The Millionaire Next Door
I recently read a blog from a friend of mine about an interview he just did regarding how “Average Joes” retired as millionaires. He, and another fellow interviewed for the article, were not the “typical” millionaires as profiled in the book “The Millionaire Next Door” by Thomas Stanley and William Danko. Neither of them were high income earners and don’t even come close to the book’s reported average annual income for millionaires of $247,000. Neither of them had high income professions in medicine or law, and neither of them were dot com entrepreneurs.
Another event that triggered my desire to write about this topic involves a recent e-mail I received from a previously anonymous person who sought me out after reading some posts I made on a retirement forum I used to frequent (and have since gone back to read my previous posts). He claimed to have no interest in selling me anything but genuinely interested in learning how I was able to retire early (various forums don’t agree on what retirement age is considered retiring early but most agree it is before the age of 60 or prior to full retirement age of 65 or 66 – I retired at age 44). By “cultivating friendships” with “like-minded” individuals, he feels he would be that much closer to staying on the path towards financial independence and retiring early…and I can appreciate that.
So, what does it take to achieve Financial Independence and Retire Early (capturing FIRE, if you will)? For starters, it would probably help to explore the portrait of a millionaire and the 7 Characteristics of the Wealthy as covered in the book “The Millionaire Next Door”.
The book paints a profile of millionaires with the following traits:
- A 57 year old male; married with 3 children
- 70% of millionaires earn 80% or more of their household’s income
- 20% of millionaires are retired (early or typical retirement age)
- 66% of millionaires who are working are self employed (self employed make up 20% of workers in America but 66% of millionaires)
- 75% of self employed millionaires consider themselves entrepreneurs (most businesses can be classified as dull, normal)
- 50% of millionaires’ wives don’t work outside the home (for wives who do work, the number 1 occupation is teacher)
- A millionaires’ household’s total realized annual income is $131,000 with average income of $247K
- Average net worth of $3.7 million
- Live on less than 7% of their wealth
- 97% of millionaires are home owners with an average value of $327K; 50% occupied the same house for more than 20 years
- Most of the millionaires did not receive any inheritance; 80% are first generation affluent
- Millionaires live well below means, wear inexpensive suits, and drive American cars (only a minority drive the current year auto)
- Millionaires save at least 15% of earned income
- Millionaires are fastidious investors, invest on average 20% of realized income each year
- 79% of millionaires have an account with brokerage company but make independent decision
- A minority of millionaires lease their vehicles; only a minority of millionaires own a foreign motor vehicle
- Well educated and hold advanced degrees; 80% have college degree
- Only 17% of millionaires attended private schools; believe in education for offspring
From this profile, it is fairly clear that it is a good bet there are millionaires living next door whom you might not even realize have accumulated 7 figures or achieved “double commas” for their net worth. And what is encouraging is the fact most millionaires come from relatively ordinary backgrounds. What I see as a common theme is “regular” millionaires (eliminating from the equation the nouveau riche who happened upon money through professional sports, entertainment, or inheritance and were not properly equipped with experience and values to properly handle new found riches) live below their means, save and invest at least 15% of their income(s) and are not blinded by the trappings of richness. They live their regular, normal lives, and I would surmise most of them don’t even consider themselves rich despite surpassing the Million Dollar mark. I grant that a million dollars now (with inflation) isn’t such a goodly sum as it was in a previous generation, but being a millionaire still carries that psychological impact amongst most Americans…and is still elusive for about 95% of Americans.
The book also proposed the following are the seven characteristics of millionaires which propelled them towards achieving financial independence:
- Live well below their means
- Allocate time, energy and money efficiently
- Believe financial independence is more important than displaying high social status (“big hat, no cattle”)
- Parents did not provide “economic outpatient care”
- Adult children are economically self-sufficient
- Proficient at targeting market opportunities
- Chose the right occupation
The above characteristics, while I don’t think is all encompassing, captures the paramount trait of living below ones means. As a corollary, by living below ones means, one has more assets to employ towards investments and savings. The book suggested millionaires invest at least 15%-20% of their income…I propose at least 20% or more if you can afford to do so without crossing into deprivation. I would also add, that choosing the right partner/spouse who share the same beliefs and values is supremely vital towards achieving financial independence. It makes no sense for one spouse to dutifully save and invest if the other is just as diligent and dedicated in spending frivolously.
I have been fortunate and blessed to have started saving and investing as soon as I started my career. There were expensive “learning” opportunities along the way, which I have recovered from, but making a habit of saving and investing at least 20%, and up to 50%, of income is a great way towards achieving FI and RE. One can not control the vagaries of the stock market…but one can control how much one saves and invests. Start early and invest regularly…harness the power of compounding. Investment costs matter, so I highly suggest investing in low cost, well diversified index funds (or Exchange Traded Fund equivalents) for your retirement and taxable accounts. Identify your ideal asset allocation and stick to your financial plan. I got used to living below my means after a fulfilling career steeped in a disciplined, martial lifestyle. I have also been blessed to have met and married a beautiful spouse who shares the same values and beliefs towards money as I do. Money doesn’t define us but it affords us the freedom to pursue our interests (i.e. travel and exploring new cultures) and be able to help out financially.
Despite achieving financial independence, we hardly consider ourselves rich, from a monetary standpoint (we prefer amassing riches in experiences through our travels over material things). I recall reading or hearing about an interesting way to define being rich – you are rich when you don’t need a key…presumably, someone will open doors for you and will cater to your every need and want, negating the need for you to have to worry about maintaining keys in your person. Well, all I can say is I have many keys of different shapes and sizes that jangle in my pocket.
We still marvel at how much we’ve accumulated…and remain thankful for our blessings. If we can achieve financial independence at a relatively young age, then there is no reason why you can’t achieve the same thing…and be the millionaire next door to us.