The Millionaire Next Door

Some of the most important points of the book “The Millionaire Next Door” which is a book based on an extensive research of millionaires in the United States listing some of the most important traits the presses.

The 6 main facts about Millionaires:

1. They live well below their means. 

2. They allocate their time and money efficiently, in ways conducive to building wealth. That can mean a number of things

3. They believe that financial independence is more important than displaying high social status.

5. Their adult children are economically self-sufficient. 

6. They chose the right occupation.

7. They are proficient in targeting market opportunities.


Lesson #1: Income Does Not Equal Wealth. It does matter what you make but what matters even more is what you keep.  On average, millionaires invest nearly 20% of their income this is what makes all the difference.

Lesson #2: Have a Budget. The majority of millionaires have a budget. Of those who don’t, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first”. In other words, they invest a good chunk of their income before they can spend any of it.

Lesson #3: Time is Money, spend it wisely.

Lesson #4: Frugal Frugal Frugal. Frugal is defined as “behavior characterized by our reflecting economy in the use of resources.” The opposite of frugal is wasteful. 
Being frugal is the cornerstone of being wealthy. Promoters often lavishly enhance the image of millionaires of lavish spender or wasteful people. Where in the real world most of the millionaires are frugal savers.

On Tax:

To build wealth minimize your realized taxable income and maximize your unrealized income (wealth/ capital appreciation without Cash Flow).

How to calculate your Net Worth

Your Age * Realized Pretax Annual Income from all sources except inheritance this divided by ten. This less any inherited wealth is what your Net Worth is.

What the Past can teach us about the future

The following Questions help us to  determine if the past is representative for the future.

  1. Observation: Will the past behaviour continue? How long can it possibly continue?
  2. Explanation: The past can tell us why something happend.
  3. Predictability: From the past we can learn how probable an event really is, how possible is that it will happen again?
  4. Continuation and Change:  What is required to make the past/ present record continue? What forces can change it or cause what we don’t want to happen and is it likely?
  5. Certainty and Consequences: How certain am I? And what the consequences of being right/ wrong?

The past can teach us a lot about the future when we ask the right questions and look at the bigger picture.

“Study the past if you would divine the future” – Confucius

Why we all should think like an Investor

You don’t have to be invested in the stock market to be a Investor. In fact here is the definition of a Investor:

To put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciationin value.

To use, give, or devote (time, talent, etc.), as for a purpose or to achieve something.

That means that everyone who tries to allocate his resources in a smart way is an Investor by definition . This is was the “Investor Mentality” is, the awareness that you are an Investor with the goal of using your resources as efficiently as possible. Resource could be your time, energy, money or talent …

You only have to keep in mind one simple formula for making your investment decisions:

Ask yourself: Is the Value I personally get from this product higher than the Price I pay for it?

Value > Price = Yes, then do it! / No, its not the best use of my money!

“Price is what you Pay, Value is what you get” Charlie Munger

If the answer is no, it’s not the best deal. You don’t necessary  have to think only in term of money on in energy or time. The value you place on something is of course subjective, things have different value for different people, that is why a great investment for one person would be terrible for the next one.

The best example for that are books, books cost on average 30$ but have the  potential to make you millions over your lifetime. Therefor even a book that looks expensive to most people can be an absolute bargain (granted that the book is a good one). With that simple formula in mind you can make much better decisions.