The Millionaire Next Door

The Millionaire Next Door is a classic in personal finance literature. I can’t recommend it highly enough. It’s less a prescription for how to invest your cash but a description of who actually becomes rich.

Lawyers tend to want to think through what principles ought to apply in order to get to a certain result. Here are some examples: Make a lot of money, then you will be rich. Go to a good law school, then you will be successful. Make partner, then you will be rich.

These are all fine inferences if you want to think your way into disappointment.

This person’s net worth is probably higher than yours.

Another way to figure out what gets a result is to look at when that result has happened, then study how it happened.

The Millionaire Next Door uses this approach. The authors were hired back in the day to study millionaires by a trust company that wanted a bunch of business from millionaires. The book is the result of that study – and many more that they’ve done over the years.

The core message of the book is that if you want to have a high net worth, you should spend less money. Even though you’re making serious bank at your fancy job, if you’re spending it on luxury travel and spendy wine, you’re going to lose the wealth game.

The book talks about lawyers a fair bit. Basically, we’re good at generating income and bad at generating wealth. In the language of the book, we’re good at offense – making money – but we’re really bad at defense – not spending money.

There’s a nice comparison between a lawyer and a guy who owns a mobile home park. Both bring in about $90,000 a year. The mobile home park owner has a much greater net worth.

How is that possible? Because the mobile home guy hangs out with people who don’t have a lot of money. He drives a relatively cheap car. He wears jeans every day. He drinks Coors Light or, when he’s really feeling crazy, maybe a Corona with lime. The lawyer, in a word, doesn’t. Buying BMWs, suits, and craft IPAs is not a recipe for generating wealth.

There’s a few lovely vignettes that illustrate the point.

A guy comes home finds his wife in the kitchen clipping coupons. He tells his wife that his company just sold for many millions of dollars. They were worth, as a result, more than $10 million dollars.

She smiles at him and says, basically, “That’s nice dear.” Then she goes back to clipping coupons.

At some point, they decide to host a focus group for people worth more than $10 million. They know they’re getting time from people whose time is very valuable, so they lay out a spread that spares no expense. There’s seafood and caviar and fine wine.

The first attendee arrives. They know that his net worth is something like $17 million. They offer him a glass of the really quite expensive wine.

His response? “I only drink Bud or scotch.” At the end of the multi-hour session, the seafood and caviar was untouched. The wait staff wound up eating it.

Basically, you can choose to look rich, or be rich.

They’ve got a cool formula for figuring out if you’re on track with your net worth. Basically, you take your age and multiply it by your pretax household income. Then divide by 10. That’s what your net worth should be.

So, how you doing with that?

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