Free Money Finance

Why Many Homeowners are Having a Tough Time

Here are some interesting thoughts from the preface of Stop Acting Rich: ...And Start Living Like A Real Millionaire:

The reason why so many homeowners today are having a difficult time making ends meet goes way beyond mortgage payments. When you trade up to a more expensive home, there is pressure for you to spend more on every conceivable product and service. Nothing has a greater impact on your wealth and your consumption than your choice of house and neighborhood. If you live in a pricey home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised.

My research has found that most people who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence. In the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more.

My thoughts here:

1. I understand completely what he's saying. When we were looking to move, I had estimated that the upgrades we needed to the new (bigger, more expensive) place would have cost us at least $20k initially (that doesn't count moving costs or fees to sell our home) and another $5k per year more in maintenance/on-going expenses. And we were looking at a home in the $350,000 range. Imagine what the costs would be on a million-dollar place!

2. Following that thought, just think what happens to the people who get Extreme Makeover homes. It's no wonder that many of them go into foreclosure or have to be sold -- even though they aren't in a new/more expensive neighborhood, costs for home maintenance are now way, way more than they were before.

3. We saw several high-priced homes on a recent tour of model houses. Some of our thoughts were along the lines of "boy, I'd hate to have their gas and electricity payments."

4. In the above, there's more keep-up-with-the-Joneses stuff going on.

5. The "treadmill existence" here is what The Difference: How Anyone Can Prosper in Even The Toughest Times called living "paycheck to paycheck." Again we see this from another set of research.

6. Wow. That fact on three times more millionaires living in homes under $300k than million-dollar homes is very interesting. BTW, our home is well under $300,000 in value.

7. I would be remiss if I didn't mention my formula for buying a house. Seems like the statements above bear out that this is good advice. :-)

Rich People Know that Things Don't Satisfy

Here are some interesting thoughts from the preface of Stop Acting Rich: ...And Start Living Like A Real Millionaire. Let's start with a short summary of what the book is about:

[In this book] I detail why so many people who are not rich hyperspend on luxuries. Often they think that collecting these expensive toys will enhance their overall satisfaction with life. But, as you will read in detail, happiness in life has little to do with what you wear, drive, eat, or drink. The people with the greatest satisfaction are those who live well below their means.

Wow, lots to digest here. I'll comment on this in a minute, but let's continue with a bit more for now. Author Thomas Stanley then offers a thought on why some people spend so much:

So who are hyperspenders really emulating? They are merely mimicking the behaviors of people like themselves, who are not rich but act in ways they think economically successful people act.

And, on the opposite end of the spectrum, here's why others don't spend as much:

Why is it that some people worth $10 million, $20 million, or even $30 million own few or no luxuries whatsoever? They know that satisfaction in life is not a function of what you can buy in a store.

Several thoughts from me:

1. This may go without saying, but I'm going to say it anyway. This book highlights the habits and thoughts of the wealthy as defined by their net worth (the author doesn't count the value of housing in calculating net worth), not by their income. He contrasts this with others who make great incomes and yet have virtually no wealth to show for it. In other words, a high income often does not lead to a high net worth. Again, this is Money 101 for some of you, but I just wanted to be perfectly clear.

2. The book will highlight (and I'll post on this for sure) how many of the most wealthy (high net worth) people in America are those with "average" salaries/incomes.

3. Overall, what he's saying is very similar (almost identical) to what we just covered when I highlighted a few pieces from The Difference: How Anyone Can Prosper in Even The Toughest Times. Is anyone starting to see a trend here? Guess what they're saying must be at least somewhat valid, huh? (I'm being sarcastic -- of course it's valid. And yet, some will try and make excuses for why it's not really true.)

4. We've already discussed the fact that possessions often don't satisfy -- experiences do. And, experiences often get better with time while possessions tend to lose their luster with age.

5. "The people with the greatest satisfaction are those who live well below their means." Ha! Told ya so!!!!

6. Hyperspenders seem to be the ultimate keep-up-with-the-Joneses sort of people.

7. There are many, many things in life more important than money. Looks like the truly wealthy people have this figured out -- and, in part, it's a reason they are so well off.

How to Become Wealthy

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on how to become wealthy:

If you want to become wealthy [the way other wealthy people have], live in a neighborhood where your household is among the top income generators. For example, what if your household's total realized income is in, say, the high five figures? Then live in a neighborhood where the median market value of a home is less than $300,000. Do so, and the chances are that among your neighbors, your household will likely be in the top 20 percent along the income continuum. Then live and consume as though your household's income was only 80 percent of what it actually generates. Save and invest the rest. Now you are on your way to becoming wealthy.

What is a good rule if you are determined to become wealthy? The market value of the home you purchase should be less than three times your household's total annual realized income.

If you're not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

A few thoughts from me:

1. I'm predicting that several people will hate this post. People don't like being told what sort of house to buy. ;-)

2. The author gives us the saving amount that seems to make most people wealthy (or so I assume from the info above): 20%. It looks like to me that if you can save 20% of your salary, you'll end up wealthy. There, now that is easy, isn't it? :-)

3. Do the two pieces of advice ("the market value of the home you purchase should be less than three times your household's total annual realized income" and "never purchase a home that requires a mortgage that is more than twice your household's annual realized income") imply that you should put up to 1/3 of a downpayment on any home you buy? If the home is worth three times your income and the mortgage can only be two times your income, that means you have to put at least 1/3 of the home's value as a downpayment, right?

4. I GUARANTEE that someone reading this (if not someone commenting) will say that the formula above will not work on the coasts and/or in higher-cost-of-living cities. My responses to that are:

• I told you that living in more expensive cities is a drain on your net worth.
• What about all those "great/high" incomes everyone is always talking about in big cities? As I've said, the higher salaries are more than eclipsed by higher living costs, and the inflated prices of homes is one of the biggest cost hits there are.
• You can always rent.
• If you don't want to become wealthy, there's no problem. Buy whatever house you want in whatever city you like.
• Even if you buy a home outside these parameters, you still MIGHT be able to get rich if you are able to save the 20% of your income. I'm not sure, but it's at least an option to consider. (A way to do this would be to cut your spending in some other area where others spend more.)

5. I have to mention my formula for buying a house. Very similar to what they are saying above (though not as specific.)

6. The advice above is what we've used to buy our homes. Since we've been married, we've owned three houses. Here are the breakdowns on them:

• House 1 -- Value was 1.4 times our household income, mortgage was 1.2 times our household income
• House 2 -- Value was 1.4 times our household income, mortgage was 1.1 times our household income
• House 3 -- Value was 1.2 times our household income, mortgage was 0 times our household income (we paid cash for this house)

My wife was working when we purchased our first two homes. By the time we got house #3 she was staying home full-time with the kids. These sorts of results are possible when do you what I've been preaching on this blog for years: manage your career to maximize your income, work to add additional income, and keep your spending under control. For the most part, this is also what the book advises, though they focus less on generating income and more on controlling spending.

Stop Acting Rich

The other day I ran into this piece. It's about a new book by Thomas J. Stanley, one of the authors of my all-time favorite money book, The Millionaire Next Door. It's titled Stop Acting Rich. Here's a summary:

If you think that having a 5,000-square-foot McMansion means you’ve arrived financially, think again. You may be fooling the neighbors. You may be fooling yourself. But you’re certainly not fooling Thomas J. Stanley, who aims to show readers the difference between how the really rich really spend and how wannabe millionaires jeopardize their financial security by focusing so much on the appearance of wealth.

What Stanley discovers (through a special survey he used to collect the information for "Stop Acting Rich") is that rich people in general are actually frugal, driving Toyotas instead of BMWs, owning only one home instead of several. They’re not cheap, but they’re also not concerned with showing off their wealth. That’s an attitude markedly different from that of the aspirational buyers in our spendthrift culture who fork over $60 for bottles of Grey Goose vodka, $3,000 for Chanel suits and $250 for haircuts. Most of these people are merely buying into a myth that looking the part will get them the gig, as Stanley observes.

Mainly, Stanley has the good sense to suggest that, as millionaires do, we live below our means, that happiness isn’t found in having a wine cellar, or a walk-in closet or a Maserati (hard to believe, but apparently true). It seems like an all-too-easy prescription for our society of debt-addled consumers. But after reading through Stanley’s engaging anecdotes about how the other America actually lives, you may come to feel that perhaps you don’t need to impress the other guy so much. This in itself is no small thing. Your wallet will thank you. And you may end up happier.

A few thoughts on this:

1. Of course, I simply HAD to read this book, so I contacted the publisher and they sent me a copy. I can't wait to read it!

2. From this summary the book sounds like it's a re-hash of the findings in The Millionaire Next Door. If so, I bet I'll LOVE it.

3. His ideas on how real people get rich sound very familiar. :-)

Anyone out there read this book yet? What was your take on it?

Praise for The Millionaire Next Door

It was over a year ago that I started my series on one of my favorite money books of all time The Millionaire Next Door. However, I continue to get comments on the series such as this one from another fan of this book:

TMND is one of the five best books I've ever read. The only one on finance. Probably only one of ten books I've ever finished reading since I get bored with just about every other book.

I loved TMND because I could identify with it, word by word, page by page. It seemed to describe my life. My investment and spending behavior as well as my family (one wife and three children), is so similar to that described on the book that it was almost like looking into a mirror and understanding myself better.

On the wealth formula, at age 40 I've achieved 6.25 times the suggested net worth to be wealthy, 95% of it created in the last 10 years. I did not realize I was financially wealthy, I just thought I was doing good. The only difference that I have experienced with respect to the book is that it describes wealthy people's habits as being rather boring. I have achieved my economic success while developing four very different companies, investing in different opportunities and enjoying every minute. But the book is not just a mirror to make me feel good about myself or make those who are "being left behind" feel bad. I found it extremely insightful as to how to bring up your children to be economically self-sufficient. I believe my thoughts were heading in the general direction, but the book gives very clear and concise examples making a very strong case not to subsidize your children. It also gave me very good suggestions on how to work on my Will. At my age I had just handwritten a long itemized letter to make sure if I died my wife would know all the properties, company participations, and various investments that we have... but I was sure lacking the depth suggested by the book.

For those who do not find themselves in this book and probably choose to criticize it instead of changing their own habits, I'd suggest you try to meet some wealthy people and ask them a few questions. You may start to believe that the book is onto something and that might help you change your attitude. I myself am buying several copies of the book and lending it to several family members and friends.

For those who don't believe in the book because it does not give you investment advice and financial formulas, I would say it gives you a lot more. It gives you an insight into the right attitude to achieve wealth. I have not made my money on the stock market, nor a dot-com company. I didn't make it because of a masters in this or that, nor did I win the lottery. I saved, invested, reinvested, left my job and took a drastic change in lifestyle to start my own business from scratch. My parents are wealthy, and so were my grandparents. Each self-made. Each not giving a penny nor subsidizing the next generation other than helping to pay for the first four years of college. One may think it is genetic; it's not, it's a matter of learned behavior and attitude, becoming good habits over time. I'm lending the book to my brothers and sisters... I hope I can convince them to read it without the apathy or disdain they might develop. I hope they keep an open mind.

Truly a great book.

A pretty glowing endorsement, wouldn't you say?

As for me, The Millionaire Next Door is a must-read for anyone serious about growing their net worth. (If you want to see other books I really like, review my list of must-read money books.) To see a list of my best posts from The Millionaire Next Door series, visit Best of Free Money Finance: Millionaire Next Door.

Don't Look at Others' Riches -- Become Wealthy by Doing Your Own Thing

Here's a piece from Yahoo that discusses the fact that one of the key money problems in America is comparing ourselves to how others are doing. It makes the following statement which I found to be particularly interesting:

Meanwhile, books like "The Millionaire Next Door" by Thomas Stanley and William Danko have documented the fact that many wealthy people got that way by living below their means and saving heaps of money. But, as Boss points out, no one looks at someone with a used car and modest home and says, "Wow, they must be putting a lot of money aside for their future!" As she puts it, "They're just not on our radar screen."

This is a great truth of money -- you can't tell who's rich by looking at people. If you see someone with a big house, a late model, expensive car, country club memberships and the like, most people would assume that they're rich. But in many cases, they aren't. They may be high income families, but they are also likely to be high consumption families. And if so, they're not accumulating much wealth. After all, if you make a million dollars a year and spend a million dollars plus some, you're going backwards.

The opposite also holds true. You can see a guy who has an "average" house, older cars, and shops at the Salvation Army for "good buys" on clothes and think that he's not wealthy. But you never know. He could be the millionaire next door.

Take me for example. I live in a family-oriented neighborhood with an "average" house in our development. We drive inexpensive cars (compared to most), shop at Wal-mart, and wear nice but non-name-brand (usually) clothing (and we wear it until it gives out). But we apply the various money tips I discuss here at Free Money Finance and, as a result, our net worth is several times that of our neighbors (based on average statistics for our area). But you'd never know it from looking at us. In fact, you'd say we were middle class at best if all you did was look at our possessions, how we dress, what we drive, and how we spend our money.

I want to end this post with three main thoughts. First, don't judge a book by it's cover and don't get caught up trying to get more "stuff" than your seemingly wealthy friends, neighbors, and relatives. The truth is, they are likely not doing nearly as well as they appear to be doing. And why should you ruin your finances trying to keep up with their unrealistic spending levels?

Second, and this is great news for us all, anyone can become wealthy. All you need to do is spend less than you earn and take a few other, simple steps. If you want details on how, see the Free Money Finance Guide to Getting Rich.

Finally, it's been awhile since I had some posts from the great book The Millionaire Next Door. I may start posting on it again some day, but for now, here are some of the great posts I've done previous from this book:

• How You Become Wealthy

• Seven Factors to Becoming a Millionaire

• The Typical American Millionaire

• Three Questions to Determine if You're Affluent (Or if You Will Be)

How to Become a Millionaire (How to Become Rich)

If you'd like to learn more about how to grow your net worth, you can subscribe to Free Money Finance's RSS feed for free by clicking this link.

Yeah, yeah, a million dollars ain't what it used to be. But it's more than 90%+ of all U.S. households have. So who wouldn't want to be a millionaire?

This article from Money Central is written by a millionaire and in it she shares her tips on how to become a millionaire. The key tips:

• Make financial security a priority.
• Spend less than you earn.
• Save and invest regularly.
• Pay down debt.
• Own a home.

Good, simple, basic, effective tips. I'll come back to these in a minute, but let's first review a few other tidbits from the piece:

• If you haven't got a plan, it's way too easy to lose your way: spending money on stuff that isn't important, taking on debt that's toxic rather than helpful, giving in to despair when markets turn against you. Having a long-term goal, and a long-term view, are essential to keeping your balance.
• I bless my Depression-era mother, who grew up poor, knew how to pinch a penny and put a high priority on savings. She understood the importance of "paying yourself first," so from my first job I've been in the habit of saving at least 10%, and often 20%, of my gross pay. She taught me to use credit cards as a convenience, not an excuse to buy stuff I couldn't afford. She viewed people who carried credit card balances with the same suspicion and displeasure with which she regarded people who didn't keep a tidy house.
• Again, automated investing plans really help. We invest regardless of whether the market is up, down or sideways. We know that, in the long run, a well-diversified portfolio of stocks beats out every other investment, even if there are some bumpy times along the way.
• Another key: Don't cash out your 401(k) when you leave a job. About half of all workers do, and that's nuts. It's not just the taxes and penalties that eat up a quarter to a half of your withdrawal. More importantly, every $1,000 cash-out costs you $10,000 or more in future retirement income. So roll the money over into an IRA or your next employer's plan.
• But it does mean you should avoid high-rate debt and be cautious about your total debt load. Keeping your housing expenses to 25% of your gross pay, for example, will help ensure you've got enough left over to fund your other goals and have some fun once in awhile.
• Despite the ups and downs, owning a home has long been the cornerstone for wealth for most people. Consider that the median net worth of all homeowners in America in 2004 was $184,400. For renters, it was $4,000. Among the richest 10% of households, 96.9% are homeowners, compared with 69.1% of all households.
• We’ve discovered (duh) that it's easier to meet your goals, and have money for fun, if your income is rising. So we've invested in education, launched our own businesses and looked for new ways to generate cash. In today's ever-changing economy, you have to be ready to learn new skills and take new directions.
• Finally, and maybe most importantly: My husband and I don't live just for tomorrow. Our long-term goals are important to us, but we also want to enjoy life today. The fattest bank account in the world wouldn't be worthwhile to us if we didn't have a chance to enjoy each other, our daughter and our lives. So we appreciate the financial mileposts when we achieve them, but we know there's more -- a lot more --to life than money.

Just an excellent, excellent, excellent article all the way around. All this, and she also recommends two of my all-time favorite finance books -- The Millionaire Next Door and The Automatic Millionaire. What's not to love??!!

If you've been reading Free Money Finance for more than two seconds, you know how I talk about these issues on a regular basis. Here are some links that provide additional thoughts on what the article has highlighted:

Have a Financial Plan

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To
• MND: Why do Millionaires have Budgets?
• MND: Have a Budget

Spend Less than You Earn

• How You Can Become Wealthy
• Even the Rich Need to Spend Less than They Earn
• It's Not What You Make, It's What You Spend, Part 3

Save and Invest Regularly

• Why I Like Index Funds
• Poverty to Prosperity
• The 15 Minute Investment Portfolio

Pay Down Debt

• 7 Credit Card Trends that Can Cost You
• Yes, You Can Erase 15 Years of Debt in 14 Months
• Get Out of Debt, Part 1

Own a Home

• My Formula for Buying a House
• Why Homeowners Get Rich and Renters Stay Poor
• Increase Your Home's Value with Cheap Landscaping Tricks

Importance of Education

• Sell College to Your Kids
• The Value of an Education
• Facts on Education (and the Value of It)

Other Topics Mentioned

• The Richest Man in Babylon, Keep Part of All You Earn
• Don't Kill Your Retirement Fund When You Change Jobs
• Maximizing Your Greatest Asset: Why Your Career is So Important

Comments: The Typical American Millionaire, Part 2; Live Below Your Means

Here's a comment a reader who responded to my post on The Typical American Millionaire, Part 2:

It's not the job that's important.  What's important is spending below your means.  You can become a millionaire doing almost any kind of work.  If you can save about $500 a month at 6% growth, you will be a millionaire in 40 years.  Or $1,000 a month gets you there in 30 years.

You KNOW I love this comment. ;-)

See my thoughts on the issue at these posts:

• It's Not What You Make, It's What You Spend
• It's Not What You Make, It's What You Spend Part 2
• It's Not What You Make, It's What You Spend, Part 3

Reminder: Free Money Finance is currently in Russia.

Best of Free Money Finance: Millionaire Next Door, Part 9

For those of you who may have missed some of these, here's part 9 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Millionaire Test for a Financial Advisor
• How to Choose a Financial Advisor
• Use an Accountant

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Best of Free Money Finance: Millionaire Next Door, Part 8

For those of you who may have missed some of these, here's part 8 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Trade Sparingly and Invest for the Long Haul
• Almost Infinite Investment Return
• Hiring the Wrong Financial Advisor is Bad for Your Net Worth
• Operate Your Household Like a Business when Hiring a Financial Advisor

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 9 of this series.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Richest Man in Babylon
• The Millionaire Next Door
• The Automatic Millionaire

Best of Free Money Finance: Millionaire Next Door, Part 7

For those of you who may have missed some of these, here's part 7 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Know and Control Your Spending
• Planning Your Investments
• Have a Budget
• Comments: Buy a House You Can Afford

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 8 of this series.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Richest Man in Babylon
• The Automatic Millionaire
• The Millionaire Next Door

Best of Free Money Finance: Millionaire Next Door, Part 6

For those of you who may have missed some of these, here's part 6 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• More on Income Taxes
• Buy a House You Can Easily Afford
• Devote Time to Investment Planning
• Both Spouses Must be Frugal

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 7 of this series.

Comments: Operate Your Household Like a Business when Hiring a Financial Advisor; They're Interviewing You Too

Here's a comment a reader who responded to my post on Operate Your Household Like a Business when Hiring a Financial Advisor:

This is all great advice. Another thing to keep in mind while you are interviewing an advisor is, the advisor is also interviewing you to determine if he/she wants you as a client.

Good point! You don't want to go to the trouble to find an advisor that you want to work with but that doesn't want to work with you, so remember this tip.

Then again, how many advisors turn down business? And if they do, how often does it happen? Not very frequently, I'd guess.

Reminder: Free Money Finance is currently in Russia.

Free Money Finance recommends Emigrant Direct because of its 4.0% yield.

Best of Free Money Finance: Millionaire Next Door, Part 5

For those of you who may have missed some of these, here's part 5 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Why do Millionaires have Budgets?
• Four Questions
• Millionaires are Happier
• Minimize Taxes

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 6 of this series.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Automatic Millionaire
• The Millionaire Next Door
• The Richest Man in Babylon

Best of Free Money Finance: Millionaire Next Door, Part 4

For those of you who may have missed some of these, here's part 4 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Why are so Few Americans Affluent?
• Great Offense and Great Defense
• You Need a Frugal Spouse
• Why aren't You Wealthy? (More on Great Offense and Great Defense)

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 5 of this series.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Automatic Millionaire
• The Millionaire Next Door
• The Richest Man in Babylon

Best of Free Money Finance: Millionaire Next Door, Part 3

For those of you who may have missed some of these, here's part 3 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Facts About American Millionaires
• Why are There so Few Millionaires?
• Three Questions to Determine if You're Affluent (Or if You Will Be)
• Millionaires are Frugal

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 4 of this series.

Best of Free Money Finance: Millionaire Next Door, Part 2

For those of you who may have missed some of these, here's part 2 of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• The Typical American Millionaire
• Wealthy Defined
• How to Determine if You're Wealthy
• How People Become Millionaires

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 3 of this series.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Automatic Millionaire
• The Millionaire Next Door
• The Richest Man in Babylon

MND: Buying Cars, Millionaire Style, Part 2

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 113:

How many millionaires indicated that their most recent vehicle [purchase] was used? Nearly 37 percent. In addition, many millionaires indicated that they traded down recently -- that is, purchased lower-priced vehicles than they had before.

We recently bought two new cars. My wife's was the same value (at purchase -- inflation adjusted) as her old car while mine was just a tad lower than my old car.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Richest Man in Babylon
• The Automatic Millionaire
• The Millionaire Next Door

Best of Free Money Finance: Millionaire Next Door, Part 1

For those of you who may have missed some of these, here's a list of Free Money Finance's best posts from the "MND" (The Millionaire Next Door) category:

• Net Worth is What Matters
• How You Become Wealthy
• The Average Millionaire
• Seven Factors

Want to be sure you don't miss any great money saving tips? Consider subscribing to Free Money Finance. You can then review all the new stuff and click through to only what interests you. I've made subscribing easy by including a "Subscribe to FMF" section on the left hand column (at the bottom) of every page. I've set it up so you can subscribe easily using Bloglines, Yahoo, News Gator, or MSN. Or you can just click my feed and subscribe using your preferred method of reading blogs.

Click here to read part 2 of this series.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Automatic Millionaire
• The Millionaire Next Door
• The Richest Man in Babylon

MND: Buying Cars, Millionaire Style

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 112:

How do millionaires go about acquiring motor vehicles? About 81 percent purchase their vehicles. The balance lease. Only 23.5 percent of millionaires own new cars. Most have not purchased a car in the last two years. In fact, 25.2 percent have not purchased a motor vehicle in four or more years.

Not much surprise here. Millionaires buy cars and drive them forever. This is what I do as well. The last two cars we got rid of were 10 and 14 years old respectively.

Looking for a great book that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Automatic Millionaire
• The Millionaire Next Door
• The Richest Man in Babylon

MND: Use an Accountant

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 108:

Another correlate of wealth accumulation is employment of a CPA, not just to do taxes but also to provide various kinds of investment advice.

I use an accountant to do my taxes. It's basically a time/cost decision. For the 25 hours I could spend doing my taxes (and maybe getting it right), I can pay someone $600 and be done with it. This is a good deal to me.

As far as investment advice from my accountant, I don't think so. She'd need to pass my test for selecting a financial advisor and I don't think she's close.

Looking for a great gift that has an almost infinite investment return? Here are three recommended by Free Money Finance:

• The Automatic Millionaire
• The Millionaire Next Door
• The Richest Man in Babylon

MND: How to Choose a Financial Advisor

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 108:

Choose a financial advisor who is endorsed by an enlightened accountant and/or his clients with investment portfolios that in the long run outpace the market. If you don't have an accountant, hire one.

This is very similar to my criteria for selecting/using a financial advisor.

MND: Millionaire Test for a Financial Advisor

Here's another post in our series on the learnings from the book The Millionaire Next Door. Page 106 tells the story of how one millionaire handles financial advisors who call him (FYI, this guy has a net worth of over $5 million but he's never earned more (from employment) than $75,000 per year):

I tell him, "So you're really good. Well, I'll tell you what. Send me a copy of your personal income tax returns from the last few years and a list of what you have had in your own portfolio the last three years. If you made more money than I did from investments, I'll invest with you."

When they say, "We can't show that to you," I tell them, "You are likely to be full of baloney."

This is the same rationale I use for deciding whether or not to use a financial advisor.

MND: Operate Your Household Like a Business when Hiring a Financial Advisor

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from pages 104-105:

Operate your household like a productive business. The best businesses hire the best people. They also patronize the best suppliers. Utilizing the best human resources and top suppliers are two major reasons the most productive organizations succeed while others fail. You should view all financial advisors who solicit you as a client merely as applicants. View them as prospective employees or suppliers for your household. Then ask yourself some simple questions: What criteria would a productive personnel manager use in evaluating each of these applicants? Would a skilled purchasing agent and/or chief financial officer of an organization buy investment information and products from this potential supplier? What criteria, what key pieces of background information, would be used to evaluate potential suppliers?

I'll go a step further -- don't evaluate them at all. You should be getting your potential financial advisor options from friends, not from cold calls. If you're looking for a financial advisor, ask friends and family members who are doing well financially who they use as an advisor. Then go and interview these financial advisors as if they were job applicants.

MND: Trade Sparingly and Invest for the Long Haul, Part 3

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from pages 100-101:

We have encountered more non-millionaire active traders than millionaires who actively trade. How can this be possible? Because it is very expensive to buy and sell, buy and sell, buy and sell one's equity holdings each day or week or month.

Often, active investors spend more time trading than studying and planning their investments. Conversely, millionaires spend more time studying far fewer offerings. Thus, they can focus their time and energy -- the resources needed to master their understanding of a much smaller variety of offerings in the market.

As I've said previously, both time and cost are reasons I don't actively trade (at least from a selling standpoint -- I regularly invest in mutual funds through automatic investment programs I've set up).

MND: Hiring the Wrong Financial Advisor is Bad for Your Net Worth

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 104:

Why aren't you as wealthy as you should be? It may be because of the way you operate your household. Would a business, especially a very productive one, ever hire a key employee without doing a serious background check and an in-depth interview? No! Yet most people, even those with high incomes, hire financial advisors after obtaining little or no background information about these "employment candidates."

I already have the financial planners of the U.S. after me, so I'll keep my comments to a minimum. However, a good, solid financial planner should have nothing against what I say (or what the quote above says). He/she should welcome scrutiny and hope that it happens more often. That way, the salespeople who pose as financial planners can be exposed and the "real" planners will benefit by getting more business.

As a review, here are some other pieces I've written about financial planners:

• FMF Speaks: My Thoughts on Using Financial Planners (Or "Why I Don't Go to a Fat Doctor")
• Comments: FMF Speaks: My Thoughts on Using Financial Planners (Or "Why I Don't Go to a Fat Doctor")
• Help! I Need a Money Adviser, not a Salesperson

Almost Infinite Investment Return

I was browsing through my Amazon affiliate sales the other day and noticed that I had actually sold something! As I've said before, all my profits go to charity, so I was happy that I'll be able to make additional donations to The Sparrow's Nest. But this got me thinking about something else.

The two books that were purchased were The Millionaire Next Door and The Richest Man in Babylon. I got to thinking about these books, what they contain, and the people who bought them. I also started to think about my own life and how it's been impacted by a few good books. This is when I became VERY happy.

I became very happy for the people who bought the books. I know that if they read and apply the ideas found in these books, they will be much, much, much better off financially. In fact, if they apply the ideas over several years, they will become quite wealthy. So for a few dollars, these people now have the ideas that could help their net worth increase by tens of thousands, hundreds of thousands, or even millions of dollars.

So what's the return rate on those investments? If you bought something for $10 and 30 years later it had helped you become worth $1 million, that's a pretty amazing rate of return. In fact, it's close to an infinite rate of return. Now you could get these books from the library and make the return rate infinite (since there's no cost to you), but based on my experience, you need to have your own copies of these so you can read and re-read them often, underline, mark, and write in them, and refer to them at various times in the future. (Now if you get one as a gift, the return could be infinite too.) ;-)

That's why I recommend the books that I do. It's because I've read them over and over, have applied the principles they discuss to my life, and have seen my net worth grow substantially as a result. That's also why my recommended book list isn't 100 books long -- there just aren't that many books (at least that I've found) that meet my criteria. For now, the only books I can give this recommendation to are:

• The Millionaire Next Door
• The Richest Man in Babylon
• The Automatic Millionaire

If you don't have any of these books, I encourage you to get, read, and apply them. Doing so will give you a return close to infinite.

MND: Trade Sparingly and Invest for the Long Haul, Part 2

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 100:

One in five (millionaires) hold [investments], on average, for a year or two; one in four hold for between two and four years. About 13 percent are in the four-to-six year category. More than three in then (32 percent) hold their investments for more than six years. In fact, 42 percent of the millionaires we interviewed for our latest survey had made no trades whatsoever in their stock portfolios in the year prior to the interview.

I do the same thing with my portfolio -- I don't (corrected) sell very often (I buy quite frequently through my 401k and automated investing accounts). Why does this make sense? Here are some reasons:

1. Time. I don't have time to be trading in and out of stocks, tracking them that closely to know when to buy/sell, etc. I have a simpler investment plan that works for me timewise.

2. Cost. Every time you buy and sell stocks, you pay a broker. This can get very costly (which cuts into your returns).

3. Taxes. When you sell a stock in a taxable account, you have to pay taxes on the capital gains of that sale. As long as you hold the investment, there's no tax on it (other than dividends it may generate).

MND: Trade Sparingly and Invest for the Long Haul

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 100:

Nearly all (95 percent) of the millionaires we surveyed own stocks; most have 20 percent or more of their wealth in publicly traded stocks. Yet you would be wrong to assume that those millionaires actively trade their stocks. Most don't follow the ups and downs of the market day by day. Most don't call their stock brokers each morning to ask how the London market did. Most don't trade stocks in response to daily headlines in the financial media.

In other words, these people are in it for the long haul. They know that over a long period of time, the stock market will go up (or at least it has historically, so the odds are it will continue to do so). As such, they consistently invest monies into the market, ignore the noise, and watch their portfolios climb.

This is what I do. I invest every month (through my 401k as well as automatic transfers to an investment account), mostly in index funds tied to the overall market's performance. In addition, I ignore the financial media -- in part. I say in part because I ignore what they "advise" or what they say is going to happen with the market. Why? Because they are almost always wrong -- at least in the long term. So I do the opposite of the conventional wisdom. When things are bad and others are selling, I'm buying. When there's a run up, I hold tight and invest my regular amounts (I hardly ever sell). This strategy has been quite successful for us throughout the years.

Comments: Buy a House You Can Afford

I recently posted from the book The Millionaire Next Door saying that one of their rules to wealth-building was to buy a house work two times your annual income or less. I received a handful of comments on it, and here they are with my thoughts after each one:

We are in the third house that we bought. For our first 2 houses the mortgage were indeed less than twice the household income. But the current one is a little over. Why the difference? it depends on the circumstances. The book was written in the late 80's? I believe? Back then, interest rate was sky high because the fed wanted to fight inflation. What's assumed in the book was probably interest rate of at least 8 or 9 percent.

At what price point is suitable is a complicated subject. A better measurement is what is the percentage of the mortgage payment amounts to the monthly total after tax income. Cashflow analysis, my friend, is the key.

I think their actual point was that many people stretch themselves to the limit to buy a house, then have very little left over for wealth accumulation. The people that stayed within the rule had a better chance of having extra money left over each month.

Personally, I don't care a lot about taxes and the fact that mortgage interest is deductible. Yes, it's a nice financial exercise to calculate the "real" cost of the house once tax deductions are factored in, but in real life, very few people do this. I care more about no debt on my balance sheet. That's why we paid off our house early -- in seven years -- through a combination of buying a house worth less than two times our income then making extra payments, putting salary increases, bonuses, gift money -- anything we got -- against the mortgage. We paid off our mortgage when I was 34 years old and we haven't had a mortgage payment in seven years. As a result, our net worth has skyrocketed as we're able to sock away a good portion of income every month.

Here's the next comment:

One of the senses that I got when I read this book years ago, was that it is more about not trying to keep up with the neighbors, as opposed to living in a better, larger house. We live in one of the better neighborhoods and have seen very high gains on our equity. The trick for us is not trying to keep up with our debt laden neighbors. While we have nice things, we tend not to drive 45K cars etc.

Bingo! This is one of their other points. If you buy an expensive house, you're not only stretching your finances, but now you need to keep up with your neighbors who also have expensive houses. They also tend to drive luxury cars, have swimming pools in their back yards, belong to expensive clubs, take extravagant vacations, etc. As you try to keep up with them, you get deeper and deeper into debt.

Here's the final comment:

Is this rule of thumb even possible anymore? It isn't possible here in New York, that is for sure. When a raised ranch in a bad school district is selling for $300,000, then this just doesn't work.

Here's my advice to people who live in New York, California, Boston, Chicago, and other expensive locales: move. It's a big country out here and believe it or not, an $80,000 annual income is actually a lot for most people -- not a subsistence wage like you think it is.

I know, I know. There's "culture" there. There's lots to do. There's always something going on even at 4 am in the morning. Besides, your friends and family live there. My thoughts:

1. Culture is over-rated in most cases and is not exclusively found in big cities.

2. Who cares if there's always something to do. Do you have the time and money to always do it?

3. Most people sleep at 4 am. Don't you?

4. Get new friends.

5. Take your family with you.

Ok, so I'm being a bit sarcastic. But really, moving is an option that many people haven't considered but should.

MND: Have a Budget

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 78:

Planning and controlling consumption are key factors underlying wealth accumulation.

Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.

We've had an annual budget every year we've been married. We've tracked our spending on Quicken for the past ten years or so. And we can attest that these principles are true. Apply them to your life and your net worth will be much better off.

MND: Planning Your Investments

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 96:

Planning is typically found to be a strong habit among people who have demonstrated propensity to accumulate wealth. Planning and wealth accumulation are significant correlates even among investors with modest incomes.

You have to take some time to plan your investments or you can't expect them to give you a good return. Now before you dismiss this idea because "you just don't have the time," let me say that you don't need that much time. Here are two points that support this assertion:

1. No matter what amount of time is available to plan your investments, you can find a strategy that fits your availability.

2. The difference between people who accumulated wealth and those that didn't is not that great in this area. Wealthy individuals spent an average of 8.4 hours per month planning investments while under accumulators of wealth spent 4.6 hours per month. For an additional one hour per week, you can move from the poor house to the penthouse (or at least head in that direction). May I suggest canceling your cable and spending that time planning your investments and finances instead? It will be a win-win. You'll save on cable bills and get more out of your investments.

MND: Know and Control Your Spending

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 83:

Only those clients with considerable wealth want to know exactly how much their family spends on each and every category.

Do you know exactly how much your family spent last year for each and every category of product and service? Without such knowledge, it's difficult to control your spending. If you can't control your spending, you're unlikely to accumulate prodigious amounts of wealth.

I know how much we've spent in every category for the past 10 years. As I've said before, we use Quicken to track and analyze our spending. Without it, we'd be shooting in the dark. With it, we can make intelligent financial decisions and control any spending that starts to get out of line.

MND: Both Spouses Must be Frugal

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 80:

What if your household generates even a moderately high income and both you and your spouse are frugal? You have the foundation for becoming wealthy and maintaining your wealth. On the other hand, it is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.

You may read all the money saving tips here at Free Money Finance and think I'm tight with a buck. You should get to know my wife. I have nothing on her. An example: One time our house was tee-peed with toilet paper along with several houses in our neighborhood. Two days later, I noticed our toilet paper was nicer that it usually was. Yep, you guessed it. My wife had collected the larger rolls from outside and we were using them. Of course once I pointed out how cheap that was (not to mention potentially unsanitary -- who knows where that had been), she was a bit embarrassed. So I promised not to tell anyone about it.

But I can certainly attest that this quote from The Millionaire Next Door is true. It's worked in our lives and I've seen it go the other way in countless couples' lives. If one keeps on spending, even if the other is frugal, their finances are in trouble.

MND: Devote Time to Investment Planning

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 71:

There is a strong positive correlation between investment planning and wealth accumulation. Over-accumulators of wealth allocate nearly twice the number of hours per month to planning their financial investments as under-accumulators do.

They don't give an absolute number of hours (at least nearby this quote) so this is a relative measure. I don't spend a lot of time every month planning my investments because I don't have the time to spend hours and hours in this area. This is fine since my investment strategy is based on the time I can devote to it. I've done well using it and the time/return ratio is very, very good.

Work Hard, Earn Less?

Here's a piece from Yahoo about how controlling taxes is a key to your financial well-being. It's from "Rich Dad Poor Dad" author Robert Kiyosaki. It's an article that I agree and disagree with. First, the part I support:

One of the reasons the rich are getting richer is because they have more control over our number one expense: Taxes.

This statement is backed up by findings from The Millionaire Next Door that say millionaires minimize taxes and pay only a small amount of their net worths to Uncle Sam.

Now, here's where the article goes south:

For example, my passive income from real estate can be the lowest taxed income of all. On one of our commercial properties, my wife and I receive approximately $30,000 a month in income -- almost tax-free. When we sell the property, we can legally take the capital gains without paying capital gains tax, which in our state would be 20 percent. Try doing that with stocks, bonds, mutual funds, or real estate investment trusts (REITS). In fact, mutual funds can be a tax trap if you do not understand the rules.

Another example, when we invest in oil and gas projects, we receive approximately a 70% tax deduction and a depletion allowance -- another tax break -- for income from oil and gas revenues. That means if I invest $10,000 in oil and gas, I can deduct approximately $7,000 from my income as well as receive a tax break for income from the sale of the oil and gas.

Obviously, I'm not a tax professional and you should not make any tax or investment decisions based on this brief article. My point is this: If I had followed my poor dad's advice and got a job with a 401(k), there would be almost nothing an accountant could do to protect me from higher taxes. The 1943 Current Tax Payment Act saw to that. Today, employees with a 401(k) work hard and earn less.

I simply can't agree with this. Yes, maybe he's technically correct (based on the treatment of real estate, oil and gas revenues, etc. -- I can't even vouch for this though), but to say that people who invest in 401ks are working hard and earning less is simply not true. In fact, 401ks are one of the best ways to avoid taxes and accumulate wealth over time. And when you add in employer matching amounts, they become even better investment options -- ways for people to earn and save MORE, not less.

For your reference, here are some additional posts on the value of 401ks and how to handle them:

• Tips for a Great 401k
• Advantages of a 401k
• How Much Goes in the 401k?
• 401k Tips from Fool

MND: More on Buying a House You Can Easily Afford

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 69:

Living in less costly areas can enable you to spend less and to invest more of your income. You will pay less for your home and correspondingly less for your property taxes. Your neighbor will be less likely to drive expensive motor vehicles. You will find it easier to keep up, even ahead, of the Joneses and still accumulate wealth.

As I said last Thursday, this is what my family has done and it has been a key part of raising our net worth.

MND: Buy a House You Can Easily Afford

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 68:

Here is another one of our rules:

If you're not yet wealthy but want to be someday, never purchase a house that requires a mortgage that is more than twice your household's total annual realized income.

This rule has worked for us. Every house I've purchased and every house my wife and I have purchased have been worth less than twice our household's total annual realized income. (And since that first house purchase, our net worth has grown dramatically.) Yes, this meant that we have never lived in the "ritziest" neighborhoods in town and we didn't have a five-bedroom place on a lake, but we lived in nice middle class areas with friendly neighbors. This is certainly fine with us and it has been a key part of raising our net worth.

MND: More on Income Taxes

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 56:

Income tax is the single largest annual expenditure for most households. It is tax on income, not on wealth and not on the appreciation of wealth if this appreciation is not realized; that is, if it does not generate a cash flow.

What is the message? Even many high-income-producing households are asset poor. One reason is that they maximize their realized incomes, often to support high-consumption lifestyles.

If you read The Millionaire Next Door post yesterday, you know that millionaires only have 7 percent of their wealth subject to tax each year. Pretty good stats. It's likely because they are invested in growth stocks, real estate, and businesses that can appreciate from year-to-year but don't churn out cash (the business will, of course, but it can also appreciate without yielding cash at the same time). I'm trying to get more of my assets in these categories as I'm fed up with taxes and looking to minimize them as much as possible.

MND: Minimize Taxes

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 55:

The typical millionaire in our surveys has a total annual realized income of less than 7 percent of his wealth. This means that less than 7 percent of his wealth is subject to some form of income tax. In our latest study of millionaires, the percentage was found to be 6.7 percent. Millionaires know that the more they spend, the more income they must realize. The more they realize, the more they must allocate for income taxes. So millionaires and those who will likely become affluent in the future adhere to an important rule:

To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).

I'll spare you a rant on income taxes and simply end this post with a comment that this makes perfect sense. If you invest in assets that appreciate but don't spin off cash, there's nothing to be taxed. Ultimately, you will have a taxable event (for example, when you sell the asset), but you can put that off for years while your assets appreciate.

MND: Millionaires are Happier

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 46:

Financially independent people are happier than those in their same income/age cohort who are not financially secure.

Ok, I'm a bit slow sometimes, but even I could have guessed this! ;-)

I don't think it's that "money makes you happy" as much as being financially secure eliminates a lot of worry, arguments, etc. within families. That's my guess as to why they are happier.

What do you think?

MND: Four Questions

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from pages 40-46:

Do you wish to become affluent and stay affluent? Can you answer "yes" candidly to four simple questions?:

1. Does your household operate on an annual budget?

2. Do you know how much your family spends each year for food, clothing, and shelter?

3. Do you have a clearly defined set of daily, weekly, monthly, annual, and lifetime goals?

4. Do you spend a lot of time planning your financial future?

Here are my answers to these:

1. Yes. We plan out our budget for the next year at the end of each year. We keep it on an Excel spreadsheet. (Quicken's budgeting features leave something to be desired for me.) We then update it mid-year to check our progress and make adjustments.

2. Yes. We track all spending on Quicken and have for 8 years or so.

3. "Clearly defined" are the key words here. I have written annual goals that translate into daily, weekly, and monthly to-dos. In addition, I have a series of statements about who I want to be and what I want to do in my lifetime. I'd say they are fairly defined, so I'm giving myself a "yes" here too.

4. I write a financial blog with 30-40 posts per week -- what do you think the answer to this is? ;-)

As a result, we have a high net worth compared to others in our age group. You can too if you simply follow the principles we discuss here.

MND: Why do Millionaires have Budgets?

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from pages 39-40:

When we tell our audiences about the budgeting and planning habits of the affluent, someone always asks a predictible question: Why would someone who is a millionaire need to budget? Our answer is always the same:

They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.

Yes, you can make all the money in the world, but if you spend all the money in the world plus $1, you have a negative net worth. Budgeting and controlling expenses hold the key to wealth.

MND: Being Financially Fit

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 40:

Most people want to be physically fit. And the majority know what is required to achieve this. But despite than knowledge, most people never become well conditioned physically. Why not? Because they don't have the discipline to just do it. They don't budget their time to just do it. It is like becoming wealthy in America. Oh, you want to all right, but you play lousy financial defense. You don't have the discipline to control your spending. You don't take the time to budget or plan. Note that under accumulators of wealth spend three times as much exercising per month as they do planning their investment strategies.

The road to wealth is not all downhill -- there is some effort required. While you don't have to spend 40 hours a week working on your finances, you do have to commit the minimal time needed to set goals, track your spending, and take action to make your money work as hard as possible for you. I know you've taken at least one step since you're reading this blog. I hope you find something here every day that helps you improve your finances.

MND: Why aren't You Wealthy? (More on Great Offense and Great Defense)

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 38:

Why aren't you wealthy, you ask? Well, Let's examine your lifestyle. Is it one of great offense (earning a lot)? Are you in the $70,000, $100,000, $200,000 income category? Congratulations, you play wonderful offense. But how is it that you keep losing the game called wealth accumulation?

Be honest with yourself. Could it be that you play terrible defense? Most high-income earners are in the same situation, but not most millionaires. Millionaires play both quality offense and quality defense. And quite often their great defense helps them outscore/outaccumulate those who outearn/have superior offenses. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.

What more can I add? Here's another example of "it's the ability to save, not to earn, that makes you wealthy."

MND: You Need a Frugal Spouse

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 37:

Most people will never become wealthy in one generation if they are married to people who are wasteful. A couple can not accumulate wealth if one if its members is a hyperconsumer. This is especially true when one or both are trying to build a successful business. Few people can sustain profligate spending habits and simultaneously build wealth.

This goes back to the leaky bucket analogy. No matter how much water you pour into a leaky bucket, if it's leaky enough, you'll soon be out of water.

MND: Great Offense and Great Defense

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 37:

Consider the typical affluent household. Most of these men play great offense in the game called income generation. Great offense in economic terms means that a household generates an income significantly higher than the norm. Most of the households also play great defense; that is, they are frugal when it comes to spending for consumer goods and services.

As we've discussed, you don't have to have a high income to become wealthy, you just need to be a saver. But if you do have a high income and are frugal, you can save a lot more a lot faster and become wealthy much faster.

MND: Why are so Few Americans Affluent?

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 36:

Why are so few people in America affluent? Even most households with six-figure annual incomes are not affluent. these people have a different orientation than [most millionaires]. They believe in spending tomorrow's cash today. They are debt-prone and are on earn-and-consume treadmills. To many of them, those who do not display abundant material possessions are not successful. To them, nondisplay oriented people are their inferiors.

If my choice is to look like I have a million bucks and really be broke or look "average" and really have a million bucks, I'll certainly take the latter. That's the choice many millionaires have made.

Update: Linking to the Beltway Traffic Jam.

MND: The Most Millionaires Have Ever Spent on a Suit

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from page 31:

According to our most recent survey, the typical American millionaire reported that he (she) never spent more than $399 for a suit of clothing for himself or for anyone else. Fifty percent or more of the millionaires surveyed paid $399 or less for the most expensive suit they ever purchased. Only about one in ten paid $1,000 or more; only about one in one hundred paid $2,800 or more. Conversely, about one in four millionaires paid $285 or less, and one in ten paid $195 or less for his (her) most expensive suit.

Just another example of how people got to be millionaires by spending less than they make and living well below their means.

MND: Millionaires are Frugal

Here's another post in our series on the learnings from the book The Millionaire Next Door. A quote from pages 28-29:

What are three words that profile the affluent?

FRUGAL FRUGAL FRUGAL

Most [millionaires] don't become millionaires until they are fifty years of age or older. Most are frugal. And few could have ever supported a high-consumption lifestyle and become millionaires in the same lifetime.

This is good news for us all. One of the keys to becoming wealthy is something we can control -- spending less than we make (over a long period of time)!