Millionaire next door
- Harshal
- Feb 3
- 4 min read
Book Review: 4/5 Impact On Me (Thomas J. Stanley)
Read more about the book here
I found it fascinating that although the book's title is about millionaires, it gives you a formula based on your age and net worth: an index like BMI that shows whether you are above average, underperforming, or in the middle (PAW, UAW, and the middle). That led me to think about follow-up research.
Follow-up research ideas
Three follow-up questions came up:
Inflation and the formula: Do the book's numbers still hold after inflation? How would the formula change?
Dual-income households: How does the formula work when a couple earns for the household instead of one person? One earner at 100k at 30 is one picture; two earners at 100k each at 30 might double the expected net worth for that family, but I am not sure.
Expenses: The book stresses knowing your annual expenses as a starting point. I should start tracking mine with my assistant.
Tax-to-Wealth
Think about how to reduce your income tax as a percentage of your total wealth. Income tax is the biggest expenditure for many households. High-net-worth individuals (PAWs in the book) spend about 7% of their net worth on annual income tax. Many of the comparatively rich minimize their realized income to lower tax, using tax-free bonds and similar. Two-thirds of high-net-worth individuals in the book are self-employed, which can add flexibility for expenses.
I am not too interested in the "minimize realized income" angle for myself. In Ireland there are few big levers - not mortgage, stock trading, or bonds - mainly pension.
Buy and hold
Buy and hold stocks; do not day trade.
Cars
Buy second-hand cars. Do not lease. Do not buy new. Do not buy luxury brands. The author says that when you buy a new car, you can get the best price by waiting for the right time in the month and bargaining hard, but if the car you buy is an expensive luxury brand, you are still saving on a much higher purchase than you need.
Spend on quality advice
Be willing to spend more on good accountants and financial advisors instead of saving on price. Financial advisors might give you investment options but may feel uncomfortable telling you to your face that your expenses are too high.
Some examples did not hold up for me
Some of the book's examples of millionaire behaviour did not stand up to my kind of check: look at everyone who had that behaviour and see what their life outcome was (Bayesian-style). At some point I also felt that the comparison can seem like a cheat code: if you have your own business, you can use it as a separate legal entity to improve your personal finances (for example by referring clients to your car dealer or trimming expenses). It did not feel fair to me to treat that as "people should build a business to manage home expenses better." On the other hand, the idea that the wealthy are better at hiring their accountant makes sense if they have run businesses before. I like the example that you do not want to hire an accountant by cold-calling them; you want to have done your due diligence first. The author talks a lot about buying second-hand cars but also mentions that if you are self-employed you can mark the depreciation of your car against your business, which feels like a grey area.
Tracking expenses
In my life we often thought we are not spendthrifts and we do not spend in odd ways, and it felt hard to evaluate and analyse our expenses so we did not do it. Now I see that if you do not analyse something, there is no way to improve it.
Parents and wealth
There are far more non-millionaires than millionaires, so statistically a given millionaire is likely to have come from a non-millionaire household; but if your parents were millionaires, you are more likely to be one. The author recommends that affluent parents who want to help with their kids' expenses pay for tuition but not much beyond that; the bigger gift is to teach them to be frugal. Parents often spend money and effort on their kids based on how independent or financially needy they are.
Online research (including Ireland)
After reading the book I did some online research to use the findings.
For high-net-worth comparisons, reaching the top 1% of wealth in Ireland requires around €2.6 million. In Ireland, 5% of adults have personal wealth over $1,000,000. Source: https://www.irishexaminer.com/news/spotlight/arid-40863371.html
Modern personal finance still uses the 4% rule: net worth should be at least 25 times annual expenses for safe, indefinite withdrawal. With that rule, you can theoretically cover 25 years of current expenses without investment growth. Source: https://www.investopedia.com/terms/f/four-percent-rule.asp
Median net wealth in Ireland is about €193,000. Source: https://www.cso.ie/en/releasesandpublications/ep/p-hfcs/householdfinanceandconsumptionsurvey2020/wealth/
Most wealth statistics are reported at the household level, so "household net worth" usually means the combined assets and liabilities of everyone in the household (often dual-income couples).
