How do you become rich? That's the million-dollar question, isn't it? Ten years ago, researchers Thomas Stanley and William Danko offered an answer in their book, The Millionaire Next Door, and in the process revealed a blueprint for living Foolishly.
Buffett trumps Trump
Stanley and Danko spent decades studying the habits of the rich and found that most households with $1 million or more in net worth had little to show for it. No fancy cars or fancy watches. Just fat bank and brokerage accounts accumulated over decades of prudent saving and smart spending.
Real millionaires, Stanley and Danko say, have more in common with Warren Buffett than Donald Trump. While Trump flaunts gold-plated mirrors on national television, Buffett remains in the modest Omaha, Neb., residence he purchased in 1958 for $31,500.
Time to cash the reality check
But modesty alone isn't the secret. Stanley and Danko point to seven traits that net worth millionaires have that others don't. I won't list them all, but here are two that I believe are even more relevant today than they were in 1996:
- Real millionaires live well below their means.
- Real millionaires allocate their time, energy, and money efficiently, in ways conducive to building wealth.
Or, if I may paraphrase: Real millionaires live Foolishly.
Unfortunately, if the evidence is to be believed, not many of us are destined to be millionaires. Average American households like mine are carrying huge debts. And while we're shelling out thousands in interest, household affordability, as measured by the National Association of Realtors, has reached its lowest level in more than 15 years. Don't blame interest rates, either: In April 2006, the median price of an existing single-family home was 5.9 times the median family income; in 1990, it was 2.7 times the median family income. That may be good news for homebuilders such as Centex (NYSE: CTX ) , DR Horton (NYSE: DHI ) , and Lennar (NYSE: LEN ) , but it's awful news for home-buying consumers.
Are you a net worth investor?
Accordingly, prudent living is more important today than it has been in nearly two decades. But too many of us have decided that in-the-moment comfort trumps long-term financial security. I know, because I was in that camp till recently.
No longer. Now, I'm focused on rebuilding the net worth that has been eaten by debt. What's net worth, you ask? It's your personal balance sheet, and it's easy to calculate. Combine the value of your cash and investments with the estimated value of everything you own. Now subtract everything you owe. That's your net worth. Stanley and Danko's millionaires had at least $1 million more in assets than liabilities.
The lesson for me in revisiting Stanley and Danko's work is that every dollar spent is an investment of some sort. Most of the time you can choose to either increase or decrease your net worth. I say most of the time because, let's be honest, no one in their right mind forsakes groceries to maintain a high net worth. But spending $5,000 on a pet armadillo named Sherman is no way to get rich, either. Conversely, investing smartly in stocks, bonds, and mutual funds increases your chances greatly.
Of course, I've got no right to preach. After all, I'm the guy who saddled his family with $60,000 in new debt. That's a clear wealth destroyer. Last week, I wrote about three general steps I'm taking to reduce the burden. Here are two more:
- Sell unneeded items: eBay may be the greatest outcome of the dot-com revolution. It means that the still-functioning but dated computer equipment I own can be sold for cash. I've done this before successfully and it's long past time I did it again.
- Do more household chores myself: We spent all sorts of moola on stuff I could've done myself. Take car washes, for example. Every two weeks or so I'd take the trucks to be scrubbed. That's at least $30 a month wasted. Well, no longer. Picking up a hose and sponge will help save money to pay down debt and get me some needed exercise.
Get Foolish today
Though it's been 10 years since the debut of The Millionaire Next Door, the book's lessons remain timeless. It's a blueprint for living Foolishly and getting rich in the process. So, pick up a copy. Or, better yet, check it out from the local library.
And then check back here often. We've got many free resources to help you with money management at the Fool's School. And our Living Below Your Means discussion board is a great place to learn the basics of becoming a better net worth investor. Finally, if you need more hands-on help, then I've good news. Motley Fool GreenLight, our new money-management guide, offers plenty of tips on saving even more. Click here to learn more without spending a dime.
Fool contributor Tim Beyers hopes you never have to dig your way out of debt. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.