The Millionaire Next Door
This is one of the best books in accumulating wealth. The book was published after a study in the late 90’s about the wealthy in America. The book is authored by Thomas J Stanley. The study found out some shocking revelations on who are the wealthy in America;
- The wealthy live way below their means
- They rarely have articles of social status like expensive cars, suits, watches, or jewelry
- They are extremely frugal
- Most do not live in upscale neighborhoods
- Their net worth can support their lifestyle for ten years or more if they lose their current income
- Most are self-made and accumulated their wealth in one generation
In sharp contrast the people that we believe are millionaires are not. The majority of people displaying high social status are merely living high because of a high income. Most cannot survive for 3 months if they lose their job.
UAWs versus PAWs
Under Accumulator of Wealth (UAW) is a name coined by the authors used to represent individuals who have a low net wealth compared to their income. A doctor earning $250,000 per year could be considered an “Under Accumulator of Wealth” if their net worth is low relative to lifetime earnings.[1] Take for example a 50-year-old doctor earning $250,000. According to the authors’ formula he should be saving 10% yearly and should have about $1.25 million in net worth (50*250,000*10%). If their net worth is lower, they are an “Under Accumulator”. The UAW style is based more on consumption of income rather than on the method of saving income.
A Prodigious Accumulator of Wealth (PAW) is the reciprocal of the more common UAW, accumulating usually well over one-tenth of the product of the individual’s age and their realized pretax income.
The authors define an Average Accumulator of Wealth (AAW) as having a net worth equal to one-tenth their age multiplied by their current annual income from all sources. E.g., a 50-year-old person who over the past twelve months earned employment income of $45,000 and investment income of $5,000 should have an expected net worth of $250,000. An “Under Accumulator of Wealth (UAW)” would have half that amount, and a “Prodigious Accumulator of Wealth (PAW)” would have two times.
Main Takeaways
Spend less than you earn
Leave below your means to accumulate wealth
Avoid buying status objects or leading a status lifestyle
Buying status objects such as branded consumer goods is a never-ending cycle of depreciating assets. Even when you get a good deal on premium items, if you choose to replace them frequently, the older items hold no value and have become a sunk cost. Living in a status neighbourhood is not only poor value, but you will feel the need to keep buying status objects to keep up with your neighbours, 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 only in the stock market, but invest in private businesses and venture capital.
Family and Generational Wealth
The authors also make the 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.
The authors talked about the seven most common traits that showed up among those who have accumulated wealth. Those common traits are the following; high income, low expenses, frugal, wealthy, breaking even (Spartan), spender, broke, and breaking even (Lavish).
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