This is part 2 of my review of The Millionaire Next Door. Yesterday, I covered the first four chapters of the book and today I’m reviewing the last four chapters.

Chapter 5 - Economic Outpatient Care
What often takes place among the children of the affluent is economic dependency. Wealthy parents are often supporting and funding the high-consumption lifestyle of their children and even their grandchildren. The authors criticize this behavior and explain that “in general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.” Understandably parents want to support their children and provide for their welfare, but how much is too much? The authors commend parents that provide and help pay for the education of their children. But they also say this about cash gifts that are given to help prop up certain lifestyles; “We find that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.”

The authors’ main point here is that frugality and discipline must be instilled in the children of the affluent. And these things cannot be bought with money.

Chapter 6 - Affirmative Action, Family Style
This next chapter talks about the distribution of wealth among family members. A trend that the authors mention is how many affluent parents tend to give greater assistance to the child who is struggling financially and economically less productive. And the child who is more financially stable and independent gets a smaller share of the wealth. However, the authors make a great point that the opposite desired effect happens and “you strengthen the strong child and weaken the weak.” Why? Because the economic assistance that is given continues to function as a financial crutch. “They typically lack initiative. More often than not, they are economic under-achievers but have a high propensity to spend. That’s why they need economic subsidies to maintain the standard of living they enjoyed in their parents’ home.”  

The authors offer ten rules for affluent parents:
“1. Never tell children that their parents are wealthy.”
Don’t give your children a reason to spend and raise their standard of living.
“2. No matter how wealthy you are, teach your children discipline and frugality.”
I think this is one of the most important points in this book. These lessons must not only be taught but also modeled.
“3. Assure that your children won’t realize you’re affluent until after they have established a mature, disciplined, and adult lifestyle and profession.”
“4. Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.”
Doing this is like setting yourself up for family conflict. Personally I think parents should minimize their giving and offer only modest inheritances.
“5. Never give cash or other significant gifts to your adult children as part of a negotiation strategy.”
“6. Stay out of your adult children’s family matters.”
I do believe that parents have a place to give advice and warnings, but they also have to realize that some lessons need to be learned instead of taught.
“7. Don’t try to compete with your children.”
This is just dumb. Don’t teach your children that accumulating wealth is an ultimate goal.
“8. Always remember that your children are individuals.”
Some mature faster than others. Don’t compare and make them feel insecure or feel like a failure.
“9. Emphasize your children’s achievements, no matter how small, not their or your symbols of success.”
This advice is right on. Celebrate and praise the positive achievements your children have.
“10. Tell your children that there are a lot of things more valuable than money.”
Again, another lesson that needs to be modeled by the parents.

Chapter 7 - Find Your Niche
This chapter discusses the various careers that could be in high demand as more and more Americans enter into affluence. Potential careers include: estate/tax attorneys, real estate, medical specialists, appraisers/auctioneers, accountants, travel agents, etc.

Chapter 8 - Jobs: Millionaires versus Heirs
Although two-thirds of millionaires are self-employed, the authors caution that “the average net income for the more than fifteen million sole proprietorships in America is only $6,200! About 25 percent of sole proprietorships do not make one cent of profit during a typical year. It’s even worse for partnerships. Forty-two percent, on average, make no profit in a year. What about corporations? Only 55 percent have any taxable income during a typical twelve-month period.” So what does this mean to the reader? There is no magic career or profession that is guaranteed to expand your wealth. And just because you start your own company, don’t expect guaranteed success.  What matters more are discipline, hard-work, and frugality! In whatever career path, there is potential to accumulate wealth if one is diligent and cautious.  More than anything, the authors emphasize the truth that if you truly desire to build wealth and become financially independent one must break away from the high-consumption lifestyle of our culture.  It is probably the single greatest hindrance that entangles so many people into debt and a paycheck-to-paycheck lifestyle.  Don’t try to keep up with the Joneses!

Conclusion
I would definitely recommend this book. Overall a well-rounded book that offers readers extensive research from the lives of millionaires. The conclusions and insights they draw from their findings are definitely worth the price of the book. Of course a better option would be to apply their principle of frugality and borrow it from the library.

I picked up this book for $1 at a used book sale at my local library. I just finished reading it and I’m glad I did. There are many great truths and lessons to be learned from this book, no wonder this book is so popular. I thought this book would just be a book that chronicles the lives of millionaires and their habits, but its so much more than that. The authors draw many conclusions about accumulating wealth and the culture that we live in. I’m dividing this book review into two parts. Today I’ll cover the first four chapters and tomorrow I’ll cover the last four chapters. I’ll try to highlight the things that really stood out to me.

Chapter 1 - Meet the Millionaire Next Door
The book starts off with various statistics about millionaires. “About two-thirds are self-employed even though self-employed people make up less than 20 percent of workers in America.” “97 percent are homeowners.” “About 80 percent are first generation affluent.” “95 percent of millionaires are married.” “Half the wives of millionaires don’t work outside the home. Those who do, the number one occupation is teacher.” The wealthy are defined by the authors as being “those who get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.” Being frugal and not succumbing to a hyper-consumer mentality is a continuous theme throughout this book. They authors again and again urge those who desire to become wealthy to avoid it like the plague.

The authors give a simple rule of thumb to determine whether you are on track to becoming wealthy according to your age: “Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”

According to this, I’m supposed to be sitting on well over $100,000, but obviously I am no where near that.

If you are further along in your wealth according to this equation, the authors call you a “PAW, prodigious accumulator of wealth”. If you scored quite poorly, then the authors refer to you as a “UAW, under accumulator of wealth”. Throughout the book the authors use their research to show that “UAW’s tend to have a higher propensity to spend than those in the PAW group.” “UAW’s tend to live above their means and they emphasize consumption.”

As mentioned above, most millionaires are first generation affluent. In addition, most millionaires are not of English decent. Contrary to popular belief, “the longer the average member of an ancestry group has been in America, the more likely it will produce millionaires and the more likely he or she will become fully socialized to our high-consumption lifestyle.”

Chapter 2 - Frugal Frugal Frugal
“Being frugal is the cornerstone of building wealth.” We see the lavish lifestyles of celebrities and athletes on TV and in the magazines, but this is not the typical millionaire. Its is precisely because they said no to a “high-consumption lifestyle that they were able to become millionaires in their lifetime.” In fact, the authors provide a glimpse into the spending habits of millionaires. “Average of most they ever spent on a suit: $399. Average of most they ever spent on shoes: $140. Average of most they ever spent on a watch: $235.” Lucky for me that the most I’ve ever spent on these items is far below these averages.

“Do you wish to become affluent and stay affluent,” the authors ask. Well you have to be able to say yes to these four questions:
- “Does your household operate on an annual budget?”
- “Do you know how much your family spends each year on food, clothing, and shelter?”
- “Do you have a clearly defined set of daily, weekly, monthly, annual, and lifetime goals?”
- “Do you spend a lot of time planning for your financial future?”

Finally in this chapter the authors give advice about mortgages, “If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.” Why? Because when you live in a less costly neighborhood, it will enable you to spend less and save more. Property tax and mortgage payments will be less. And it will be easier to keep up with the Joneses. Live in a high-status neighborhood and you will more likely be pressured to live a high-consumption lifestyle.

Chapter 3 - Time, Energy, and Money
“People who become wealthy allocate their time, energy, and money in ways consistent with enhancing their net worth.” PAW’s spend far more time planning, analyzing, strategizing their financial goals and plans. They also spend far less time worrying about their financial future outlook. UAW’s on the other hand spend their free-time and resources shopping and maintaining their high-consumption lifestyle. In fact “There is an inverse relationship between the time spend purchasing luxury items such as cars and clothes and the time spend planning one’s financial future.”

Chapter 4 - You Aren’t What You Drive
Here are some facts about millionaires and their vehicles: “The typical millionaire spent $24,800 on their most recent vehicle.” “About 81 percent purchase their vehicle instead of leasing.” “And only 23.5 percent of millionaires own new cars.” “The most a typical millionaire ever spent on a vehicle averages around $29,000.”

Half of millionaires purchase vehicles from dealers they have bought from before. Since many millionaires are business owners, they utilize this by making connections and exchanging patronage and referrals in return for good deals. The other half of millionaires purchase vehicles from the cheapest sellers they can find. They haggle and bargain and spend a fair amount of time shopping around. Being savvy and frugal is the way in which many of these millionaires became wealthy, so its no different when it comes to car-buying.

The authors pause here to give another remark. The majority of Americans will never be able to significantly increase their annual income (they call this offense). So, “if you cannot increase your compensation significantly, become wealthy some other way. Do is defensively. This is how most of the used-vehicle prone shoppers did it. They successfully inoculated themselves from contracting the high-consumption lifestyle so many of their neighbors adopted.”

Throughout the first four chapters the authors give numerous examples of people who earn very high income and yet have virtually no wealth to show for it. In fact, they might be living next to neighbors who make half of the annual income they do, but may have five times their net worth. How can this be possible? It is often the case that a high-consumption lifestyle is paired with high-income. The authors do a great job here of showing that “Great offense and poor defense translates into under accumulation of wealth.”

We’ll take a look at the last four chapters tomorrow…

This article over at Christianity Today covers the story of how microfinance has really flourished over the past few years. The concept of microfinance involves loaning small amounts of money to the world’s poor and providing them with a means to start a business, learn a new trade, or explore other entrepreneurial options. In addition to the loan, the borrowers are also provided with lessons on how to manage their finances and begin saving their profits. Small investments of knowledge and skill provide the potential for many poor families to move from meager subsistence to being able to provide and plan for their future well-being.

This Christmas, in addition to my regular Christmas shopping, I’m exploring ways in which my finances can enable others and help those in need. Opportunity International, is one of the first organizations to implement microfinance. I’m gonna check them out and see if I can sponsor some families in need.

Christmas is just around the corner and I need to do some shopping. I always struggle with gift ideas for my family. Sometimes I buy clothes for my parents or sister but it isn’t always a success. And giving gift cards seem a little too plain-jane. Other times I try to be more creative and buy something unique but that can also end up being a bad move. I just can’t win. Last year I tried something different. Instead of buying them material goods, I took them all out to a fancy restaurant and treated them. It was a memorable time spent together and the food was great. It was well worth the few hundred dollars I spent. I don’t remember all the gifts I bought for them in the past, and they probably don’t remember either, but special occasions such as these will be remembered for many years. As my sister and I get older, time spent with my family is becoming more and more cherished. So for this Christmas I think I’ll do the same and take them out to another restaurant. The great thing about living in Los Angeles is that there are so many good places to choose from. OpenTable, here I come.

Like other folks, I’m choosing not to shop tomorrow. I’m not much for crowds being that its the busiest shopping day of the year. I know that there might be some hot deals on laptops or Plasma TV’s, but I don’t need the added encouragement to buy something I don’t really need. Besides, I usually enjoy shopping online much more.

Here’s some links to get you started. Stay at home and enjoy the extended weekend. Shop from the comfort of your own home if you have to shop:

Froogle - Google’s search for the cheapest prices.
Pricegrabber - Another price comparison website.
SlickDeals - Daily hot deals.
Fatwallet Hot Deals - This forums is constantly updated with the hottest deals.

The post “Companies Don’t Care About Money” over at I Will Teach You To Be Rich really got me thinking about how we personally view money. We all try to maximize both making money and saving money, but for me saving money is what really drives me. I’ll scour the internet to find the hottest deals, I’ll drive 25 miles to buy books at a used book sale, and I’ll maximize double-coupons at the grocery store. What drives me is my frugality and the satisfaction of saving money. I don’t know when I started to develop this character, but it eventually became a core value of mine.

But fundamentally, many companies come from the opposite mentality. Ramit brings up an interesting point in his article about the way companies view money. Often times they don’t care about saving money or cutting costs because when “time is money” they would much rather focus on increasing revenue and making money. That’s why, for example, they don’t care about spending thousands of dollars on last-minute fares for plane tickets if it means getting the job done. Yet if it was me, I’d shop around online and try to find the best deals. I’m sure there are many other instances of potential “cost-cutting” that exist in companies. So why do I care? I care because I hate being wasteful and when I see a potential for improving something, its a waste not to implement it. Ideally, companies should be constantly looking for ways to cut costs and save money, as well as maximizing their time to make money. It seems to me that we should also have the same kind of balance when it comes to our personal finances. Maybe its time for me to start moonlighting…

As I mentioned in this post, the Chase Cash Plus Rewards card gives you 5% cash-back at gas stations, supermarkets, and drug stores. The link no longer exists so you must call 1-888-787-0329 and tell them the code 2YL or TP7. On top of that you get a $100 sign up bonus after you first purchase. This is a lot better than the Citibank Thankyou network because you can still request cash checks once you reach $50.00. I’ve been using this card since March.

David Topazian, a Christian dentist, covers five key elements to help you be successful in managing your finances. Read the full article here.

1. Realize that God owns everything
This truth over-arches all other truths. If we see all our money and possessions as belonging to God, it helps curb our wants and desires. Our homes, cars, jobs, clothes, possessions, all belong to God and he has entrusted them to us. Letting this perspective truly sink in helps us not to take anything for granted.
2. See money as a tool, not a goal
Just as John Wesley taught that there is nothing wrong with making lots of money and saving lots of money, he also taught that its motivated by selfless reasons to use this money to benefit others.
3. Give with integrity
I think this goes hand-in-hand with believing that God owns everything. Whether tithing to the church or supporting various organizations, when giving is a regular part of our financial choices it shows God where we place our priorities.
4. Adopt a stewardship lifestyle
To me this means not only using my money and resources wisely, but also to conserve and not be wasteful. Too often we buy or take more than we can consume.
5. Spend less than you earn
Such a simple truth, yet so many people struggle with this. Keeping track of your finances and budgeting is a great way to plan for spending less that you earn. Once you get a handle on this, its also important to plan where this extra money will go.

This article by first appeared in the Spring 2001 issue of Today’s Christian Doctor.

I just noticed that Fidelity started to offer free finance podcasts. Check them out here. I listened to the personal finance one and it was a little cheesy, but hey at least its free. Hopefully they’ll start to fill it up with some more content.

My fiancée and I decided to forego the engagement ring to save money and to be good stewards of our income. She actually brought up the subject halfway through our relationship and told me that she didn’t want one. We both felt that it was too much money and that it could be spent elsewhere (like our wedding and our honeymoon). I was glad to find out that she shared the same values and priorities that I did. I know that engagement rings are a very personal issue, so to each his own. When I was planning to propose, I still wanted to have something to propose with. Initially I thought about getting a birthstone ring, but realized that she might not wear it. Instead I bought two wedding bands from E-WeddingBand.com and had them engraved with our names and our theme verse Phil 2:1-11 and placed them on a necklace. I presented it to her when I proposed to her on the beach and she said yes!

I was pretty happy with the purchase I made from E-WeddingBand.com. Check them out if you are shopping for wedding bands. If you are in the market for an engagement ring, I can’t help you out too much but there is a great forum over at PriceScope that gives great advice on finding diamonds.