The Millionaire Next Door

Transcription

1 The Millionaire Next Door Questions from the reading: 1. Explain the following four concepts addressed in The Millionaire Next Door. 1. Big Hat, No Cattle : Describes a person who is assumed to make a lot of money, but spends much more than they save, if they save at all. A presumed wealthy individual may have a nice house and a lot of other valuable, but may have debt and little or no savings. In other words, no actual wealth. Those who wear a big hat, but have no cattle, tend to spend money with the expectation of making money, before they ve actually made it. 2. Go to Hell Fund : Not necessarily a measure of wealth, but more of a savings account for unforeseen events, such as job loss, quitting a job, moving/relocating, divorce, etc. Essentially, a Go to Hell Fund would provide enough money to survive until the aforementioned situations, as well as others, would come to pass. However, a Go to Hell Fund isn t a savings that should be used to support an individual, couple, or family for a long period of time. 3. UAW: Under Accumulator of Wealth is a concept used to describe someone whose net worth is lower than his or her income. Generally, a UAW spends more than saves. 4. PAW: Prodigious Accumulator of Wealth is a concept used to describe somebody whose net worth is more than their income. Generally speaking, a PAW would be somebody who saves more money than they spend. 2. In the example of Theodore Teddy J. Friend, provide three reasons why Teddy is considered a UAW. What was the message that Teddy s parents sent him about consumer behavior? 1. Teddy was motivated by his parents lack of wealth to become more wealthy than them. 2. Teddy s idea of wealth meant having more possessions. 3. Teddy s view of wealth meant working harder to obtain more or better possessions he is a consumer. 4. The message Teddy s parents sent him was One earns to spend. When you need to spend more, you need to earn more.

2 3. In the example of Mr. W. W. Allen, self-made millionaire, he never extended his credit to people who exhibited the Big Hat, No Cattle philosophy; why? Why did he decline the Rolls Royce? 1. Mr. W. W. Allan chose not to invest in those with a Big Hat, No Cattle philosophy because, in his mind, those people would be unable to repay their debts. Such people, spend, spend, spend, in anticipation of having money before they even earn it. If your goal is to become financially secure, you ll likely attain it But if your motive is to make money to spend money on the good life, you re never gonna make it. Money should never change one s values Making money is only a report card. It s a way to tell how you re doing. 2. Mr. Allan declined the Rolls Royce gift that his business associates were going to give him because, There s nothing the Rolls-Royce represents that s important in my life. Nor would I want to have to change my life to go alone with [owning] the Rolls. I can t throw fish in the back seat of the Rolls, like I do right now when I go fishing. I m gonna have to get you all to the lake I m out fishing here every weekend. We have some of the best freshwater fishing in the country. Right out here where I keep my fishing boat. With a Rools, I can t go to some of the crummy restaurants I enjoy going to Can t drive up in a Rolls-Royce. So, no, thank you. And so I had to call and say, I really got to tell you something. That I don t want it. It s totally unimportant There are some things that are more fun to do more interesting to do [than owning a Rolls]. 4. Define Economic Outpatient Care. Like the example of James, many EOC receivers inaccurately view themselves as. As illustrated in the example of Henry and Josh, what is the fundamental rule regarding wealth building (be specific)? Why did Laura succeed? 1. Economic Outpatient Care is parents or grandparents providing financial assistance or economic gifts to their adult children and grandchildren, respectively. It can also be viewed as independent adults expecting or feeling entitled to, even depending upon such financial assistance. 2. Many EOC recipients inaccurately view themselves as self made; additionally, I might add, they have a sense of entitlement. 3. The fundamental rule of wealth building is: Whatever your income, always live below your means. Regardless of how much money you earn, always spend less than what you make save and invest the rest wisely. 2

3 4. Laura succeeded by not letting obstacles get in the way of her success, be it financial or otherwise. She was determined to succeed on her own, without the help of her parents. Laura proactively takes fiscally responsible actions to live below her means, even though she could afford to spend more. She chose to take a red eye flight over more convenient flight times in order to save money. 5. What are the two concepts you found most useful? How will you apply them to your life? In your own words, give your thoughts in a minimum of three paragraphs. The Millionaire Next Door was full of facts (an overwhelming amount of them, if I may add) and useful concepts. Although some were, more or less, common sense, others were really eye-opening. In fact, some of the concepts discussed in the book shed light into some of my own poor financial habits. At first, overwhelmed by the statistics, percentages, ratios, and numbers presented throughout the book, I struggled to read on. But after reading further, I soon found myself learning a great deal about myself. Two concepts that I found particularly useful were the Better Than and Better Off theories, as well as the concept of living within one s means and the correlation of income and wealth. The Better Than theory states that individuals seek to be better than friends, neighbors, and close relatives by measure of their possessions. Possessions and success don t have a direct correlation. The Better Than theory also illustrates that, those who exhibit the Better Than attitude, feel the need to obtain bigger, better, and/or more expensive possessions to prove that they are, in some way, shape or form, better than their perceived competition. Individuals who want to be better than friends, family, or neighbors typically those who grew up in a poor family can also exhibit traits of the Better Off concept, wherein they feel the need to be better off than their parents. The ways in which they quantify this need is, again, by measure of possessions: a bigger house, a better vehicle, a better education, and a better career. Although I wouldn t say that I ve grown up impoverished, by any measure, I would say that my family has had its fair share of financial struggles, what with the downfall of the economy in recent years. When reading through the examples of the Better Than/Better Off concept, I realized that, in some small ways, I have felt a desire to be better than or better off than some of my friends, family, and peers. Although I don t aspire to be wealthy or better than anybody, my eyes were opened to the idea that, it is much easier to be truly better off than others, but only in the sense of being both fiscally responsible and secure. Now, more than ever, I feel that it is genuinely important for us to end the perpetuation of reckless spending habits, and to redefine what truly makes us better off. We have nothing to prove to others, only to ourselves, as the story of 3

4 Laura illustrates. Appearances are much less important than the courage, discipline, and resolve of people who are economically productive. As a college student majoring in aviation, I ve had the opportunity to attend flight school, not without a great deal of outside financial assistance. Although being a professional pilot was initially my goal, through meeting and discussing career options with other pilots, I ve determined that, financially, I wouldn t feel secure as a pilot (trust me, I really have done the research, and it s not pretty for the first 10 years or so). Instead, I ve chosen a path toward a career that will, in addition to offering a handsome salary of $200,000 after 10 years, open the doors to advancement opportunities that pay more. My life won t be centered around commuting, spending money on fast food, restaurants, bars and entertainment; instead, I ll be able to use that money to fly planes for leisure, as well as travel in my spare time. After coming to this realization recently, and when reading about education and career choices, and the correlation between income and wealth, it has reaffirmed my decisions. I never realized, until reading the statistics about doctors, lawyers, and other high-income professions, that the prescribed lifestyle expectations for those professions isn t what I want. Like Mr. W. W. Allan, I would rather own a modest vehicle that will take me to and from work and my airplane hangar and be able to enjoy the things I truly love, rather than fit my mold into the expectations of others. By living well within my means, maintaining a modest budget, keeping my savings account well-stocked, investing wisely, and carefully weighing necessities against desires, I will be succeed, and comfortably enjoy the things I love, and share them with others. 4

5 Reflective Writing Finally, while reading and analyzing The Millionaire Next Door, I acquired substantive knowledge and thought critically, even from Chapter 1. The Millionaire Next Door is full of facts, statistics, and real-life stories both positive and negative helping to paint a very realistic picture for the reader. The agenda of the authors is very clear, and that agenda is to help readers realize that being wealthy isn t a matter of possessions or societal status, but rather a matter of discipline and wisdom. Being wealthy is about saving, investing, and spending wisely; and, when done wisely, one can accumulate great deals of wealth. On the other hand, the authors paint the picture of many different types of people who appear to be wealthy, but pay with credit or spend their money unwisely. Although such habits make it appear as though such a person is wealthy on the outside, their bank accounts generally say otherwise. The substantive knowledge I gained from reading The Millionaire Next Door stuck with me as I was reading the book. From day to day, I started analyzing my spending habits vs. my budget, and looking for ways to cut unnecessary spending. Those kinds of habits are extremely valuable for college students, especially with the possibility of facing loans and debt as soon as we graduate. The authors differentiate between those who accumulate and spend their money, in some cases without even having it; and those who save and invest excess money from their income, usually by living well within their means, leaving money in their bank accounts between paychecks. Just the fact that I was thinking about the concepts introduced and discussed in The Millionaire Next Door outside of reading it at work, in classes, or during my free time speaks for the critical thinking the authors invoke from within the reader. The facts and stories are truly eye-opening, thought-provoking, and relevant to anybody who is struggling financially. There are ways to live within one s means, it just isn t easy, and it takes hard work, discipline, and self-control to do it. But the payoff is, in the end, well worth it. 5