The Millionaire Next Door: Lesson #2. Avoid Buying Status Objects or Living a Status Lifestyle

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

by: Thomas J. Stanley and William D. Danko

My TakeawaysLesson #2 Avoid Buying Status Objects or Living a Status Lifestyle

According to the authors, a common UAW drives a current model car, purchased new, and may have financed it on credit. PAWs rarely purchase new model cars and are less likely to own foreign or luxury vehicles. An example from the book details a UAW that spent roughly 60 hours researching, negotiating and purchasing a new car. In the end, while the car was purchased “near dealer cost,” in the long run the UAW’s time and money could have been more efficiently spent creating wealth rather than collecting possessions notorious for depreciating in value. The authors contrast the story with a PAW who decided that the pride of owning a brand new car wasn’t worth the $20,000 price difference.

Buying or leasing brand-new, expensive imported vehicles is poor value. Buying status objects such as branded consumer goods is a never-ending cycle of depreciating assets. Even when you get a good deal on premium items, if you choose to replace them frequently, the older items hold no value and have become a sunk cost. Living in a status neighborhood is not only poor value, but you will feel the need to keep buying status objects to keep up with your neighbors, who are mostly UAWs. The authors make the point that Hyperconsumers must realize more income to afford luxury items and become more vulnerable to inflation and income tax.

Some of the financial choices that UAWs make are considered to be “million dollar choices” because if the choice hadn’t been made, the UAW would have in excess of a million dollars. One example of a million dollar choice is to smoke. Smokers and drinkers tend to be UAWs because instead of building net worth, they spend their income to purchase alcohol or cigarettes. Another hypothetical example given in The Millionaire Next Door explains how a small purchase of cigarettes over a long period of time can accumulate a large sum of money. Mr. Friend’s poor parents were smokers and drinkers. They smoked at least three packs of cigarettes a day during the week. Three packs a day over 46 years translated into a sum of money that exceeded the value of their home by $33,000.[1] Even more extraordinary, if the Friends had invested and reinvested that money over a 46-year period, the portfolio would have exceeded $2 million. The value of a small amount of money over a long period of time is amazing. A UAW makes choices that, although financially insignificant at the present value, have a very significant future value. Choices such as drinking two cases of beer a week, smoking several packs of cigarettes a day, and buying large amounts of unnecessary food and objects are some examples of typical UAW choices. These choices are not necessarily large financial purchases right now, but over a long period of time, the opportunity cost of that money is very expensive.

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The Millionaire Next Door: Lesson #1. Spend Less Than You Earn

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

by: Thomas J. Stanley and William D. Danko

 

My TakeawaysLesson #1: Spend Less Than You Earn

The most prominent idea shared by Under Accumulator of Wealth’s (UAW) and American society in general is “spending tomorrow’s cash today”.[1] This is the leading cause of debt and a lack of net worth in the UAW category. This contradicts the common belief of a PAW (Prodigious Accumulator of Wealth): “save today’s cash for tomorrow”.[1] Many UAWs do plan, under certain conditions (such as a rise in income), to use investment strategies to accumulate wealth; however, most don’t actually use investment strategies to accumulate wealth once the initial conditions are met. For example, Under Accumulators of Wealth will promise to start investing once they have earned ten percent more in annual income. Unfortunately when most receive that extra ten percent of income, there isn’t an investment made.[1] These claims and ideas usually branch off an initial belief that a lack of wealth can simply be solved by an increase in income. Even among those that do invest money, most invest only because they have an excess of income. Between 2001 and 2004, the median family income dropped 2.3% and in response, the percentage of families who owned investment stocks fell by 3.3% showing that investments are only made in times of excess.[3]

When it comes to spending habits, Under Accumulator of Wealth’s (UAW) are everything but frugal. A typical UAW tends to live in luxury, style, and above all, comfort. Not all UAWs fit these characteristics. A $50,000-a-year janitor can be more of a PAW (Prodigious Accumulator of Wealth) than a $700,000-a-year doctor. The spending habits that UAWs have are a direct effect of the “Better Than” theory.

The “Better Than” theory is one of the main reasons many UAWs don’t hold true to their promise to invest after a rise in income. The theory is that the UAW’s “necessity” for that income will also rise in response to the risen income level. Most UAWs are possessed by possessions. According to a study conducted by Yale and stated in The Millionaire Next Door, individuals measure the level of their success through comparison to nearest neighbors and/or closest relatives.[1] Therefore, as the level of income rises, so will their desire to outperform those that they compare themselves to. This leads directly into my next Major takeaway from the book “Avoid Buying Status Objects or Living a Status Lifestyle” More on that in the next post but in the mean time……

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

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

by: Thomas J. Stanley and William D. Danko

This book is a compilation of research done by the two authors in the profiles of ‘millionaires’. In this case they used the term ‘millionaire’ to denote U.S. households with net-worths exceeding one million dollars (USD).

The authors compare the behaviour of those they call UAWs (Under Accumulators of Wealth) and those who are PAWs (Prodigious Accumulator of Wealth).

Under Accumulator of Wealth (UAW) is a name coined by the authors used to represent individuals who have a low net wealth compared to their income. A $250,000 per year doctor is an “Under Accumulator of Wealth” if his/her net worth is less than the product of their age and one tenth of his/her realized pretax income. Take for example a 50-year-old doctor earning $250,000, according to the formula she should have (50*250,000*10%) or about $1.25 million in net worth. If her net worth is lower, she is an “Under Accumulator”. The UAW style is based more on consumption of income rather than on the method of saving income. Prodigious Accumulators of Wealth (PAW) is the reciprocal of the more common UAW, accumulating usually well over the product of the individual’s age and one tenth of his/her realized pretax income and are usually considered to be millionaires; however, not all are.

The authors define an Average Accumulator of Wealth (AAW) as having a net worth equal to one-tenth their age multiplied by their current annual income from all sources. E.g., a 50-year-old person who over the past twelve months earned employment income of $45,000 and investment income of $5,000 should have an expected net worth of $250,000. An “Under Accumulator of Wealth (UAW)” would have half that amount, and a “Prodigious Accumulator of Wealth (PAW)” would have two times. This metric has been criticized since, for example, a 20-year-old making $50k a year should have a net worth of $100k to be considered an “average accumulator of wealth”. That makes little sense since it would take a new graduate years of strong savings and investments to accumulate that amount. The formula fails to take into account compounding interest; younger people up to age 45 or so will generally have much less as a percentage of income than older wealth accumulators due to compounded growth.

The authors go on to chronicle a few ways Prodigious Accumulators of Wealth handle their money:

1.) Spend Less than You Earn

2.) Avoid Buying Status Objects or Living a Status Lifestyle

3.) PAW’s are Willing to Take Financial Risk if The Reward is Worth It

4.) Family & Generational Wealth

I will go into the authors findings in more depth in my next few posts. The authors dig so deep into the profile of what our American millionaires really look like and what habits have led them to that status. This is one of the best reads for the young and old to get a true look at finance and what wealth really looks like. If you want to become a Prodigious Accumulator of Wealth follow my next few posts and serious….

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The Five Love Languages: Physical Touch

The Five Love Languages: How to Express Heartfelt Commitment to Your Mate

By: Gary Chapman

 

Affection can be defined as tender feelings of love that are expressed to another person. Notice that there are two parts to the definition: (1) tender feelings of love and (2) expressing those feelings to another person. Showing affection is a necessary way to honor and nurture one another. It helps keep love flourishing in your relationship. Affection in marriage needs to be deliberately maintained. Just as you work to improve your relationship with the Lord on a daily basis, you need to work to improve your relationship with your spouse on a daily basis.
We have long known the emotional power of physical touch. That’s why we pick up babies and touch them tenderly. Long before an infant understands the meaning of the word love, he or she feels loved by physical touch.In marriage, the love language of physical touch includes everything from putting a hand on your mate’s shoulder as you walk by, touching his or her leg as you’re driving together, and holding hands while you’re walking to kissing, embracing and sexual intercourse. If physical touch is your spouse’s primary love language, nothing communicates love more clearly than for you to take the initiative to reach out and touch your mate.

 

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The Five Love Languages: Quality Time

The Five Love Languages: How to Express Heartfelt Commitment to Your Mate

By: Gary Chapman

If your spouse’s love language is quality time, giving him or her your undivided attention is one of the best ways you can show your love. Some men pride themselves on being able to watch television, read a magazine, and listen to their wives, all at the same time. That is an admirable trait, but it is not speaking the love language of quality time.

Instead, you must turn off the TV, lay the magazine down, look into your mate’s eyes, and listen and interact. To your spouse, 20 minutes of your undivided attention – listening and conversing – is like a 20-minute refill of his or her love tank.

Men, if you really want to impress your wife, the next time she walks into the room while you are watching a sporting event, put the television on mute and don’t take your eyes off her as long as she’s in the room. If she engages you in conversation, turn the TV off and give her your undivided attention. You will score a thousand points and her love tank will be overflowing.

  1. Make Date Nights a weekly event. Even if you can’t afford a babysitter, plan a night at home that is yours alone.
  2. When your spouse asks to talk to you about something, put your smart phone or iPad down and make eye-contact with them while they speak.
  3. Use the questions from Connect Like You Did When Your First Met on a regular basis to enrich your conversation about things you might not think to discuss.
  4. Go to bed at the same time, even if at times you have to get up after they’ve fallen asleep. It’s meaningful for them to know that you’ve purposed to spend that time right before sleep together.
  5. Go for walks together after dinner. Even if the kids join you, the time spent will mean a lot.

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The Five Love Languages: Receiving Gifts

The Five Love Languages: How to Express Heartfelt Commitment to Your Mate

By: Gary Chapman

In his book, The Five Love Languages, Gary Chapman writes:

A gift is something you can hold in your hand and say “Look, he was thinking of me,” or, “She remembered me.” You must be thinking of someone to give him a gift. The gift itself is a symbol of that thought.

In every society throughout human history, gift giving has been perceived as an expression of love. Giving gifts is universal, because there is something inside the human psyche that says if you love someone, you will give to him or her.

What many people do not understand is that for some people, receiving gifts is their primary love language. It’s the thing that makes them feel loved most deeply. If you’re married to someone whose primary love language is gift giving, you will make your spouse feel loved and treasured by giving gifts on birthdays, holidays, anniversaries and “no occasion” days. The gifts need not be expensive or elaborate; it’s the thought that counts. Even something as simple as a homemade card or a few cheerful flowers will communicate your love to your spouse. Little things mean a lot to a person whose primary love language is receiving gifts.

Don’t mistake this love language for materialism; the receiver of gifts thrives on the love, thoughtfulness, and effort behind the gift. If you speak this language, the perfect gift or gesture shows that you are known, you are cared for, and you are prized above whatever was sacrificed to bring the gift to you. A missed birthday, anniversary, or a hasty, thoughtless gift would be disastrous—so would the absence of everyday gestures.

 

The Five Love Languages: Acts of Service

The Five Love Languages: How to Express Heartfelt Commitment to Your Mate

By: Gary Chapman

Do you remember the old saying, “Actions speak louder than words”? For some people, that is particularly true of love. If acts of service is your spouse’s primary love language, nothing will speak more deeply to him or her emotionally than simple acts of service.

For people who have “acts of service” as their primary love language, helpful acts are seen as very powerful expressions of love and devotion. Actions like cooking a meal, setting a table, washing dishes, vacuuming, taking out the garbage, mowing the grass, etc. are all acts of service. If done with a positive spirit and without expecting something in return, they are indeed expressions of love.

Within every language, there are many dialects. If you have a significant other with acts of service as his/her primary love language, find out the specific things he/she would like by asking. If you are the person with that specific love language, let your spouse know which actions mean the most to you.

Here are a few ideas of acts of kindness you can make a part of the every day routine for your partner:

  1. During the cold months, put a towel in the dryer while your spouse is showering so it’s all fluffy and warm when he/she gets out.
  2. Clean the kitchen or bathroom
  3. Men: Be a gentleman and walk on the “dangerous” side of the road so she feels protected.
  4. Fix things that the other can’t fix.
  5. Buy or make him/her lunch and bring it to him/her at work, even if (especially if) it’s out of your way.
  6. Cook a special meal that you know he/she likes.
  7. Fill up your gas tank without being asked.
  8. Drop your spouse at the door when it is raining.
  9. Men: Open car doors for your wife.
  10. Go to the grocery store and buy items you know he/she loves—without being asked.

Let Your Help Come from the Heart

Make sure you are helping and giving because you want to; however, don’t overextend yourself and feel resentful for doing the lion’s share of the giving. Acts of Service lovers don’t want people helping them out of obligation. They love a cheerful helper! A happy smile and a helping hand translates to, “You are the best and I love you!” And if your honey does speak the language of Service, he or she will probably be serving you a lot as well. After all, it comes naturally for them!

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