The Millionaire Next Door Formula
I bought that car when I was 20 for $35,000. After reading this book the first time, I decided to sell the BMW and get a $60,000 townhouse. That choice helped me avoid countless thousands of dollars in maintenance costs and depreciation.
I’m 27 now, and every time I make a purchase I ask myself “what percentage of my savings is this item?” and “is this item worth x% of everything I’ve worked for?”
(Your age divided by 10) multiplied by your average income since you began working.
- Were your parents frugal?
- Are you frugal?
- Is your spouse more frugal then you are?
If you answered “yes” to these questions, it’s likely you’re wealthy or on your way to becoming wealthy. How should you define “wealth”? The following formula is to determine how much you should have in your savings. If you have it, you’re “wealthy”. If you don’t, you’re not.
I don’t think my goals are much like those of most internet entrepreneurs. Judging from what you read online about business success, you’d think the ultimate goal is to build a big company fast and then cash out. I think my reality is going to be much more slow and deliberate than that…
How does the average millionaire live?
He paid less then $500 for his watch and $140 for his shoes.
The most he ever spent for a piece clothing was $399 (it was a very special occasion, and after he became a millionaire).
He bought his Jeep Grand Cherokee many years ago… When it was already 3 years old… For less then $24,000.
He thinks of his pest controller (or welding contractor, janitorial contractor, family oriented resort, safari/ tour marketing, etc) business as “dull and normal”.
His wife is a teacher.
Their accountants are most trusted advisors and they are NOT frugal with advisers.
They have a Visa OR (not and) a MasterCard. They do not have an AmEx.
Their total net worth on paper is $3.7 million.
21% of their wealth is their business.
Their house is less than 10% of their net worth… It’s valued at 320k. They’ve been living there almost 20 years.
They have a go to hell fund. They could stop working today and live for at least 12 years with their current living standard.
They fear policies and regulations which are unfavorable to the affluent. But, they’ve become less and less fearful by overcoming them earlier in life.
How does the average millionaire become wealthy?
They did not receive any inheritance.
They work 45-55 hours per week.
Their combined taxable income was about 130,000 last year.
They have investment accounts which earn about $100,000 per year un-taxed.
The husband contributes 80% of the family’s income, but his wife (considered even more conservative/ frugal than him) keeps a strict budget.
They have been saving 15% and investing 20% of income for decades.
They either have a college degree, or started earning and saving early in life.
They rarely sell stocks, but when they do sell, they make their own trades.
What can you start doing now?
Don’t buy status products in anticipation of becoming wealthy. Once you do, they require other status products to keep up. Millionaires view these as a threat to their simple and efficient lifestyle.
Budget and plan. Millionaires know exactly what they spent in each category of spending last year (food at home vs food not at home, gifts, vacations, clothes, etc). Budgeting is like jogging. Joggers appear to need jogging the least… But that’s why they are fit. Same with budgeting and becoming wealthy.
Plan your personal and business investing at the same time. Use your expertise to manage investments (if you work in web stuff, you invest in web stuff).
Have goals (lifetime, annually, monthly, weekly and even daily). Know how much needs to be set aside each year to achieve those goals.
Each year, spend more time planning your financial future than you spend looking for status products or trying to save money on depreciable assets.
How can you help your kids become wealthy?
Do NOT provide economic outpatient care. Most millionaires have not received much cash gifts in their entire life.
Self-made millionaires setup a 3rd party attorney to be in charge of their trust and to make sure their children do not receive cash gifts until around age 30. Interestingly, most give daughters more money than sons.
55% send kids to private schools.
Their children were raised to be disciplined and frugal… and most don’t even know they are wealthy.
They never negotiate using money with their kids.
They follow the same rules that they tell their kids to do. They say things like “waste not – want to”, “don’t feel sorry for yourself”, “close the front door- you’re letting the cool air out” and “put things back where they belong”.
They also tell their kids that reputation, respect, family and health are all more important than money. Money is not the cake, it’s just the icing.
They do not shield their kids from every adversity possible in hopes of letting them learn hard lessons earlier in life.