The Millionaire Next door (Pros and Cons)

Agree or disagree? 

I personally agree with the principles it shares, others may disagree yet it is common sense. I know when I have ignored the principles laid out it was at my own peril. 

Main Points

•      Spend Less Than You Earn - If you are always spending up to or above what you earn, you will never increase your net worth no matter how much you make. The author discusses being prugal: prudent and frugal.
  
•      Avoid Buying Status Objects or Leading a Status Lifestyle - Buying expensive imported vehicles is poor value and you will constantly need to buy the newest model. Buying status objects such as branded consumer goods is a never-ending cycle of depreciating assets. Living in a status neighborhood is not only poor value, but you will feel the need to keep buying status objects to keep up with your neighbors, who are mostly UAWs.
  
•       PAWs Are Willing to Take Financial Risk if it is Worth the Reward - PAWs are not misers who put every penny under their mattress. They invest their money for good returns, and will consider riskier investments if they're worth the reward. Many put money not in the stock market, but invest in private businesses and venture capital. They do not gamble or speculate on long-odds stocks.
  
•       Economic Outpatient Care - The authors also make the interesting observation that UAWs tend to have children who require an influx of their parents' money in order to afford the lifestyle that they expect for themselves, and that they are less likely to have been taught about money, budgeting and investing by their parents. 

Passive Income 

What Does Passive Income Mean?
Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved. As with non-passive income, passive income is usually taxable; however it is often treated differently by the Internal Revenue Service (IRS). 

Investopedia explains Passive Income
There are three main categories of income: active income, passive income and portfolio income. Passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest or capital gains. For tax purposes, it is important to note that losses in passive income generally cannot offset active or portfolio income. 

It is important to note that, by some, portfolio income is considered passive income; in which case dividends and interest would be considered passive. The important definition is the one the IRS uses, and to be sure your taxes are filed correctly, it would be prudent to check with the IRS or a tax professional on this matter if you have a blend of active, passive, and portfolio income.  

Top 10 ways to become the Millionaire Next Door 

Everyone wants to get rich and become the Millionaire Next Door. Unfortunately most of us will not be on the Forbes list of Billionaires under 40. However, we would all like to have the Millionaire Mind or be the Millionaire Next Door. Some keys tips to becoming the Millionaire Next Door are:

1. Live well below your means, try paying cash for purchases versus running up debt.  In order to not run up debt you will need some ideas on how to save money and reduce your expense.
2. Own your own home, now is a really great time to own your own home.  The fastest way to build wealth with your home it to get a shorter mortgage.  Make sure you consider the advantages of 15 year vs 30 year mortgage.
3. Most millionaires are married
4. Unfortunately, working for 30 to 40 years is key.  This is sort of the get rich slowly mentality but it works, however there are ways to become a millionaire as an employee.  Make sure you invest in your companies 401K.  You can take advantage of matching funds and the tax benefits.
5. Own your own business or be self employed.
6. Be conservative with money have a family budget, save and invest your money
7. Get a college education, advance degrees are better, Eighteen percent have master's degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.  It is a know fact the if you have a degree you are more likely to have a job.  98% of the people with college degree are employed right now.  It is worth taking the time and figuring out a way to pay for college to get this advantage in your life.
8. Put in your time most millionaires work 45 to 50 hours per week.
9. Invest wisely and diversify your portfolio, stock picking is tough, you have to stay on top of it.    Consider hiring a financial planner to help you with your investments.  It is well worth it is you get the right person.
10. Non-formal education is also important, read a lot, self help, investment magazines, Wall Street Journal

So for most of us, and based on the Top 10 list will need some time become a millionaire. However, if you are looking to find out how to earn extra income. Or you are curious how to develop a passive income as describe in the book the 4 hour Work Week, you need to start now. Did you ever wonder about all those internet millionaires? The guys that started Youtube or Facebook and sold it for a gazillion dollars? Most of us will never be those guys. I know that I am not smart enough. However, I would love to earn extra income on the side and eventually build it up to something I might be able to do full time. I frankly would love to be able to work at home. If you are curious and looking for a way to jump start your passive income. Click Here!

Related links:

• Home based businesses
• Investing In Mutual Funds
• Get Rich Quick

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The millionare nextdoor .Pdf Ebook Download

 

What’s Wrong with The Millionaire Next Door 

I put a passing reference to The Millionaire Next Door in my post Wednesday on The Tragedy of Impulse Saving.  A commenter asked about it and actually followed up to say that he would love to hear my opinion on the book.  I can’t bring myself to write a proper review of a 13 year–old title, but on the flimsy pretense that one person who comments must represent thousands of silent readers who feel the same way, let me share why I don’t like it.  (That’s the problem with leaving comments here; I just read what I want to.)

To start with, Millionaire Next Door is poorly written.  Large sections just dump information on the reader without drawing any conclusions or giving any advice.  And the authors’ choices of topics, and how much ink to use on them, is peculiar, as if they just threw together the book from notes they happened to have had lying around.  So, for example, 70 pages (of 245 in my paperback copy) are spent on giving money to your children.  36 pages cover buying cars.  There isn’t much of anything on buying houses.  There’s a big section on selecting financial advisors, but little on investing as such.

The core advice in the 70 pages on giving money to your children is that you shouldn’t give money to your children.  Not only will it make you poorer, but it is bad for the kids. They will amuse themselves by spending it and not learn to be frugal like you. The authors cite data that shows that adult children who get money from parents are in general poorer and argue that giving your kids money will have the opposite of the intended effect. Unremarkably, they do not consider the possibility that maybe those children got money from their parents because they were poorer, not the other way around.

The other reason not to give your children money, besides it being good parenting, is that if you give it to them then you will not have it anymore. And it is here that I stop being able to even relate to the message of the book. You save your money carefully throughout your life not so you can spend it on the finer things, nor even so you can spend it on the ones you love. You save it because it’s the right thing to do. This is the Scrooge McDuck school of wealth management.

The authors describe sharing their research with an audience of “affluent grandmothers.” (Yes, really.) One takes them to task.

I’m as indignant as hell. What am I supposed to do with my money? My daughter’s family is having a rough time making ends meet. Do you know about the problems with public school around here? I’m sending my grandchildren to private schools. (p. 145)

I’m with grandma on this one. Starting a statement claiming to be “indignant as hell” is not the way people, even affluent grandmothers, talk in my part of the country. But where I come from, sending your grandchildren to private school is just about the most wholesome thing you could do with your money, short of anonymous donations to charity. The authors of Millionaire Next Door have different values. Private school tuition is mentioned repeatedly in the same category as big houses, country club memberships, and, of course, luxury automobiles. (Did I mention the other day that the authors were professors of marketing at state schools?)

And their analysis of this obviously deranged old lady:

It is obvious to us that this grandmother is not completely at ease about providing economic outpatient care to her daughter’s family. The real problem is not with the public schools; it is that her daughter’s family is in a situation of economic dependency. Mother has difficulty with the fact that her daughter married someone who is unable to earn a high income. (p. 146)

Even I have trouble getting beyond the Neanderthal sexism implicit in this diagnosis. Perhaps the son-in-law does just fine but it is the daughter’s career as an aroma therapist that disappoints her mother. Or maybe daughter is a single mom.

Even if we accept that this woman is disappointed in her daughter’s choice of life partner, can it really be that the authors are blind to the fact that it is not the daughter or son-in-law who are the recipients of grandmother’s largess? It is the grandchildren who are going to private school. Perhaps Grandma wants them to have every advantage they can, something especially important given their good-for-nothing father.

Alas, these authors cannot get beyond the fact that this person is allowing her descendants to live a lifestyle beyond their means. The right course is to live well below your means. Living at your means is bad enough, but beyond it is just flat out wrong. And reading this book you come to realize that they do not mean wrong in the sense that it is fiscally unwise. They really mean immoral.

Scratch the surface of Millionaire Next Door and you find an ugly streak of class envy, or maybe class disgust. The heroes of this book are the millionaires who look and act like ordinary folks. They shop at J.C. Penney and drink two kinds of beer: “free and Budweiser.” The villains are those that have expensive tastes and spread those tastes to others. And nowhere is it suggested that those expensive high status things might actually be objectively nicer than the lower status alternatives. For the authors of this book, status is the solitary benefit you get from the country club or from sending your kids to a private school.

Millionaire Next Door has, and I use this term carefully, a Marxist view of consumer culture.  It holds that the reason that most people with steady jobs lack tidy fortunes is that they are seduced into spending all they make, and possibly more, on high status items consistent with their perceived station in life. The problem is not that you, the reader, cannot figure out how to live the lifestyle that you desire but that you desire it to begin with. The point of the millionaire living in the ordinary house next to yours is not that even somebody like you from this neighborhood can get rich. The point is that the millionaire had the good sense not to take on pretensions and move on to a nicer area.

Millionaire Next Door sold about three million copies and spent three years on the New York Times bestseller list.  I don’t think this was because the late ‘90s was a time receptive to an anti-materialism, anti-status, anti-rich message.  On the contrary, it was the surface message, that anybody could become rich if they followed the secrets in the book, which generated enthusiasm.  Readers just ignored the anti-rich stuff and the kooky advice about buying cars by the pound.  That’s the trouble with giving advice; folks just read what they want to.

What do you see (30 MPG or better cars)?

As I left the gas station this afternoon a thought can to my mind. I will have to admit it was inspired the the Kia Soul commercial. The thought was if I drive from lot to lot how many models of cars can I find that get 30 plus miles to the gallon.

I had expectations of what I would find when I started but what I found actually raised a few questions like:

• Why?
  
• How can this one be and others are not?
  
• Does size have as much to do with economy as we were lead to believe?

The highest MPG I saw was a hybrid advertising almost 50.

Instead of my telling you what I concluded let me share what I found so you can tell me the patterns and notable exceptions (if any) you observe.

3 Blind Mice (What is business and the Big 3) or Lost in Space

Do you remember that nursery rhyme growing up?

Have you considered how can the blind lead the blind. If the leader has no idea where they are going then what? 

Remember the Hyundai assurance plan – loose you job they will pay for 6 months?

• Now GM is saying they will do 8
• Form is saying they will do 12
• I have to wonder what Chrysler will say 

On one level I appreciate what they are doing and yet on another I have to ask myself is this not more enabling behavior?

• Is this designed to help people or is it a race to the bottom?
• Is this the altruistic auto maker helping the consumer or another copy cat marketing plan to exploit the consumer and more cars? 

How about this for a brilliant idea – manufacture cars people want instead of making a car and convincing the consumer to by. I drive a Ford and yet many in my family on both sides were diehard GM people. Why, because of our experiences with the respective brands – I have driven GM and was not impressed with their design aesthetics back them – very clumsy.  As a business owner I remember talking with a few of my friends, fellow Dartmouth Exec Business Alum and peers joking about the fact that given a chance we could turn these companies around and yet we know they would not retain us to do so because what we would require and the changes we would make would be deemed to radical on an institutional level and radical organizational level.  Any yet I know that neither I nor my friends will get a call or an email requesting our services. 

Here is the lie that has been taught for years – the purpose of business is to make money – talk about ego and entitlement issues – WRONG!!!!!!!!!!  Want to know the purpose of business – to provide a quality good or service to the end user what enhances the value and quality of their life in such a way they are willing to pay you for it! In my prime I had almost 10 people full and part time working for me and have at times like this had to contract down to me yet never was it about what the client/customer could do for me – rather what they needed. Bottom line is this simple truth of which we lost sight – a business exists to provide a needed good or service to solve a real consumer problem. 

• With all of this is mind and looking at the current financial problems in society – what is the answer?
• Also, with the advent of the digital age and the eminent demise of the industrial age how had the business model changed?

Symbiotic or Parasitic?

Business – far too often business has been associated with green and riches have been associated with wealth. Was getting gas today and struck up a conversation someone surprising who was taller than me. He asked me about myself and being in the south he was amazed a fiscally conservative, socially moderate Lutheran who happened to be an ethnic minority. Of course his first question was about President Obama. Let me state something for the record – regardless of party as an American I think it is important that if we respect our process we put our respective differences aside o support of leader. Further I believe so often people forget he inherited a mess that was a long time in the making, All of his predecessors back to Nixon played a part in the creation of our current situation. We all ignored the warning shots sent by Enron and World Com. We ignored the many people in the business and financial sector who told us this will lead to our demise. Even General Powell’s caution on the middle East of we break it we own it fell on death ears. Let me bottom line this – GREED IS NOT SUSTAINABLE!

Back from my tangent

I do not:

• think being rich and being wealthy are the same
  
• think the rich should receive special treatment
  
• believe in trickle down economics
  
• believe the ends justify the means
  
• believe greed is a good thing
  

I do believe

• the flow of the economy starts with the consumer/customer
  
• the people (not the government) will restore the economy
  
• character counts
  
• culture has nothing to do with the amount of money you have
  
• equity in all things – the rich, working class and poor should receive the same treatment
  
• the strength of this country lies not in the rich buy in the size of our middle class
  
• the true economic engine of this country is not the large corporation but the micro, small and mid sized business
  
• the true minorities in this country are not those of ethnic decent rather those who own a business
  
• you can tell much about a person by the company they keep and the people they call friends
  
• a liar will steal and sooner or later a thief can and will kill
  
• the problem with the country is not that God is not in the institution – rather that the creator is not in the person
  
• all people (unless they served in ROTC or Scouts) regardless of gender should be conscripted to two years mandatory service either in peace corps, red cross, salvation army, military, etc.
  
• It is shear arrogance to assume yours is the best and only way (pride comes before the fall)
  
• If your way was better your would be business doing it instead and leading by example because the only way to teach is not with your words but your actions 
  

There is an old saying the fruit never falls too far from the tree or you can tell a tree by its fruit. Looking at this country what fruit have we produced of late? What I see is that we are leaving a wonton path of destruction and instead of leaving people the same or better than when we found them they are worse. ok, now that I have laid some groundwork let me share something – to survive we need sustainability not greed, empathy, not selfishness. 

• Leadership - the “process of social influence in which one person is able to enlist the aid and support of others in the accomplishment of a common task” 
  
• Business - a legally recognized organization designed to provide goods and/or services to consumers
  
• Accountability - a tool used by people and organization to accept the positive consequences of actions they often themselves set in motion
  
• Symbiotic – a relationship where both involved benefit in a reciprocal type relationship (maybe slightly on sided) but each clearly are better together than they would be apart
  
• Exploitation – receiving an unjust benefit in political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for the benefit of others
  
• Blame – a tool used by people and organization to avoid facing the negative consequences of actions they often themselves set in motion
  
• Greed - the desire for the pursuit of money, wealth, power, food, or other possessions, especially when this denies the same goods to others
  
• Parasitic – a relationship where the host is drained of anything useful until the host dies and in some cases the parasite (the parasite, takes from the host, sometimes for a prolonged time. In general, parasites are much smaller than their hosts, show a high degree of specialization for their mode of life, and reproduce more quickly and in greater numbers than their hosts). Parasites reduce host fitness in many ways, ranging from general or specialized pathology (such as castration), impairment of secondary sex characteristics, to the modification of host behavior. Parasites increase their fitness by exploiting hosts for food, habitat and dispersal. 
  

Examples:

• Symbiotic – people breath out carbon dioxide and solid and liquid waste which in turn in taken in by trees and plants and then turned into for water, fertilizer, and nutrients which the plans in turn use to create oxygen.
  
• Parasitic - the parasite Taenia solium causes 50 million tapeworm infections and 50,000 deaths from brain disease in the developing world each year
  

So what do you see as the solution?

Want my opinion - point blank - Stop attacking the president - if you have a beter way offer a solution or suggestion or better yet prove it by doing it yourself and showing with your actions (both personally and professionally) that you have a viable alternative - any fool can criticize and complain - only a leader can offer suggestions and solutions. 

If I were to take a look at your life would I see

• A path of construction or destruction?
  
• A series of issues and unresolved problems or solution?
  
• A series of failed businesses with no success or a successful (single) or series of businesses?
  

What are your accomplishments and what is the answer?