Review – The Millionaire Next Door

As stated in a previous post, I will review one book per month that covers personal finance topics.

According to the cover, this book is an “incredible national bestseller that is changing people’s lives – and  increasing their net worth.”  My interest was initially piqued after reading other personal finance blog reviews, but I ultimately chose to read this book after skimming the introduction.  It was clear that the authors had spent a great deal of time researching America’s affluent.  For instance, the introduction pointed out the following millionaire traits:

• Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life.
• This person owns a small factory, a chain of stores, or a service company.
• He has married once and remains married.
• He lives next door to people with a fraction of his wealth.
• He is a compulsive saver and investor.
• And he has made his money on his own.
• Eighty percent of America’s millionaires are first-generation rich.

My decision to read this book was finalized with the following statement on page 3, “…we have determined how ordinary people can become wealthy.”  The results of their research illustrate just how simple it can be to reach the millionaire milestone.  While it may not be easy, it is very simple. If you don’t find that statement inspiring, then you may want to set this book aside and look for something else to read.

In chapter one, the authors define “wealthy.”  While Webster’s refers to the wealthy as people who have an abundance of material possessions, this book defines wealthy in terms of one’s net worth, or assets minus liabilities.  They considered someone with a net worth of $1 million or more wealthy.  In addition, the authors established two different types of individuals, PAWs and UAWs. PAWs are prodigious accumulators of wealth while UWAs are under accumulators of wealth.  Would you like to know which category you fall under?  Complete this formula below to find out how the authors would classify you based on their research:

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.”

If your net worth is twice this number, then congratulations!  According to the authors, you are a PAW.  If your net worth is half this number, then you are a UAW.  Personally, I’m off to a slow start.  My wife and I are currently working on those pesky student loans, which so many young people have.  I’m not sure how accurate this meausure truly is as I think it is somewhat skewed for the younger generation.   But this is the measure used to draw the line between the over spenders and wealth accumulators, and the authors continuously explain the differences between PAWs and UAWs throughout the book.

The following chapters are based on The Seven Factors wich are the common denominators among those who successfully build wealth. Each of the seven factors receive a chapter dedicated to defining their principles and explaining how PAWs and UAWs differ regarding that particular principle.  These factors include:

1. They live well below their means.
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high 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.

Is the book worth reading?

This book is definitely worth reading, regardless of your age or wealth.  The book debunks many myths the general population believes about millionaires.  One cautionary note – while it isn’t a complex read, it is heavy on the statistics.   However, these statistics are the foundation of the book.  The stats provide the reader with the millionaire’s “DNA” and make it look incredibly easy to become one yourself.  The younger you are, the stronger my recommendation to read this book. The more time you have to practice the simple Seven Factors described in this book, the more you will eventually gain.

This is a book that I checked out at my local library.  I liked this one so much I will undoubtedly refer to it time and time again.  With that in mind, I will soon be requesting a copy for myself at paperbackswap.com.

Check back soon to find out which book I’ll review in January!