What I learned from reading "The Millionaire Next Door"

One area I feel that our education system lack is the area of financial literacy and wealth management. Other than learning to be frugal from my grandma, practically I received no education in this area. I am entirely on my own, and real enough, I made many mistakes along the way.

This book by William Danko is more for me more than for my children. However, there are a few good points I learned from that book which parents should be aware. Here are some key points:

(1) One interesting point is the way to calculate how much wealth should one accumulate. The formulate given: Multiply your age times your realized pretax annual income from all sources except inheritances, then divide the number by ten. For example, if you are 50 years old and your yearly salary is 60K, you should have 50x 60K/10 = 300K. Anything higher means you are PAW (Prodigious Accumulator of wealth). Anything lower means you are a UAW (Under Accumulator of Wealth).  Using this model, I know whether I am a good role model for my children.

(2) Based on the data the author researched on millionaires in the US, most millionaires are PAW, or I should say expert in accumulating wealth.  I am not surprised by this. What amazes me is that the majority of millionaires are not professionals such as lawyers or doctors, but entrepreneurs or business owners. The business is nothing exciting or those we see in the movies.  PAW may not gain high income, but they accumulate wealth very well. PAWs are frugal, and they live below their means. Those PAW millionaires are not easy to identify and often people do not think that they are rich.  It's not the occupation or types of business, but the characters which separate the PAWs from the UAWs.

(3) Quite a large numbers of professionals are UAWs. Due to their status in society. UAW may have a high income, but they spent a lot. To look good, UAWs live in an upscale neighborhood, and drive expensive cars, and therefore, tend to spend more money. Financially, these UAWs are financially unstable.  For example, a 50-year-old lawyer making 2 million a year but having 1 million in his savings is financially less stable than a 50-year-old shop owner who makes 100K per year but having 1 million in savings.  Ironically, the lawyer would spend all his savings within a year.

(4) The millionaire PAWs educate their children well and do not provide "economic outpatient care (EOC)."  EOC means assistance in the form of money given to the children to maintain a lavish lifestyle that the children could not have afforded using their income. PAWs often want their children to be professionals because they understand that doing business is not easy. Usually, the children of the millionaire PAWs do not know about their parents' wealth, and they learned to be frugal. There will be a high chance for the children of PAW millionaires to become a future millionaire because the children learned all the right character from their parents.  PAW (and their children) spend time increasing knowledge, growing their business whereas UAW (and their children) spend time on how to maximize spending their money. One example given is that the UAW spend a lot of hours surveying where to buy a luxury car at the lowest price.

I like the book. It is highly recommended.