There are a handful of financial books that have had a profound impact on my thinking, maybe none more so than Dr. Thomas J. Stanley’s “The Millionaire Next Door.” Dr. Stanley’s research was, at the time, the most comprehensive study of the wealthy in America and included how they got that way. More than one thousand people responded to the survey, which asked 249 questions about their attitudes and behaviors on topics ranging from household budget planning (or lack of it) to financial fears and worries, and from methods of bargaining when purchasing automobiles to the categories of financial gifts, or “acts of kindness,” financially free people give to their adult children.
The research found several standout characteristics amongst those surveyed:
They live well below their means. This seems obvious but future millionaires made aggressive savings a priority even when their incomes were low.
They allocate their time, energy, and money efficiently, in ways conducive to building wealth. The wealthy know how to budget both their time and money and plan their incomes and expenses as much as a year in advance.
They believe that financial freedom is more important than displaying high social status. They’re less concerned with looking wealthy than they are with actually being wealthy.
Their parents did not provide economic outpatient care and their adult children are economically self-sufficient. The more financial assistance an adult child receives, the less likely it is that the adult child will become financially independent. Gifts often simply generate higher levels of consumption.
I read "The Millionaire Next Door" when it was first published in 2000 and was happy to see in print many of the good financial habits that I picked up from my parents and challenging circumstances. Money was very tight when I enrolled at CU Boulder in 1992 on a full scholarship and as newlyweds ,we tracked and scrutinized every dollar that came in and out of our household. Pre-internet, it was a painstaking process that involved manually transcribing every single financial transaction from paper statements into an Excel spreadsheet on at least a weekly basis and reconciling our budget every month to carry over any surpluses or deficits. This level of attention and financial management assured that we made the very best use of our limited financial resources, but it was tedious and time-consuming, even with the limited complexity of our graduate school finances. I can’t imagine following that process now that our household generates almost 200 financial transactions per month.
Who does cashflow planning and budgeting these days?
It is interesting to look back on my training as a financial advisor and realize how little attention was paid to budgeting, debt management, saving or cashflow planning – the hallmarks of strong wealth building potential. Our industry always has a very strong focus on pursuing the group of financially successful prospects who have already somehow figured this out for themselves. It reminds me of what Josh Kaufman says about MBA programs – “Business schools don’t create successful people, they simply accept them, then take credit for their success.”
When our incomes increased, we drifted away from budgeting and cashflow management as it became less of a challenge to comfortably cover our expenses. I know this is somewhat universal having conducted an informal survey over the past few weeks. I did not speak with a single person who diligently plans and budgets the way that the Millionaires Next Door did in the 1990s.
Never been a better time to start!
Last month, I described a system whereby you systematically pay your fixed expenses (including saving for retirement) and spend whatever remains free of guilt. A big disadvantage of this simple system is the lack of awareness of exactly where your money goes as the month unfolds. After writing last month’s article, I spent an afternoon connecting our own personal credit cards and bank accounts to eMoney’s cashflow management and budgeting platform. This cloud-based software securely and accurately downloaded and categorized several YEARS worth of financial transactions and after spending a few hours making corrections, the system then drafted a going-forward budget purely based on our past spending habits. With this as a starting point, I created a family budget that only takes a few minutes per week to review and now we have a completely accurate financial picture including exactly how much we spend and on what. We have used 2017 technology to implement in an afternoon the Millionaire cashflow and budgeting systems that used to be extremely tedious and time-consuming!
Curious about your Wealth Potential?
Our focus has always been on helping our clients achieve financial freedom which in 2017 often requires more than a net worth of $1M but the same principals still apply. We have recently started working with the late Dr. Stanley’s daughter, Dr. Sarah Stanley Fallaw, who has created a set of online assessment tools to help future millionaires measure their own wealth building potential. With this data you can identify any gaps and create a plan to address them. My own recommendations confirmed that sometimes too much of a good thing can be a problem: “Be tempered, thoughtful, and moderate in the application of your frugality. Don’t look to optimize spending in situations where the financial benefit is small but the personal or emotional cost is high. Some spending/consumption may not be strictly rational or optimized, but the emotional value that you (or, ahem, your spouse/partner) get from the spending maybe be worth it.”
If you are curious to take the survey and receive your assessment and recommendations, please email [email protected] with the subject “Wealth Assessment” and she will send you the link to get this confidential report completely free of charge!