Jun 222020
 

This is the third and final post in this series where I discuss the most influential events of my personal finance journey. I like to save the best for last so today I’m discussing a book called, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy,” by Thomas Stanley and William Danko. 🙂

The Millionaire Next Door

A hundred years ago everyone owned a horse but only the rich had cars. Today the middle class drive cars and only the rich have horses. Oh how the stables have turned. 😎 The advantage of building wealth today is you don’t have to be smart, highly educated, inventive, or take precarious risks. There’s actually a rulebook – a set of specific guidelines that you can follow to reach millionaire status. It all comes down to practicing some simple habits. 🙂

saving like a millionaire next door

I read the Millionaire Next Door when I was 20 years old because I wanted to know how rich people live so that I can be like them one day. Or better yet – for the rest of my life. 😉 What I discovered from the book blew my mind. For some reason I had the misconception that most millionaires inherited their money, and enjoy spending it on lavish goods and luxuries. But instead, the book revealed that 80% of millionaires are self made. And most of them live a very low key lifestyle – known as stealth wealth. Your next door neighbor could be a millionaire, but you probably can’t tell just by looking. The book is essentially a compilation of behaviors and habits of rich people through academic surveys.

I decided to follow in the footsteps of the millionaires in the book. Since 4 out of 5 millionaires are first-generation affluent it gave me more confidence that I don’t need any financial help from my parents to reach a 7 figure net worth.

My plan was straightforward. I would simply behave like a millionaire until I became one. 😀 That’s literally all I did. Everything I needed to know to act like a millionaire was right there in the book. And believe it or not this actually worked! 13 years later I became a millionaire. 🙂 So let’s take a look at the behaviors I began to adopt back in 2007.

 

The Characteristics of a Millionaire

Here are 10 habits that I picked up from the book. Some of these behaviors I followed to a T in order to improve my chances of success.

  1. Millionaires spend twice as many hours per month planning their investments as other people.
    At first I didn’t know how this would actually help make me a millionaire. But I did it anyway. And it was pretty easy. I started to watch the performance of my investments more closely. To my surprise, what I paid attention to grew the fastest. For example, by focusing on my retirement plan, my RRSP has now grown to $150,000.
  2. Wealth accumulators don’t drink much, and spend less than $10 on average for a bottle of wine.
    Alcohol is often taxed more than other goods. An evening spent drinking can cost $50 or more, especially if you order the good stuff. But rich people usually don’t drink. And when they do it’s often something affordable. 🙂 I have followed this rule myself and have saved lots of money. There are tons of other activities in life to enjoy. Drinking alcohol doesn’t have to be one of them.
  3. The millionaire next door probably doesn’t smoke.
    The financial cost of smoking can be expensive. And it’s not good for your healthy either. Although I’ve heard it is good for curing salmon. 😎
  4. Most wealthy people own cars instead of leasing them. The millionaire’s car make of choice: Toyota.
    I bought a used Toyota in 2010. I’ve been driving it for the past 10 years. Amazingly it still works like new. 🙂 I could probably get another 10 years out of it. It’s fuel efficient, cheap to maintain, and easy to insure. I can see why millionaires like to drive these.
  5. Millionaires avoid buying status objects. They tend to reject status symbols whenever possible.
    You can either look wealthy or be wealthy. But it’s nearly impossible to do both. That’s why I don’t own luxury brands. This alone has saved me thousands of dollars over the years. I don’t even have any Apple products since there are always cheaper alternatives.
  6. Millionaires like to track their spending. Two-thirds of millionaires can answer “yes” to this question: “Do you know how much your family spends each year for food, clothing, and shelter?” In contrast, only one-third of high-income non-millionaires answered yes to this question.
    I started to track my spending when I learned about this habit. It doesn’t take too much time with a spreadsheet. It really makes me feel in control of my budget and personal finances. 🙂
  7. Most millionaires work between 45 to 55 hours a week.
    I adopted a 50 hour work week in my twenties by taking up a part time job. It has worked out really well as the skills I’ve learned from the side job has given me the tools to advance my full time job. 🙂 The U.S. Bureau of Labor Statistics reports that the average person who works 13% longer earns 44% more pay. So there’s a nonlinear return on overtime.
  8. About 80% of millionaires have brokerage accounts. But they make their own investment decisions.
    I used to have a financial advisor in college. But after reading this book I took out all the money and started to invest it all myself. Best decisions I’ve ever made. Saved myself over $50,000 in management fees.
  9. The vast majority, (97%) of millionaire are homeowners. Most of them have lived in the same home for over 10 years. Thus, they have likely enjoyed significant increases in the value of their properties.
    This is why I’m a staunch proponent of real estate investing and saved up a downpayment ASAP when I was starting out. There’s a huge correlation between being rich and being a property owner. I’ve lived in my home for nearly 12 years now. The market value has easily doubled. 🙂
  10. On average, the wealthy invests nearly 20% of their realized income each year.
    My salary today is around $70K, the highest it’s ever been. But no matter how much I earn I always invest at least 20% of my income every year. Consistency is key. Making six-figures would be great, but it’s not required to become a millionaire.

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Sep 272017
 

Understand Why You Invest Before You Invest

There should always be a goal, or objective attached to an investment. But not all investments require them to have the same goal. Here’s a list of some objectives, and how they’re different.

Investment Objectives
  • Capital Preservation – To seek maximum stability for our investment by investing in assets that are associated with extremely low risk. For example, I usually have a couple thousand of dollars on hand.
  • Hedging – To take long or short positions of an asset in order to hedge or offset the risk of another asset. For example, I hold gold and silver to hedge against inflation, which is gradual devaluation of currency.
  • Income – To generate dividend, interest, RoC, or other types of income instead of capital appreciation. The peer to peer lending platform, Lending Loop, is a good example of this. My effective annual yield on the platform is currently over 10%. 🙂
  • Growth – To increase the principal value of our investments over time through capital appreciation. Investors can expect attractive long term gains but also assume relatively higher levels of risk. My farmland and growth stocks such as Amazon, Netflix, and Facebook, are all examples of this objective.
  • Speculation – To greatly increase the principal value of our investments by taking on substantially high levels of risks. Examples of this would be trading cryptocurrencies, or penny stocks.

Some investments could fit into multiple objectives. And much like anything else with personal finance, our investment objectives can change over time. But the important thing is to be mindful about what we want our money to do, and re-evaluate those objectives periodically (ie: annually,) based on our changing financial situations.

At this time my primary objective is growth. Most of my financial decisions are based on this objective. 😀 I’m willing to overlook short term gains in favor of maximizing the potential for long term total returns. Much of my choices, such as using leverage, makes sense when viewed in this context. But having said that, it wouldn’t be wise to rely 100% on a single investment objective. 😉 This is why about 20% of my net worth is allocated to investments that strictly produce income. Naturally over time, in preparation for retirement, my investments will focus more on income and capital preservation, and less on growth and speculation. 🙂

Whatever our investment objectives may be, the important thing is to make a decision. 🙂 As fund manager Sir John Templeton once said, “the only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future. The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing. The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.”

 

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Random Useless Fact:

 

Sep 082016
 

The Debt Free Fallacy

The mainstream concept of debt creates unnecessary anxiety for people. Innocent consumers are made to believe that if they have $2,000 of credit card debt at 18% interest rate then that’s somehow a terrible thing and paying this off should be their first financial priority. But that’s a load of baloney, 😛 because we all know that paying for things like food is more important.

But let’s say they made some sacrifices to quickly pay off this $2,000 credit card balance. “What a big relief!” they tell themselves. “I’m finally debt free. It feels like a great weight has been lifted off my shoulders.”

But has it really? I’m all for celebrating financial achievements but let’s put things into perspective. That $2,000 of debt was only costing them $30 per month in interest. That’s less than 1% of most household budgets. It’s really just a drop in the bucket.

So yes they are debt free. But they don’t realize that they had to give up $2,000 of hard earned money in order to pay for their “debt free” privilege. That money could have been used for a wonderful vacation to Maui instead of paying back the loan. If they cut their internet or cell phone bills by $40 a month, then that would be more beneficial financially speaking than paying off their credit card balance.

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What’s so great about being debt free anyway? Even after they pay off their $2,000 consumer debt they’re still on the hook for everything else in life. It’s not like the other 99% of household spending magically goes away because they no longer have any more debt payments. There would be almost no difference in how they live now compared to when they still owed $2,000. In fact, having reasonable amounts of debt is actually advantageous because it would help build their credit history.

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Jun 092016
 

Living on $29/week

I thought about becoming a food taster once, but decided not to because I didn’t want to have too much on my plate. ? Most wage earners get paid either once or twice a month, but we generally have to eat food everyday. This means learning how to budget our grocery bill is an important skill to have. For some people maybe $200 a month for food is enough, but for others it might be $400 or more. Having a personalized budget that is reasonable will teach us about self control, rationing, meal planning, and will probably even save us money. 🙂 If we fail to watch our spending and plan ahead then we may run out of money before our next paycheque and find ourselves in times of scarcity. ?

16-06-food-stamp-challenge-basket-budgeting-fail

Earlier this week I started a food stamp challenge inspired by a famous celebrity. The idea is to spend no more than $29 on a whole week’s worth of food. I’m about half way through the challenge so I thought I’d give a quick update on how things are going. You can see the previous post for the full list of ingredients and detailed breakdown.

So far I’ve gone through most of the vegetables, but I’ve only eaten 5 of the 14 turkey drumsticks. I’ve been making a lot of salads, sandwiches, and roasts. Overall I’m roughly half way through my food basket. Tomorrow I’ll make a quick stew out of some potatoes, radish, and fish. I have 2 squashes remaining which I’ll probably stuff and bake. I have some left-over tomatoes and green peppers which I’m going to use up tonight lest they spoil. Below are some examples of simple dishes I’ve made so far.

16-06-food-stamp-challenge-basket-update

As mentioned in the previous post I’m only using salt and pepper for seasoning. I first thought this may become boring and repetitive after awhile, but so far the whole foods like tomatoes and bell peppers have quite a lot of natural flavor themselves, especially when cooked, and the salt actually helps to bring out their taste. Since I only eat two meals a day, plus snacks, I don’t have to cook very often. I think eating fewer meals is helping me with this challenge by eating less than other people would.

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Dec 072015
 

Breaking Through the Mental Barriers

For most of humanity the world believed that it was not physically possible for humans to run a mile in 4 minutes or less. This was a universal belief because the challenge had been attempted by athletes across many generations throughout human history but no one had ever succeeded. 🙁

But then something miraculous happened in 1954. A man named Roger Bannister stunned the world when he ran an entire mile (1.609 km,) in 3 minutes and 59.4 seconds! 😀

Later that year during the British Empire and Commonwealth Games hosted in Vancouver, B.C., Roger Bannister and Australia’s John Landy both ran a mile in less than 4 minutes. The race’s final moment is memorialized in a statue of the two placed in front of the PNE entrance plaza.

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But here’s the amazing part. Since 1954, over 1,000 people, including high-school students, have successfully broken the 4 minute barrier. Nobody could run a mile in 4 minutes prior to 1954, but now new runners are joining the 4 minute club every year. So what the heck changed in the last six decades? 😕 I don’t think a bunch of people suddenly developed super-human speed and endurance, although that would be pretty cool. 😉

What actually changed was people’s beliefs. Bannister didn’t just become the first person to run a 4 minute mile. His most significant achievement was changing the world’s perception about what a person is capable of doing. Prior to 1954 a 4 minute mile was simply considered impossible. But after 1954, everyone knew it had been done, so it must be possible. The psychological barrier had at last been shattered. Everyone believed that if someone else can do it then I can do it too. If someone else can make their dream into a reality then so can I! 🙂

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The biggest barriers to financial enlightenment that most people face are not physical, but rather psychological in nature. Michelangelo once said, “the greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.” This is why it’s important to set ambitious goals.

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