Here's an excerpt from the book The Frugal Millionaires: 70 millionaires anonymously share their ideas about money to help each other and you. Today we're seeing what the millionaires have to say about investing and mortgages. There's lots of good advice here -- as you would expect. After all, these people are doing pretty well financially.
FYI, these are some representative tips from The Frugal Millionaires. There are over 800 tips in the book. The frugal millionaires are only referenced by their initials. The author signed a confidentiality agreement that the millionaires' identities would never be disclosed in exchange for them saying whatever they wanted. If they chose not to have their initials used they were given the initials AFM which is an acronym for Anonymous Frugal Millionaire.
INVESTING
SLL – Rules of investing in stocks:
-
Rule #1: Don’t invest in anything you don’t understand. You are buying a piece of a business, not “betting” on price movement. Read books on investing.
-
Rule #2: Assess your risk tolerance. What’s more important, the safety of what you have or growth? Pick the longest time horizon. Longer is better.
-
Rule #3: Have a good reason to purchase, like good management or if the stock is undervalued.
-
Rule #4: Diversify. Buy funds until you know enough to buy individual stocks. Look for low expense ratios.
JTA – The best advice I can give you is to invest your money or go into a business that pays you when you are awake, sleeping, eating and/or on vacation. Otherwise, start investing early and be patient. Be weary of get rich quick schemes. When everyone was at the water cooler talking about stocks or became a day trader in the late 1990’s it should have been a sign to get out of the market. When everyone was a part time speculative home builder in the early 2000’s it should have been a sign to get out of that market.
B&GH – I never wake up in the middle of the night screaming, “Oh God, I have too much of my money in cash!” Hope for the best but plan for the worst. When your stocks are up 10%, take that money off the table and move it into safer things. Decide how much you are willing to lose and put the rest in safe places. Don’t confuse amusements with investments. Cars, boats and planes are amusements.
DMG – Constantly look for ways to increase your rate of return by 1%. It will make a difference.
MORTGAGES
AFM – Don’t be a slave to your mortgage. Don’t believe real estate agents, loan officers and seemingly “rich” people when they say that you should “stretch and buy big.” Your home and mortgage should reflect what your goals are. My goals involve family and freedom. That means that I wanted a house that was nice, big enough for a family, etc.…but not so expensive that both my wife and I would have to work –or– that I would have to work in such a time-suck job that I’d never be home. Where’s the freedom in that scenario? The result: my wife has never had to work, we’ve never been late on a payment or had to dip into investments. Why? Because we were never over-extended in the first place. That has kept our wealth growing and our sanity and freedom intact.
S&AW – Don’t buy the biggest house you can “afford.” Buy a house that won’t be viewed as a financial burden. Nothing makes you less mobile than a mortgage you can’t fund.
AFM – Stick with a 15 or 30 year conventional loan. Don’t go for the tricky ARMs (Adjustable Rate Mortgages) or interest only deals…you won’t like it when they adjust or if/when the real estate market goes down.
AFM – You can only afford a house when your income, after taxes and expenses, allows you to: 1) Save for your children’s education, 2) Save for your future, and 3) save for short term needs.
I like these posts, FMF, and I think I'll have to pick up this book. It reminds me of The Millionaire Next Door, in the idea that becoming a millionaire is less about "get rich quick" and more about common sense and patience.
Posted by: spivey | January 16, 2009 at 10:22 AM
Spivey - I wrote The Frugal Millionaires and re-read The Millionaire Next Door before writing TFM. Some people have asked me: Is this book like The Millionaire Next Door? The answer is: No, not really.
TMND is a fantastic book that is now over 12 years old, but the philosophies are timeless. It is research and commentary heavy (the authors analyzed the cost per pound of cars that millionaires drive…uh, OK.) and dealt with a very narrowly defined target audience (mostly small business owners who were older and wealthy). The 7 success factors they identify are very different from the 6 ways frugal millionaires think differently about money and the 15 best practices uncovered in The Frugal Millionaires. (Not to mention the 800+ practical tips offered by TFM - directly out of the mouths of the frugal millionaires.) TFM is more "tell it like it is" than a research report.
Others have asked: Is this book like Rich Dad, Poor Dad? The answer is: No, not at all.
The highly popular RDPD is written like a story or fable and communicates finance concepts simply. It is basic finance education material (in a very understandable format), but it’s also a platform to sell a lot of other products. TFM is less “story” and more on “how it’s actually done.” And TFM isn’t selling anything other than the ideas in the book. We also donate a portion of the profits to charities designated by the frugal millionaires.
It is unclear what other personal finance books The Frugal Millionaires could be compared to. It might loosely be a crossover between Dave Ramsey’s and Larry Winget’s hard edged styles, but targeted at more sophisticated audiences who appreciate learning from people who haven’t failed in their personal finances. It’s more like the way Warren Buffett or John Bogle think…practically and with humor.
I hope you enjoy the book,
Jeff
Posted by: Jeff Lehman | January 16, 2009 at 11:38 AM
It's good to hear advice on buying a home that is right for you and not one that will impress your friends. Too often do we see people bragging about how big their home is, when in reality they took out a mortgage that they will be paying off for the rest of their lives.
Posted by: Studenomist | January 16, 2009 at 12:24 PM
"the authors analyzed the cost per pound of cars that millionaires drive…uh, OK."
LOL. I'm still trying to figure out how to make money off that information. :)
Jim
Posted by: Jim | January 16, 2009 at 12:37 PM
I have mixed feelings about rule #1. You had better know a company's business prior to investing in it.
However, speculation can be a valid strategy, the thing is, speculation is an active investment strategy requiring active monitoring of the investment. I have done well speculating and going long term. The only time I have done bad is when acting on "watercooler" tips. If you want to invest and not actively monitor the investment then DO NOT speculate, if you have the time, inclination, and ability to closely monitor your investment then speculation may work.
Back in the heyday of the day trader this popular image of buying in the morning, lounging during the day, and selling at the end of the day to make money only worked because of the hyper-bull state of the market. Everyone knew which direction things were going and were able to profit on it, at least until the bears came to town. Of course, a lot of those "day traders" only knew buy low/sell high strategies.
A friend of mine tells me she has a friend who makes a handsome living off of day trading - but it is regular 9to5 job in doing it.
Posted by: Mark Framness | January 16, 2009 at 02:58 PM
I fully agree with the mortgage aspect. My wife and I just bought a new house. Are limit was $350,000 (with a good down payment), that is were we felt comfortable and we were not going to be extended. However, the lender was trying to give us around $500,000 with little down. In my opinion we could not afford that much. Correction, we could not afford that much and save for anything else. It amazes me that lenders can be so short sighted. I would rather have people in homes they could afford even barring unforseen circumstances, then to have people overly extended and higher foreclosures.Even in todays economic climate lenders still do this. The only difference is they won't do it for low credit scores.
On a side note I ordered the book yesterday. All the posts got me interested.
Posted by: Steve | January 16, 2009 at 06:53 PM
For some reason, I don't find anything in these millionaire books that could make a millionaire out of a hamburger flipper.
Posted by: poor boomer | January 17, 2009 at 08:18 PM
Live like a lender not a borrower is the thumb rule in frugal investing and mortgages. In investing, buy substantial quantities of stocks if the par values are low and buy small quantities when their par values are high, since it is largely the time to dispose your stocks. The golden rule in investing in stocks is buying it in a going concern basis or for a longer periods of time, let us say two decades will be wise enough. As far as mortgages are concerned, see to it that you pay all your amortizations as soon as possible to avoid surcharges, penalties and fines. If possible pay all transactions on a cash basis. The best way to invest is first to save and to follow the adage that it is human to spend but it is divine to save which will afford us the leeway to invest in the future. As they always say the best way to predict your future is to create it. You create your future by saving frugally then when it becomes material or substantial then it will afford you to invest in stocks, bonds, TDs and money markets. Do not trust money but put your money in trust is the Midas Touch to wealth and becoming a millionaire.
Posted by: Artfredo C. Abella, Ph.D. - C.O.A. -C.A.R., La Trinidad, Benguet | September 14, 2009 at 11:40 PM