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Saturday, 02.04.2012 |
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| The Millionaire Next Door |
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Product Details
Notes
this book was published in 1996, so some statistics may have changed
half of the American wealth is owned by 3.5% of the households
more than 7 million households earn more than 100,000 in income
but the median household has a net worth of $15,000 without home equity
80% of the millionaires accumulated their wealth in one generation
1 in 4000 make it rich through windfalls like fame or the lottery
the average millionaire is a businessman living a moderate lifestyle
common factors among millionaires:
1) they live well below their means
2) they allocate their time, energy, and money efficiently to build wealth
3) they believe financial independence is more important than social status
4) their parents did not provide economic outpatient care
5) their adult children are economically self-sufficient
6) they are proficient in targeting market opportunities
7) they chose the right occupation
typical millionaire:
about 57 years old, male, married with three children
roughly two-thirds of millionaires are self-employed
3 out of 4 of the self-employed millionaires are entrepreneurs
the business is typically dull or normal stuff
average income is $247,000 and average net worth is $3.7 million
in general, the yearly income is less than 7% of the accumulated wealth
97% own a home for 20 years with an average value of $320,000
the wives are often planners and meticulous budgeters
accumulated wealth would last for 10 or more years without working
well educated, often with advanced degrees, but didn't attend private school
generally work between 45-55 hours per week
invest nearly 20% of yearly income and make their own investment decisions
hold about 20% of wealth in stocks and mutual funds, rarely sell
about 21% of wealth is in their own private business
multiply your age times your realized pretax annual income and divide by ten
this is what your net worth should be
UAW = under accumulator of wealth (worth half of expected wealth)
PAW = prodigious accumulator of wealth (worth 2x expected wealth)
AAW = average accumulator of wealth
in 1790 Colonial America, more than 2/3 of people were self-employed
most fortunes are built in one generation, and lost in the second and third
top ethnic groups of millionaires are Russian, Scottish, then Hungarian
most entrepreneurs encourage their children to have a better life
this ends up teaching the children to spend more, and stay in school longer
less than 5000 households earn more than $5 million per year
this is about 1 in 20,000 so most millionaires earn much less but save a lot
most don't become millionaires until they are 55 or older
people who inherit money often spend more than those who are self-made
other big spenders are corporate managers, doctors, and lawyers
most millionaires have frugal parents and even more frugal spouses
millionaires become wealthy and maintain wealth through careful budgeting
it's similar to the discipline required to become and stay physically fit
millionaires invest in stocks they understand from their own business
people with high income and low net worth often have high consumption
they look rich on the outside, but they're not, they spend everything they earn
they are often less happy too, because they have to keep working hard
millionaires are happier because they are financially independent and free
they minimize their taxable income and maximize capital appreciation instead
income tax is the single largest expenditure for most households
the IRS has studied wealthy people using income tax returns
the income from closely held businesses is only 1.15% of the assets
total realized income including all wages is only 3.66% of assets
so millionaires have high net worth but live off low annual income
sacrifice high consumption today for financial independence tomorrow
it's easier to accumulate wealth if you don't live a high-status lifestyle
don't buy a house with a mortgage more than twice your annual income
millionaires allocate twice as much time to planning financial investments
non-millionaires worry about wealth but don't plan or act to build it
they spend a lot of time buying the perfect luxury items like cars or clothes
doctors generally have high income but relatively low net worth
the correlation between wealth and education is negative for high incomes
the reason might be that doctors are in school for a long time
so they start earning and saving money very late in the game
it's important to start earning and investing as early as possible
planning and budgeting are essential even with high income
both husband and wife must have compatible financial goals
if one person has high consumption, the overall wealth is strongly affected
the family must plan together, not make individual spending decisions
high-income low-net-worth parents have dependent children
their children are used to high consumption, but earn lower income
so they depend on their parents to support them
but the parents haven't saved enough to do that
and the children may fight over the remaining wealth of the parents
the government usually targets people with high income, not high net worth
the average person thinks these two measures are the same
UAWs worry about government taxes and laws, PAWs don't worry as much
95% of millionaires own stocks, most have 20% of more of their wealth in stocks
but they generally are not active traders, they don't chase market trends
only 9% of millionaires hold investments for less than one year
millionaires typically make their own investment decisions
UAWs tend to pay for bad advice from brokers
then after they lose money in the stock market, they stop investing
they don't want to take the time to learn financial investing for themselves
PAWs generally love their work, UAWs work to support their spending
millionaires don't spend much more than the average person on a vehicle
self-made millionaires spend less than people who inherited their money
non-millionaires spend about 30% of their net worth on a vehicle
more than 80% of millionaire purchase their vehicles, they don't lease
millionaires spend more time shopping for the best deal than non-millionaires
in general, people become wealthy because they plan for it and pursue it
managing finances and investing is more important than high income
UAWs think they have more money than their neighbors, but they don't
the more money an adult child receives from parents, the less they accumulate
economic outpatient care by parents actually sabotages their children's wealth
more than 46% of the affluent give at least $15,000 per year to their children
many parents assume they just need to give enough to get things going
but the children become economically dependent to maintain their lifestyle
if the parents help them buy a more expensive house, they have to support it
children are less productive knowing they have free money coming in
they plan to spend the gift before they receive it, rather than investing
cash gifts are the worst because they allow the recipient to spend immediately
a better gift is private stock, it can't be traded in easily to buy a car
it's psychologically easier to spend other people's money than your own
gift receivers often trick themselves into thinking they are self-made
they spend more and invest less, but they also donate more than average
in general, children of millionaires are more likely to become millionaires
but the important thing is to pass on frugality and discipline
children of millionaires have a 1 in 5 chance of accumulating seven figures
children of non-millionaires have about a 1 in 30 chance of the same
if a child has a weakness, attack it proactively, don't do it for them
in the same way, teach them financial skills, don't just give them money
children who receive gifts actually worry more, because they are dependent
so even the gift itself doesn't make the child worry-free or happy, it hurts them
taking financial risk and struggling through hard times builds courage
parents give more money to children who have lower income
with younger children, parents would split the inheritance equally
but with adult children, the inheritance goes more to those who "need" it more
that actually sabotages their growth and independence over time
teachers and housewives get more inheritance in general
doctors and entrepreneurs generally get less inheritance
type A housewives care for their parents, so they get money as "payment"
type B housewives are dependent, they get money because they "need it"
daughters generally get more money than sons
this is because parents feel that the son-in-law can never fully be trusted
in fact, more than 4 in 10 daughters will be divorced at least once
affluent couples in general have a divorce rate less than half the norm
daughters recognize they'll get more inheritance if they don't work
wealthy parents forget that it took hard work and sacrifice for them to make it
they feel like their children shouldn't have to work as hard or take as much risk
but this actually hurts the children because they don't learn independence
receiving money is less harmful once the adult child is self-sufficient
at that point, they can manage their money and any gifts are invested properly
some children aren't recognized by their parents for their independence
this may actually increase their ambition and drive and lead to more success
male adult children and more than twice as likely to live at home as females
unemployed children may be in and out of work, or "professional students"
these children may live close to parents and act as assistant and errand boy
cash gifts may come when the child is unable or uninterested in getting a job
some adult children move back home after college or graduate school
UAWs tend to emphasize their income, consumption habits, and status items
they think being "happy" means having money to spend
they also want their daughters to marry high-income husbands
PAWs speak of their achievements, like academics and business success
they also clearly state their financial goals and know how to achieve them
they minimize discussions and behavior on inheritance and gifts
this keeps the children independent and happy due to self-sufficiency
spouses are often the initiators of conflicts regarding distribution of wealth
they believe charity should begin at home
so if their husband gives money to his sisters, it causes problems
most entrepreneur children start their own business
only a small minority inherit the family business from their parents
parents often provide seed money for a child to start a new business
if a child takes over the family business, they may have to pay their siblings
this is supposed to even out the difference the child makes from the business
entrepreneurs are typically song, independent types
they are less likely to be emotionally and financially tied to their parents
doctor children often have to provide medical service to their siblings
they are the least likely to receive any inheritance from their parents
their siblings may lobby the parents to write the doctor out of the will
the doctor child is usually economically and emotionally independent
the most common cash gift is for medical school and to get started
wealthy parents often choose at least one outsider as a co-executor
their attorney may manage any disputes between the children
grandchildren and their parents may fight for the inheritance
any gifts to grandchildren should be approved by their parents
many wealthy people were co-executors for other estates
that strongly influences how they want to manage their own estate
it's better for the children to be mad at the arbitrator than with each other
PAWs have long-term close relationships with their attorney or accountant
rules for affluent parents and productive children
1) never tell children that their parents are wealthy
2) no matter how wealthy you are, teach your children discipline and frugality
don't let them get used to a high consumption lifestyle early on
3) wait until your children are mature enough before giving them any money
4) minimize discussions of inheritance and specific distributions of assets
don't make verbal promises that will end up in conflict among heirs later
5) give because of love, not due to negotiation or pressure from children
6) stay out of your adult children's family matters, ask permission first
7) don't try to compete with your children, don't boast about your money
most children of affluent parents have different goals than just money
they often want a high-status job, rather than a business
8) always remember that your children are individuals
they differ from each other in motivation and achievement
don't try to subsidize the weak, you'll only make them even weaker
9) emphasize your children's achievements, no matter how small
don't focus on their income, material wealth, or status symbols
teach children to strive to do their best, not just to make money
10) tell your children there are more valuable things than money
good health, a loving family, self-reliance, friends, and happiness
you can't protect your children from adversity, help them learn from it
target the affluent in your own business
they are frugal with luxury items, but not with business and financial products
they also spend a lot on their children and grandchildren
children of the affluent will also spend a lot of the cash gifts they receive
the wealthy population is growing much faster than the average
opportunities exist for estate attorneys, there will be lots of affluent widows
this is because women live longer, and their husbands are a couple years older
so when the husband dies, the wealthy widow usually lives another 9 years
the government may try to target wealth in the future, not just income
a wealth tax would affect the affluent, and is a major concern for the wealthy
tax attorneys will be important to help minimize government taxes
rank of states with most millionaires: California, Florida, New York, Illinois, Texas
affluent foreigners may want to immigrate, and immigration will be tougher
so immigration attorneys may have opportunities to target wealthy immigrants
medical and dental care costs will increase in the future
millionaires will pay for themselves, their spouse, children, and grandchildren
health care professionals can charge more than insurance companies would pay
millionaires will pay more if they are convinced of the qualifications
by paying directly to the doctor, the affluent avoid gift taxes as well
appraisers and auctioneers can help children of the affluent sell gifts
they can convert gifts of hard assets directly into cash
real estate professionals can help children unload gifts of real estate
private school costs may also increase due to gifts by affluent grandparents
self-employed business owners are 4 times more likely to be millionaires
the character of a business owner is more important than the industry
most millionaires are frugal, smart investors, and own a profitable business
most people shouldn't go into business for themselves
most millionaires don't encourage their children to take over their business
they usually want their children to become self-employed professionals
this includes advanced degrees like medical, law, or grad school
professionals sell their intellect, which can't be taken away like a business
most professionals are profitable, even if they don't make millions
most entrepreneurs fail, so only a few make millions from their ventures
therefore, successful entrepreneurs want their children to be professionals
because even though it's less possible income, it's also much less risky
the margins are also much higher
a physician might net 50% of their gross income after expenses
but a coal mining operation only nets 8% of their gross after expenses
common beliefs by entrepreneurs:
1) i'm in control of my own destiny
2) it's riskier to have only one source of income as an employee
3) there are no limits on the amount of income i can make
4) i get stronger and wiser by facing risk and adversity
5) i take pride in "going it alone" and doing what i love
entrepreneurs are not fearless, they're just better at facing their fears
they have less fear than people who inherit money without earning it
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