The Millionaire Next Door: Riches De-mystified

By Nora Dunn on 27 August 2007 (Updated 29 September 2007) 25 comments
Photo: Mayr

You've seen them driving by you but you didn't even notice. They were in the checkout line at the grocery store but you didn't give them a second glance. They're everywhere, infiltrating our lives in ways we can't even detect...millionaires.

A while ago I read The Millionaire Next Door , mostly for business purposes. I found the book initially extremely dry and scholastic, but after persevering found that I was quoting all sorts of words of wisdom from the book on a regular basis.

At the very least it gave me a new perspective on millionaires and de-mystified the grandeur of their lives for me.

What goes on behind closed doors is amazing.

Did you know, for example, that the large majority of people living in "rich" neighbourhoods, driving fancy cars, and wearing the latest fashions actually aren't "rich" at all? According to the book these people more often than not live paycheque to paycheque, often working in high-income professions such as medicine or law. They generally have more debts than assets, and their monthly expenses are over the top. They are busy trying to keep up with the Joneses at a pace they often can't maintain.

Or these people were born into or inherited money, and are propagating the statistic that most people who come into money lose it within one generation.

The real millionaires are the people living in the modest houses in modest neighbourhoods, driving older cars, and even clipping coupons.

They understand the value of a dollar, and aren't too proud to go out and save one. (I'll bet we even have some millionaires reading frugal living tips on Wise Bread this very minute)! They believe in investing, delegating matters like financial planning and accounting to the experts, and thoroughly researching their options when they make any major decisions.

Most millionaires are self-made, through hard work, patience, and honesty.

The life of a millionaire (the sort of millionaire referred to in the book, rather) isn't out of reach for those of us who are patient and disciplined enough to get there if that's what we want. But beware: being "rich" isn't a status, and doesn't become a new lifestyle when your bank account magically hits a certain number. Being "rich" is a way of life and an attitude, regardless of whether or not you have money. So start being rich now and become the next Millionaire Next Door!

 

 

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Justin Ryan's picture

Very few people realize that most people with money act like they don't have any at all. The kind of people that get to a place where they make lots of money aren't the kind of people who are going to waste it on things they don't need just to impress people who know nothing about having money. Indeed, as I wrote a couple of weeks ago, sometimes even the millionaire doesn't know how much they have!

Guest's picture
plonkee

What I take from this, is that a million dollars isn't that much money any more. Thats one of the reasons that millionaires don't live the millionaire lifestyle - they're just not that rich. I expect to be a millionaire eventually, but only through the power of inflation.

Guest's picture
Barbara

And found it very inspiring. It doesn't exactly give you tips on how to be frugal, but really just how to adjust your mindset. Yes, it's really hard to wade through some of the dryer parts, but worth it when you put it down feeling satisfactory that you can in fact achieve being rich. It just takes a little work and a little know how.

Guest's picture
Barbara

And found it very inspiring. It doesn't exactly give you tips on how to be frugal, but really just how to adjust your mindset. Yes, it's really hard to wade through some of the dryer parts, but worth it when you put it down feeling satisfactory that you can in fact achieve being rich. It just takes a little work and a little know how.

Guest's picture
abw

Barbara, I take your word for the criticism you give since that is the same impression based on the different reviews or summaries of the book I came across and because you actually read it;but, I am glad it focuses on the frugal mentality instead of tips since alot of books do that already.They often focus on tips at the expense of the frugal mentality. Still I feel like it is important to be aware of the frugal mindset because if you are aware of the mindset, you can come up with frugal tips on your own to adopt to your own circumstances. It might not be a bad idea for a book in the future to contain both the mentality and frugal tips. Perhaps one day you or somebody like you can write it.

Guest's picture
Guest

It is called The Complete Tightwad Gazette by Amy Dacyzyn.

Guest's picture

My friend's family is very wealthy but you wouldn't know it if you met him. He's very humble and lives quite modestly. I always calls him the "poorest rich person" I know because he lives so frugally and never draws attention to himself. He invests wisely and doesn't spend his money on trivial and fleeting things. Quite inspiring!

- Raymond (MONEY BLUE BOOK)

Guest's picture
Guest

Years ago I worked in a nursing home as a volunteer coordinator. While there, I became acquainted with a woman who helped clean the rooms (148). We would often get into discussions during our breaks about financial things. She came across to others as slow and uninteresting. To me she was the opposite. She told me that when she was 7 years old, her pastor had given her good advice...save 10%, give away 10% and live on the rest. She informed me that is what she had done ever since.
Remember, all her life the only 'career' she had was cleaning, either houses or room for others. Today she is in her late 80's, in a nursing home as private pay and way beyond a millionaire! Now I'm laughing at those who laughed at her!

I also have a friend who inherited quite a lot of money many years ago. But she asked that I not tell anyone because she felt people treat you differently if they know you have money. An interesting observation.

Guest's picture

I found you through Lifehack, and I'm glad I did. This is the approach my husband and I are taking. Warren Buffett is a great example of this. Still lives in Omaha, still lives in the same house he and his wife bought 30 or 40 years ago.

Guest's picture
Guest

"(I'll bet we even have some millionaires reading frugal living tips on Wise Bread this very minute)! "

You do. And get this -- my car is older than that of any of my friends -- but since I don't rquire that my car be a manifestation of my personality or status, I'm fine with a machine that takes me from point A to point B. My house is comfy, spacious and well-built, but it isn't a McMansion. My idea of fun is making bread and jam with my children and providing them with a creative and loving home life. The standard external displays of wealth are wildly and wastefully expensive and show a distinct lack of imagination (or a lamentable propensity for believing advertising).

Guest's picture
Guest

"a million dollars isn't that much money any more"

A million dollars, invested in a good growth-stock or index mutual fund will yield about 12% per year. Take 8% of that, $80,000, as an annual salary, and leave the other 4% in to hedge against inflation, and you get to live on twice the median household income in America, AND get a cost-of-living raise every year.

Yeah, a million dollars isn't much anymore.

Guest's picture
Guest

Guest above, 4% is the maximum safe withdrawal rate.

The last 30 years have been overperforming ones.

Nora Dunn's picture
Nora Dunn

Guest, you bring up a great point about living off the interest or yield of the million dollars. There are many a lottery winner who think that they can do just that, however very few succeed.

Here's the problem: You now have a million dollars, and decide to quit your job and live off the interest/yield of $80k (let's even use your calculations even though I agree they're a little steep in terms of expectation of return)

......Now you have the income, but nothing to do! So, what are you going to do to fill your time since you don't work 8 hours/day any more? Whatever it is, it will probably cost money, and possibly lots of it. Not only that, but with a million bucks burning a hole in your bank account, you might figure you can make a few extra purchases that you've always wanted to make, because - well -you're a millionaire! You can afford it, right?

(of course I'm not talking about you in particular - I'm using "you" in the larger sense)

And all of a sudden one thing turns to the next and you're running out of money. A million dollars really isn't that much any more. For some, I'm sure it is, but for most, it's a mis-conception that being a millionaire is truly being rich. It goes so much deeper than that!

Guest's picture
Matte

This comes back to the fact that the rich mentality needs to be grown first. A rich mentality is really a way of being responsible and also being able to control impulses that could easily ruin your goal of living of the interest.

I would very much agree that very few people would ever be able to live of the interest because they are childish with money and can't control their emotional impulses. Having more free time to do things would in most cases equal buying more.

I have a lot of time myself (and cash), but I do have that emotional dicipline that is required. Even if you live of your interest you are stil forced to budget. The "budget" part seems to fall away as a concept when people win the lottery. Bad thing, bad thing.

Also, if you live of the interest and you want something that cost a whole lot more than your budget allows. Then do what every smart millionaire would have done: make a deal happen. Think in new ways. Think "business deal".

For example: I am looking at a house with 8 hectare of land and 2000 cubicmeter of leaf wood. But I don't have the required purchase amount on hand and I would like to buy this one cash (no loans). What to do? Well, I have been pro-active and contacted several wood companies and asked for quotes for the leaf trees.

If the sell-of of the trees doesn't cover it, then I will find someone who wants to rent the land from me. I will set all these things up beforehand and then I will move in and buy the house and the land.

No loan, no cash out of my pocket (money I don't have), but a nice house and big land as a result. And the sea view is not something to scuff at either. Nice in the morning when waking up:).

If you are smart, you can have more than you believe. But it requires a certain degree of brain first and a will to be diciplined with what you have.

Guest's picture
Guest

Who cares if a million dollars isn't what it used to be or whether you can life comfortably off of the 4 - 8% growth it may collect?

The point here is the mindset and behavior of people who successfully resist the deluge of advertising, social comparison, and other facators that drive many people to overextend, overconsume, undersave, and then pretend that everything will work out fine. The credit crunch due to subprime loans -- not all of which were made to lower income buyers -- seems partly to reflect this dynamic. More people I know than I care to count bought bigger places than they could afford (or rebuilt) with <5% down and with crazy ARMs (not to mention 40 year morts!) and then raced out to fill the driveway and such with import cars, flatscreens, and $2k washing machines. These are the same folks drowning in credit cards. Best of all, they then tried to pawn it off as their own acquired assets! Silly rabbits.

TMND is great, if only as validation that living frugally has many, many benefits.

Nora Dunn's picture
Nora Dunn

Amen, guest!

Guest's picture
Berky

One of the central issues in the book was that being "wealthy" is defined by ones spending level, not the total net worth. I know some people who are happily retired from traditional work on $40,000 per year of investment income from a 600,000 portfolio. And I know others living month to month on $2,000,000 per year- they just keep raising their spending and perceived "needs".

If a person can keep their spending from growing as their assets grow, in a while their income from the assets will fund their needs. The freedom of that is exhilerating, as the person can pursue what they wish, or keep the job knowing they do not need it for money and are doing it for the right reasons.

Guest's picture
Kiki

In theory you could live of the interest of a million dollars. Let us say that you decide to "fill in" with walks on the beach and volunteering. Perhaps you grow a garden. Suddenly you're spending less on petrol, childcare (maybe), work clothes, stress related problems. Your kids are happier, and prefer your time and attention to expensive toys. With time to burn and spare, you and your spouse are closer. You are happy, and suddenly spending less. A lot less, in fact. Quite a lot less. In fact, less than your interest...
Congratulations! You're savings are growing on 0 income! Whoo hoo!

Nora Dunn's picture
Nora Dunn

Awesome Kiki! It sounds like you write from experience....

I think the key is not to fall into the standard traps of consumption and needs vs wants that is so prevalent these days. When we can get our kids to appreciate time spent with us more than that toy all their friends have (and they don't understand why they can't have it themselves), then we'll all be in a better place.

Simple is good!

Guest's picture
Jill F

Thanks for this thread. Now let's talk about me (ha...only-child syndrome). Your comments have been fortifying. After some big moments of financial clarity, my husband and I realized big changes were in order. For this year, we've lived 23% under our income, investing & slowly paying off debt with that margin. It's been a mix between gratifying & frustrating, I suppose with the emotional realization that big results just don't happen overnight. Your posts however came at the right time. We haven't really considered eventually being millionaires -- more just to be healthier with finances. But your points lead to possibly our next financial vision: directing mindful, controlled spending toward millionaire-hood. Really gained from this. Jill, videoblogger in DC

Guest's picture
sweetkaos

Its one of the best books i have read. If you look also at warren buffet he says something i can agree.."I dont want to be rich to buy Ferraris"
The most important part of the equation is at the end of the day do you have a positive cash flow or not. People often seek for the business and deal of their lifetimes, however that serves no purpose if you cannot save.
The only money that is really yours is the one you save.
Other great books i recommend:
- Richest man of Babylon (Personal favorite)
- Rich dad poor dad

I just recently tested the computer games by Rich dad Poor dad. Cashflow 101 and 202. Although they are not as entertaining as XBOX, you WILL learn how to calculate your cashflow, and learn the differences between Capital Gains and those that generate Cash Flow. I recommend it. After playing for some weeks I decided to calculate exactly how much money i spend daily, and my current financial situation. This just makes you conscious to make better decisions.

Guest's picture
abw

The title was supposed to be called about the frugal mentality.

Guest's picture
abw

The title was supposed to be called about the frugal mentality.

Guest's picture
steve

if a twenty-year old in 2008 gets a reasonably well-paying job makes sure to save 10,000 per year, and continues for the next forty years at average 5% after-inflation returns on investment, he or she will have 1.2 million at the age of 60 (this is in today's dollars, not 2068 dollars).
If, at the age of forty, due to improved career prospects, he or she increases her savings to 20,000 per year up to the age of 60, she will have 1.9 million in 2008 dollars.

Along the way, she can choose all kinds of options that many people can't--she can buy a business, commercial property, feel more freedom to do what is most interesting to her because of the backup of having that cash available. Thus, it may be easier for her to pick work on her terms, and because it interests her, as opposed to just to make ends meet.

It's not that unreachable. Over time, it's quite attainable. It's just that many/most people aren't even aware that it's a possibility so they don't see what steps they could take (within reach) that would get them there.

Guest's picture
Guest

I recently found myself with the new lifestyle of money and free time and have had a rough time with it. I leased a townhouse for 2200 a month and now realize that was a dumb move even before moving in. I bought the stuff poor people buy when they have extra money instead of focusing on saving and actually going outdoors with the 8 hours I now have free. The one thing Im glad I did was buy a fake rolex to see how long before Id get tired of it and it was about a week when I realized its pointless to wear a watch since I dont need to know what time it is anyway. Its all advertising and craving what you think rich is supposed to feel like but the day I had 20k in checking I knew what fools middle class folks get taken for.