years. $6,720 after twenty years. $117,000 after fifty years. Now, do you still want to buy that new phone?
At least your iPhone X doesn’t affect your life expectancy negatively. If you, instead of smoking 3 packages of cigarettes every day, invested the money in the tobacco company. Philip Morris, during the time period from 1950 to 1996. You would have been a multimillionaire at the end of the period.
Reason 2: The opportunity cost of time.
To acquire and maintain large inventories of luxury goods such as fancy cars, expensive clothing, and so on. Does not only require money but also a lot of time. You don’t buy a Ferrari without first studying the market. This is time that could have been used to increase your financial intelligence. To improve your business or to set up a proper budget for your household instead. Time and energy of finite resources, even for high-income producers. Or perhaps especially for high-income producers. Why would you spend 60 to 80 hours a week at a job trying to become wealthy. And then spend the remaining few hours of the week, ruining this same wealth? It’s like trying to build a house during weekdays, but then bringing in the wrecking ball on the weekends.
Key idea no. 4: Many tycoons share their wealth with their children, even though it can hinder them.
A bear favor is a Swedish expression of someone doing another person a service. That they think will have a positive impact but which ends up being a disservice instead. Well, I guess the English expression for it is just disservice…
Number 4: Cash gifts are disservices, Really?
Nah! Every wealthy parent, or actually every parent, wants their children to be prosperous and successful in life. How do wealthy parents make sure that their kids get a head start? Well, they provide them with extra money of course!
This proves to be counterproductive though. In fact, in general, the more dollars adults children receive the fewer they accumulate. Adults who sit around waiting for the next injection of father. And mother’s money are much less productive than their counterparts.
Cash gifts teach children to live above their means.
Gift receivers have in 80% of the instances a lower net worth than their peers. However, adults who get money from their parents have a hard time distinguishing between their parent’s wallets and their own. In fact, more often than not, they think that they belong to the “I did it on my own club”. It’s much easier to spend other people’s money than dollars that are self-generated. So, in case you’re wondering. What can you give your kids that will increase their likelihood of becoming prosperous and successful? The single most common gift millionaires received from their parents is tuition. Apart from that try to create an environment where independent thoughts are cherished. And where achievements, responsibility, and leadership are rewarded. Yes, the best things in life are often free. This was the third lesson from the book the millionaire next door. Now move on to the 5th lesson.
Lesson 5: The most financially dependent children receive the largest share of the family inheritance.
- Tip : How to decide if you are on the right track.
Now, are you on your way to become financially independent. Or are you actually going in the opposite direction, towards a life of credit cards and Spotify premium accounts? Your expected net worth can be estimated using the following formula. Like, Age x realized yearly pre-tax income / 10 = net worth. Exclude any inherited wealth both on the yearly pre-tax income and your net worth.
Let’s take a few examples. Like, The Swedish Prime Minister, Stefan Löfven, earned approximately $220,000 last year at the age of 61. This means that his net worth should be 61 x 220,000 / 10 which is … $1,342,000. An engineer at Volvo. Who recently was promoted to the rank of the middle manager is earning $70,000 at the age of 30. His net worth should be 30 x 70,000 / 10. $210,000.
A student at the Stockholm School of Economics is in his last Bachelor year of study. He’s 23 years of age but earns nothing. This means that his net worth should be 23 x 0 / 10… Oh, well, I guess that the formula doesn’t apply to students, HOORAY! Similarly, Students can just keep on partying every night. Now, this is just your expected net worth. But you guys aren’t here to be average. Am I right?
Key idea number 6: Above all Pick Your Niche Topic Wisely
Above the ranks of the “Average Accumulators of Wealth” are the “Prodigious Accumulates of Wealth”. If you really want to be a part of that group you have to gather a fortune. which is around 2 times the total amount of that formula, But it does not end here. Above this exclusive group are the “Super Prodigious Accumulators of Wealth”. To join this club of glorious elites. You should be having a wealth that is 10 times more than the formula explained before.
Now that requires dedication! If you are, on the other hand, only worth half of what the formula says. That you should be worth, you belong to the “Under Accumulators of Wealth“. Calling out to the competitive person inside you. In addition, I have one thing to tell you: Friend it’s time for us to get you on the right track. you can read other business books to business books always improves our lives
Here’s a quick recap on becoming a millionaire:
- First, becoming a millionaire is the result of hard work, lifestyle decisions, planning and self-discipline not inheritance or luck.
- The second takeaway is that you must play great defense to accumulate wealth.
- Takeaway number 3 is that opportunity costs, both in terms of money. And time should be added to estimate the true cost of a purchase.
- Number 4 is cash gifts, Cash gifts are counterproductive to accumulate wealth, and last but not least.
- Number 5 is to check if you are on the right path to become a millionaire.
In conclusion, Just remember that your goals should be reasonable for this exercise to serve its purpose. you should read this book the millionaire next door.