Slow and Simple Finances - Secrets of the Millionaire Next Door
The Millionaire Next Door by Thomas J. Stanley https://www.goodreads.com/book/show/998.The_Millionaire_Next_Door
This book is based on Thomas J Stanley’s research into how self-made millionaires become wealthy. We have an idea of the “new rich” as people who live in a mansion, drive a sports car and frequent posh resorts and expensive restaurants. The myth is that such people, through luck or design, found some special way to make huge amounts of money which catapulted them into the high life. Jewelry-bedecked movie stars or sports heroes come to mind. Stanley’s meticulous research shows that such “shooting stars” are a tiny minority of self-made millionaires and that these high profile people tend to rapidly burn through their sudden wealth because of their lavish lifestyles.
Stanley’s research shows that the vast majority of self-made millionaires actually live quiet, comparatively simple lives. They live within their means and make cautious, well-informed investments. Those of us on the journey towards a more sustainable and minimalist life can learn from these real-life case studies.
Stanley was commissioned to do market research on self-made millionaires. So he invited them to participate in a focus group that aimed to pinpoint common factors that lead to financial success. He booked an expensive hotel suite and filled it with gourmet food to entertain his guests in the manner to which he imagined they were accustomed. However when they arrived, to his great surprise, they were dressed in affordable, ordinary clothes, sat uncomfortably on the silk upholstery and only nibbled the crackers. Not one touched the caviar or champagne. Stanley realized that, though wealthy and successful, these millionaires had quite simple tastes. He found this trait to be an important part of their success. They had no interest in expensive food, flash houses, designer clothing or fancy cars.
Their advice on reaching financial security was prosaic: “The moment you earn more than you need to live, save as much as you responsibly can and avoid spending cash on things you don’t need.”
“Budgeting well and living a frugal life is really all you need to build wealth (especially if you’re still young). Around 55% of all millionaires attest their wealth simply to being deliberate about their finances and disciplined in their saving.” says Stanley.
The author relates an illuminating story about two sisters whose father was extremely wealthy. One sister was cut off from her dad and had to make her own way in the world while the other inherited all her dad’s money. The poorer sister lived simply and built a successful career while her richer sibling became a profligate spender with expensive tastes in housing, clothes and cars. These bad habits compounded until she found herself in serious financial trouble. Despite her father’s millions, she was unable to afford college tuition for her children. Ironically, the self-made sister ended up paying for the college tuition of her nieces and nephews.
Stanley explains that sensible spending habits and limiting consumption are keys to financial independence - NOT chasing some huge income, high risk investment or cash payout. He says that if you give a teen or young adult a cash gift of more than $20 000, then you have virtually guaranteed that that person will never be financially independent. Large cash gifts generate consumption and high-spending habits - preventing young people from developing a sense of responsibility to carefully manage their money. Stanley says wealthy parents should avoid large cash gifts to their kids. Instead he argues: teach them sensible financial habits. Encourage them to invest in things that can have long term benefits, like a good education.
It’s not just young people that suffer when given large cash gifts. Stanley presents interesting statistics that show large cash injections into any family usually make its members poorer. Again this is because they undermine the family’s capacity to live within their means and make it too easy to develop unnecessary and expensive consumption habits. These habits become ingrained. I have known people who suddenly acquired several hundred thousand dollars through inheritance, insurance or legal payouts. Unfortunately, Stanley is right - they have all spent their money within months. I remember watching some of the purchases - luxury items that rapidly lost meaning or value: thousand dollar suits, luxury cars they could not afford to keep, cash gifts that were never appreciated or high maintenance relationships that did not last. The problem is, it does not stop when the money runs out. Extravagant spending habits keep pulling these people further and further backwards.
In contrast, Stanley paints the picture of the thrifty millionaire. He tells a story of a self-made businessman who built his company to the point of bringing in investors and selling shares. He came home from work one day with 2 cheques for a million dollars each. His wife, a co-owner of the business, was sitting at the kitchen table cutting out discount coupons from the newspaper for use in the local supermarket. Her husband handed her a royalty cheque for a million dollars. She calmly put it with the weekly banking and went back to cutting out coupons. The image is a powerful one. Self-made millionaires are disciplined in their spending habits. So much so that a large influx of cash does not affect they way they live.
I don’t think Stanley is arguing that we become stingy, mean spirited or ungenerous. It raises the question: “Are these self made millionaires actually happy?” Stanley believes they are. They live with the satisfaction that they have built successful businesses and investments from the ground up. Also, the process of living well within your means gives one a sense of control over life. The combination of sensible spending habits + solid savings offers a safety net from whatever future slings and arrows one might encounter.
Stanley tells another memorable story. A successful factory owner was very popular with his employees. One year, the staff passed the hat around and bought him a luxury European car for Christmas. The owner usually drove a base model pickup truck which would faithfully carry him, his family and camping paraphernalia on regular camping holidays. He was not impressed with the posh car and insisted it be returned. The man felt that the new car was a gateway to a lifestyle very different from the one he had chosen and would lead him to more expensive life choices. His clothing, social circles, holidays and hobbies would all start to be affected by this new status symbol. I guess it is a salutary reminder to reassess the possessions we yearn for. Sometimes, expensive acquisitions have a scorpion’s tail.
Another interesting fact that emerged out of Stanley’s research was that your average neighborhood millionaire has probably lived in the same house for nearly all of his/her adult life, neatly side-stepping the costs of upgrading houses as income increases in order to “keep up with the Joneses.” So for all you know your next door neighbor might actually be a millionaire. Successful millionaires are also most probably in stable marriages. They tend to refrain from “upgrading” their partner too, divorce being a very costly undertaking. Stanley explains that living simply and within your means can remove financial stressors creating more space to create a healthy marriage and family.
Of note, Stanley’s research revealed that your average self-made millionaire is usually in a single income family - most have spouses that do not work outside the home, though some did work part time. Stanley explains that busy double income families bring in more money - but pay more tax and spend more money making their busy lives work - eating out, clothes, outsourcing household jobs, child care, perhaps extra health costs etc. In contrast, the single income families tend to have more home-cooked meals, cheaper holidays and find ways to live simpler, calmer lives. In addition, the self-made millionaires Stanley researched found clever ways to distribute their income and minimize tax. His comments were not a call to shackle mothers to home and hearth - he is just illustrating the point that a more intentional life may provide opportunities to live more efficiently and for some, staying at home may actually be a better financial option than pursuing more money for its own sake.
The self-made millionaire is often in a field of work that we would not traditionally consider glamorous or successful. They may be a cleaning contractor or a plumber. There is no social expectation for such people to live life in a grand manner. They are happy with their friends and surroundings - feeling no pressure to upgrade the family home, buy an expensive car, join a prestigious golf club or send their children to an expensive school. In contrast, a surgeon or lawyer, when around his peers, may well feel the pressure to do all of the above - dramatically increasing weekly expenditure.
It seems the company we keep has a huge effect on the way we manage and spend our money. If you are trying to live more economically this is worth keeping in mind. My wife and I once visited an old friend who had done very well in a large corporation. To be honest, we found it uncomfortable to walk into his palatial home past the luxury car, sit on designer furniture and chat in front of expensive mountain views. We felt some embarrassment inviting them back to our much more humble home.
Far too many people in the modern world struggle with levels of debt and spending habits that are simply not sustainable. It is a situation that can cause anxiety and that horrible sense that “life” is not under control. The problem is, attempts to fix the problem by earning more money frequently don’t work as they just bring more expense and more consumption as well as exhaustion and the risk of burnout. Some may call the millionaires Stanley studied miserly and argue that life is short and these people have not learnt how to enjoy their success. I believe that in so many areas, life is about finding that middle path between extremes. I do not dream of being a millionaire. I am not convinced that great wealth brings happiness. But it is nice not to be in debt. To have a meal out if I don’t feel like cooking or to celebrate something. There is a certain dogged stress that comes with financial insecurity. And I believe being content with “what is” is a great blessing. Nothing wrong with dreaming and following our passions - but when passion for things we don’t have means that we can no longer be satisfied with what we do - then our desires have become misplaced or overblown. For me, it is usually a sign to slow down and spend some time contemplating the simple joys of life - shelter, beauty (music, art, nature, other living beings), simple but good food, solitude, and connection.
This “Slow and Simple” series is about breaking out of that cycle. On a planet where resources are increasingly stretched and where we are inevitably going to have to live more sustainably, The Millionaire Next Door has a relevant message. Of interest, it is not a book about environmentalism, just a book about real people who have found practical ways to live simply and have become very wealthy as a result. Worth a read!