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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