The death of the ‘Millionaire Next Door’ dream(latimes.com)
latimes.com
The death of the ‘Millionaire Next Door’ dream
https://www.latimes.com/business/hiltzik/la-fi-mh-the-death-of-the-millionaire-next-door-dream-20150310-column.html
510 comments
https://archive.md/2EPal
The model described in the book does work. Spend less than you make, invest the excess in long term assets that have compounding interest rates above the inflation rate. It does produce millionaires. It also requires tremendous discipline over a long period of time. The math is relatively simple, the behavior is not.
While the millionaire described in the story had $8 million in assets, you will find almost no one "next door" with 10 to 100 million or a 1 billion. That level of wealth requires a return on investment that can't be achieved using the earn and save model. It usually requires creating/controlling an assets that can grow in value many orders of magnitude faster than the stock market (real estate, businesses, intellectual property).
While the millionaire described in the story had $8 million in assets, you will find almost no one "next door" with 10 to 100 million or a 1 billion. That level of wealth requires a return on investment that can't be achieved using the earn and save model. It usually requires creating/controlling an assets that can grow in value many orders of magnitude faster than the stock market (real estate, businesses, intellectual property).
I know one guy that managed to retire before 40 (he's now 45), following the boring route. Roughly, it went like this
- He chose to go to trade school, and become an electrician
- He chose to live in his small rural town
- He worked overtime whenever he could, but not at the cost of his social or family life.
- He saved around +/- $30k every year, for almost 20 years, and invested it all on index funds.
- He didn't splurge on excessive travel, electronics, cars, etc. lived a modest life.
After he "retired", he enrolled community college to study Electrical Engineering, and now does smaller contracting work that he finds interesting.
- He chose to go to trade school, and become an electrician
- He chose to live in his small rural town
- He worked overtime whenever he could, but not at the cost of his social or family life.
- He saved around +/- $30k every year, for almost 20 years, and invested it all on index funds.
- He didn't splurge on excessive travel, electronics, cars, etc. lived a modest life.
After he "retired", he enrolled community college to study Electrical Engineering, and now does smaller contracting work that he finds interesting.
The book's claim is something like "most millionaires are people who own ordinary small businesses without a luxurious lifestyle".
This article seems to be trying to refute the different claim that "even a low-income person can easily become a millionaire". But I don't think that's ever been true, and it's not really the book's message. Someone making $130,000 as a small business owner isn't "low-income" - the book is mainly contrasting this group with highly educated doctors, lawyers, MBAs, etc, who also have high incomes but spend much more.
This article seems to be trying to refute the different claim that "even a low-income person can easily become a millionaire". But I don't think that's ever been true, and it's not really the book's message. Someone making $130,000 as a small business owner isn't "low-income" - the book is mainly contrasting this group with highly educated doctors, lawyers, MBAs, etc, who also have high incomes but spend much more.
The counter argument, and why I’ve never been bent out of shape by books like this, is: these strategies are no guarantee that you’ll live to become an 8-millionaire at 92, but they’re not likely to make your life’s financial outcome worse and even if you die at 75 with “only” $200K and a paid-off house that you lived in for 40 years, you probably experienced less financial (and overall) stress than you would have with your same life conditions but a YOLO attitude, leasing a new car every 3 years for every driver and taking big vacations every year because “you deserve it”.
> “I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house.”
I can’t help but think of Warren Buffett here. He seems happy in his (well-chosen) starter home.
https://www.businessinsider.com/warren-buffett-modest-home-b...
> “I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house.”
I can’t help but think of Warren Buffett here. He seems happy in his (well-chosen) starter home.
https://www.businessinsider.com/warren-buffett-modest-home-b...
> But the real secret to his success was catching the asset wave that Taleb mentioned. In other words: luck. The period in which he invested started with extreme undervaluations in the equity market
If anyone is curious about the actual returns of the market, I made a sheet [0] with S&P 500 returns over 10, 20 and 30 years at every possible starting point. Note that this excludes dividend yield which is about ~2% today and higher in the past, which should cover inflation for the most part.
type 10yr; 20yr; 30yr;
min -3.57%; 2.80%; 6.94%;
max 17.05%; 15.49%; 12.74%;
median 8.54%; 10.21%; 9.86%;
So for instance, if you invested over 10 years since 1929, the worst you could have possible done is a continuously compounding return of -3.57% (invested in 1927 and sold in 1937). The next worst is invest in 1938 and sold in 1938 for a 0% return. Everything else is positive.
The worse 20 year return is 1927-1947 for an annual return of 2.8%
But of course no one invests like this. They invest over time and dollar cost average. For instance you may invest $100 a month, in which case your returns would be positive and likely very high regardless of when you start, as long as you invest for long enough (more than a few years)
I don't know why a journalist would quote someone without doing 5 minutes of research as to actual stock market returns and important timing is.
I still don't understand why its so fashionable to have these garbage articles come out about how everyone working hard and saving is an idiot and everything is futile. Does the author believe this crap? What else is there to do but to work hard and save? Would you teach this stuff to your children about how they're destined to be destitute?
[0] https://docs.google.com/spreadsheets/d/1dGFQUxyUfGyBE5dnz1rc...
If anyone is curious about the actual returns of the market, I made a sheet [0] with S&P 500 returns over 10, 20 and 30 years at every possible starting point. Note that this excludes dividend yield which is about ~2% today and higher in the past, which should cover inflation for the most part.
type 10yr; 20yr; 30yr;
min -3.57%; 2.80%; 6.94%;
max 17.05%; 15.49%; 12.74%;
median 8.54%; 10.21%; 9.86%;
So for instance, if you invested over 10 years since 1929, the worst you could have possible done is a continuously compounding return of -3.57% (invested in 1927 and sold in 1937). The next worst is invest in 1938 and sold in 1938 for a 0% return. Everything else is positive.
The worse 20 year return is 1927-1947 for an annual return of 2.8%
But of course no one invests like this. They invest over time and dollar cost average. For instance you may invest $100 a month, in which case your returns would be positive and likely very high regardless of when you start, as long as you invest for long enough (more than a few years)
I don't know why a journalist would quote someone without doing 5 minutes of research as to actual stock market returns and important timing is.
I still don't understand why its so fashionable to have these garbage articles come out about how everyone working hard and saving is an idiot and everything is futile. Does the author believe this crap? What else is there to do but to work hard and save? Would you teach this stuff to your children about how they're destined to be destitute?
[0] https://docs.google.com/spreadsheets/d/1dGFQUxyUfGyBE5dnz1rc...
Something tells me this author went to an expensive school to study journalism and went on a trip abroad (or 2), and now doesn't know how to pay back all those student loans. Building wealth is still very much possible, there are many different communities online (FIRE, Dave Ramsey, and so on) where people are doing it, it just involves living a lifestyle that's abnormal for today's standards because consumerism has properly messed up our baseline.
I hadn't read the book itself, but had got a different message.
I thought that most of these people happened to run successful businesses in poorer communities (often immigrant) where their peers were all relatively poor. They therefore didn't get caught on a treadmill where expected gifts and living standards drive everyone to spend all their money on keeping up with the Joneses. Most of the community have little money, not because they're stupid or wasteful just because they're starting from very little. So the outlier has no real need to spend the money and just banks it in their business against downturns and over time it builds up.
Interesting as a phenomenon, but it sounds they were drawing very broad conclusions from that for their book.
I thought that most of these people happened to run successful businesses in poorer communities (often immigrant) where their peers were all relatively poor. They therefore didn't get caught on a treadmill where expected gifts and living standards drive everyone to spend all their money on keeping up with the Joneses. Most of the community have little money, not because they're stupid or wasteful just because they're starting from very little. So the outlier has no real need to spend the money and just banks it in their business against downturns and over time it builds up.
Interesting as a phenomenon, but it sounds they were drawing very broad conclusions from that for their book.
Another aspect not touched upon by either the author of this article nor of the book is multigenerational thinking common in immigrants. You KNOW you aren't getting that rich but you are trying to make a better life for your kids. Your kids will benefit. If your kids are industrious then your grandkids will be even better off.
There are whole cohorts of Chinese blue collar people who bought houses in lower middle class neighborhoods who sent their kids of to UCs. Those kids then become doctors, engineers, investors, etc... Some of the grandkids are more laid back but some want to climb further.
There are whole cohorts of Chinese blue collar people who bought houses in lower middle class neighborhoods who sent their kids of to UCs. Those kids then become doctors, engineers, investors, etc... Some of the grandkids are more laid back but some want to climb further.
Someone who is retired, has a million dollars invested in the stock market, no debt and no income today is not rich. They are middle class.
Assume they are collecting an average Social Security check. That's 18K per year.
If the person draws 3.5% of their net worth each year, that will give them an additional 35K per year. (I picked 3.5% because if you look at the history of the stock market, that's a safe rate to draw money for a long period of time, even during past historical market downturns.)
So they can spend a grand total of 53K per year. That's very close to the average US salary, 52K per year.
It's true they don't have to work. But they're not rich. They are middle class.
Assume they are collecting an average Social Security check. That's 18K per year.
If the person draws 3.5% of their net worth each year, that will give them an additional 35K per year. (I picked 3.5% because if you look at the history of the stock market, that's a safe rate to draw money for a long period of time, even during past historical market downturns.)
So they can spend a grand total of 53K per year. That's very close to the average US salary, 52K per year.
It's true they don't have to work. But they're not rich. They are middle class.
I dunno. My GF rents a house for $950/mo, granted it's the smaller cottage on a $2M property. The owner of the property is a 26 year old optometrist. The guy next door has a $1.5M mansion and runs a septic tank company with two trucks and a bunch of stinkin hoses. (He also doesn't believe in covid and he's afraid to come over since we got vaxed because he thinks spike proteins are gonna sterilize him). The bartender at my local place has upwards of $100k in the bank in savings, and his mom owns a $2M house. I'm still not a millionaire (inching my way there) but a million dollars isn't what it used to be.
OTOH, my brother in LA owns a condo and can't find a new place to move into for love or money. Shit's always bleak at the LA Times, but, they don't get to other parts of the country much.
OTOH, my brother in LA owns a condo and can't find a new place to move into for love or money. Shit's always bleak at the LA Times, but, they don't get to other parts of the country much.
FIRE (financial independence retire early) is the new thing. If the millionaire next door isn't possible, what are all these FIRE people doing? Oh right, I know one that's planning to retire soon - in his 40s. Don't worry, that means one more good paying job will be available for someone else ;-)
I think it's also worthwhile to consider not just whether you can amass several millions from frugal spending and steady-hand and sober-minded investments into the market, but whether you should.
I think most people set themselves goals such as working at FAANG, having millions in their accounts, driving expensive cars, not because it'd bring them happiness but because that's the societal expectations that they have unknowingly adopted and never noticed the switcheroo. It makes sense why society as a whole would value this "work to the bone at the cost of everything else" behaviour - it creates good workers whose work benefits the society. It is not clear how it benefits the worker.
At the end of the day, what's the point of having those millions in your bank account when your 75, have bad knees, arthritis and crippling back pain. Decide what you want to do with your life, and work your hardest to achieve that. Don't dance at the tune of someone else's fiddle just so that maybe at the end of that long ride you can get a handshake and a pat on the shoulder.
I think most people set themselves goals such as working at FAANG, having millions in their accounts, driving expensive cars, not because it'd bring them happiness but because that's the societal expectations that they have unknowingly adopted and never noticed the switcheroo. It makes sense why society as a whole would value this "work to the bone at the cost of everything else" behaviour - it creates good workers whose work benefits the society. It is not clear how it benefits the worker.
At the end of the day, what's the point of having those millions in your bank account when your 75, have bad knees, arthritis and crippling back pain. Decide what you want to do with your life, and work your hardest to achieve that. Don't dance at the tune of someone else's fiddle just so that maybe at the end of that long ride you can get a handshake and a pat on the shoulder.
I completely agree with the article and I still think that if you read Millionaire Next Door and it helps you get a perspective on living below your means and investing regularly, that could still be really useful.
I feel similarly about FIRE - retiring early is one of the most unappealing goals that I can think of and the FI part of it is an outright lie - but if you read something on a FIRE blog and it helps you manage your money a bit better, I'm all for it.
I feel similarly about FIRE - retiring early is one of the most unappealing goals that I can think of and the FI part of it is an outright lie - but if you read something on a FIRE blog and it helps you manage your money a bit better, I'm all for it.
There is a busy subreddit- financialindependence- comprised of people hoping to retire by 40. Its a mixture of a frugal lifestyle and high savings. The rough formula is you a financially independent when you have 25 times your annual expenses saved. That is a million if you can live on $40,000. Some single people in professional jobs can fairly easily do this.
I find it sad when some posters go overboard by denying themselves vacations and families just to feel rich.
I find it sad when some posters go overboard by denying themselves vacations and families just to feel rich.
This article pretends that there no longer undervalued assets to be found and that these guys just got lucky to be there when apparently everything was cheap. The article doesn’t consider leverage was really difficult then due to interest rates. In addition there are always undervalued assets to be bought.
But patience and discipline are required. The first million is the hardest and takes the longest to make.
But patience and discipline are required. The first million is the hardest and takes the longest to make.
I've always wondered why we don't see more people with $50M-$100M saved up over a lifetime. The average person can't do it, but there are plenty of doctor/lawyer or tech manager couples in the Bay Area or NYC that can save $100k-$150k per year. Max out retirement accounts, invest in index funds, assume 7% return, assume a long life of 90 years, and... that ends up being a lot of money.
Not saying that couples who are capable of saving that much per year are actually doing it, but rather, you would think it would at least be more common than it is.
Not saying that couples who are capable of saving that much per year are actually doing it, but rather, you would think it would at least be more common than it is.
An irony here is that after a lifetime of frugality, the hospital and library this man bequeathed his fortune to will spend it flagrantly on pet projects, staff perks, political turf and tail chasing IT projects (and sure, a bit of the mission as well). Such is the way of the world.
There is no hope. Do not try to manage your finances in any way. The only way to succeed is by pure random luck. Your actions make no difference at all.
By the way the LA times has some ads to show you for some shiny things you should buy instead of saving your money.
By the way the LA times has some ads to show you for some shiny things you should buy instead of saving your money.
The term `Millionaire Next Door` is key.
It's someone you wouldn't even realize is wealthy, because they don't demonstrate wealth visibly. They take care of needs and (some) wants based on their own internal compass rather than the image it would convey.
Certainly, low income and high cost of living is not a recipe for success. But moderate income and moderate cost of living (less than income) can be. The article says investment returns like those can't be replicated, because inflation is too low. But being able to make enough money to invest isn't possible because inflation is too high. Well, you can't have it both ways!
Lets throw some assumptions in... 7% return on investments after inflation.
> If you contribute $834.85 every month over the next 40 years towards your goal, you will have $2,000,000.00 in savings.
> If you contribute $1,764.39 every month over the next 30 years towards your goal, you will have $2,000,000.00 in savings.
$2 million (given the 4% safe withdrawal rate derived from the Trinity Study) would give you $80k annual income. Everything will be in today's dollars, since inflation is already factored into your ROI.
If you started at age 25 and wanted to retire at 55 with $2 million dollars, with the assumption you're spending $80k every year, you'd need an after tax income of $101,172.68 each year. In other words, save just over 20% of your income, and pull off early retirement in 30 years. (If you keep the $80k and $2 million at a perfect 1:25 ratio, this math works for any income/spending, for example ~$63k income, $50k spending and $1,250,000.)
Who thinks someone living an $80k lifestyle on a $101k (after tax) income is hating their quality of life? Drive 3-5 year old cars for 5 years, paid cash. (At the oldest they are 10 years old just before you sell them.) Don't buy more house than you need, with "tiny exaggeration syndrome" where you need the "best" school and the "best" walkable score and the "best" etc... Balance eating out with the joy of cooking. And so forth. Your neighbors will not think you are poor, but they also won't suspect you're getting rich. You will become a millionaire next door.
It's someone you wouldn't even realize is wealthy, because they don't demonstrate wealth visibly. They take care of needs and (some) wants based on their own internal compass rather than the image it would convey.
Certainly, low income and high cost of living is not a recipe for success. But moderate income and moderate cost of living (less than income) can be. The article says investment returns like those can't be replicated, because inflation is too low. But being able to make enough money to invest isn't possible because inflation is too high. Well, you can't have it both ways!
Lets throw some assumptions in... 7% return on investments after inflation.
> If you contribute $834.85 every month over the next 40 years towards your goal, you will have $2,000,000.00 in savings.
> If you contribute $1,764.39 every month over the next 30 years towards your goal, you will have $2,000,000.00 in savings.
$2 million (given the 4% safe withdrawal rate derived from the Trinity Study) would give you $80k annual income. Everything will be in today's dollars, since inflation is already factored into your ROI.
If you started at age 25 and wanted to retire at 55 with $2 million dollars, with the assumption you're spending $80k every year, you'd need an after tax income of $101,172.68 each year. In other words, save just over 20% of your income, and pull off early retirement in 30 years. (If you keep the $80k and $2 million at a perfect 1:25 ratio, this math works for any income/spending, for example ~$63k income, $50k spending and $1,250,000.)
Who thinks someone living an $80k lifestyle on a $101k (after tax) income is hating their quality of life? Drive 3-5 year old cars for 5 years, paid cash. (At the oldest they are 10 years old just before you sell them.) Don't buy more house than you need, with "tiny exaggeration syndrome" where you need the "best" school and the "best" walkable score and the "best" etc... Balance eating out with the joy of cooking. And so forth. Your neighbors will not think you are poor, but they also won't suspect you're getting rich. You will become a millionaire next door.
https://fred.stlouisfed.org/series/MEHOINUSA672N/
Seems like we're doing fine.
Seems like we're doing fine.
It's dated, but the principles work. Has no one hear of _fire_ ? https://www.reddit.com/r/financialindependence
Thomas Stanley and Sarah Fallaw (Stanley's daughter) published an updated book in 2016 called The Next Millionaire Next Door: Enduring Strategies for Building Wealth. They argue the conclusions from the Millionaire Next Door still hold and directly address Taleb's survivorship bias claim.
Remember that Thomas Stanley had a PhD in finance and didn't do garbage research.
There is a leanfire subreddit if you're looking for real world stories of people that are currently living the high savings lifestyle: https://www.reddit.com/r/leanfire/
Here's a great video of a young, modern leanfire couple: https://www.youtube.com/watch?v=Lb3Z5cGOksY&ab_channel=CNBCM...
Millionaire Next Door might not be possible for minimum wage workers in HCOL areas anymore, but seems to me like lots of folks are still figuring out how to make it happen and become financially free at a young age.
Remember that Thomas Stanley had a PhD in finance and didn't do garbage research.
There is a leanfire subreddit if you're looking for real world stories of people that are currently living the high savings lifestyle: https://www.reddit.com/r/leanfire/
Here's a great video of a young, modern leanfire couple: https://www.youtube.com/watch?v=Lb3Z5cGOksY&ab_channel=CNBCM...
Millionaire Next Door might not be possible for minimum wage workers in HCOL areas anymore, but seems to me like lots of folks are still figuring out how to make it happen and become financially free at a young age.
Combine the rule of 72 (compound interest) with a historical 10% return from the S&P and I don't see how it couldn't work. All it takes is a bit of willpower, and the desire to "get rich slow"...
This article doesn’t make sense - it’s basically says here’s a guy who worked hard, was frugal, and invested for the long term - but he was just lucky (because the past 60 years of asset price returns were amazing) - except how many other people were in his relevant cohort…tens of millions more or less who have had this same opportunity? Not saying the next 60 years will be anywhere near as good, but I think it’s folly to dismiss this “strategy” as most people would be quite happy with an outcome that was 25-75% of that.
It's not dead at all. With the mega-trillions in more government spending causing massive inflation, we'll all be millionaires shortly. Everyone will be inflated into the "wealthy" tax brackets.
I was going through some old financial records of mine from the 90's, and was surprised at how much less things cost then.
I was going through some old financial records of mine from the 90's, and was surprised at how much less things cost then.
one of my main gripes of the boring route to wealth is that it's so disincentivized in our society. By saving money you miss out on the present opportunities of consumption, but in many ways we subsidize those who choose present over long term choices. Ex: if you choose to work overtime to save for your future (above 401k money), you pay a greater marginal tax rate on those earnings... Ex2: there are many programs that come in times of disaster to support those who did not have any foresight to be prepared. Those who took present opportunities are subsidized in their lack of foresight, while those with foresight are denied the same resources.
It's an inversion of logic because above average intelligence will never be understood by the democratic masses, therefore the best a politician can do is reward average behavior.
It's an inversion of logic because above average intelligence will never be understood by the democratic masses, therefore the best a politician can do is reward average behavior.
Correcting for inflation since 1996 book publication, a 1996 "million"is about $1,700,000 now. The word million just sounds catchy.
About 1 in 12 Americans is a millionaire in assets. But these assests may include real estate and retirement savings which are not easily spendable.
About 1 in 12 Americans is a millionaire in assets. But these assests may include real estate and retirement savings which are not easily spendable.
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In any case, you wont become a millionaire if you elect to take unemployment in lieu of a job.