The Millionaire Next Door Book Review [6 Important Lessons]

You know that plumber who lives on your street and drives the beat up pickup truck? He’s much more likely to be a millionaire than the executive next door driving the BMW.

Don’t believe me? Well that was a common theme found in The Millionaire Next Door:The Surprising Secrets of America’s Wealthy by William Danko and Thomas Stanley.

The Millionaire Next DoorThe Millionaire Next Door
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

The authors surveyed thousands of real millionaires and their answers revealed many surprising lessons, such as:

1. The wealthy don’t always look wealthy and vice-versa.

People who look rich may not actually be rich.

They spend more than they can afford on symbols of wealth but have modest portfolios. Some are living paycheck to paycheck, heavily in debt with little or no savings.

Conversely, real millionaires usually live in middle class neighborhoods, drive cars they own outright, and don’t spend extravagantly on material things.

2. They don’t spend a lot of money on cars.

The authors point out that cars are the second biggest material expense in our lifetime.

If you add up all the money you’ve spent on cars over the years it can be really eye-opening.

Even if you’re young, the amount you’ve spent on cars compared to how much money you’ve earned is usually pretty high.

According to their survey results, most real millionaires buy a nice car, like an Acura or Lexus. They buy it with cash, or make payments until they own it, and ultimately hold on to the car for at least a decade.

Forbes backs this up, stating 61% of those earning at least $250,000 a year are driving Honda, Toyota, Acura and Volkswagens.

3. They save and consistently invest.

In America, our average household savings rate dipped into the negative in 2005, for the first time since the Great Depression. The savings rate has improved but is still only 5% currently.

Which brings us back to your original question; What are the secrets only the wealthy now and the middle class is unaware of?

Now, we all know saving money to acquire wealth is not a secret. But clearly this is an area the middle class can improve in

Compare that negative savings rate to that of the average millionaire, who invests nearly 20% of their income.

In its simplest form, that’s really all wealth is; earning more than you spend and investing the difference — consistently.

Consistently investing means you are fully capitalizing on compounding interest.

It means you are turning small contributions into large sums over time.

4. They adhere to a budget.

The majority of millionaires stick to a budget.

Even among those who don’t budget, they pay themselves first with money directly to their savings and investment accounts. They then work from the remaining funds.

But the majority do take the time to budget, even if they don’t want to, because the know the long-term benefits first-hand.

5. They spend a lot of time managing their money.

managing money

managing money

The wealthy spend a lot of time budgeting, goal setting and managing their portfolios.

According to Danko and Stanley, the wealthy spend nearly twice as many hours per month managing their finances as those without wealth.

The good news?

You don’t have to earn a big six-figure salary to accumulate wealth, as long as you plan for it.

In their survey of 854 middle-income workers, the authors found a strong correlation between investment planning and wealth accumulation citing; “Most prodigious accumulators of wealth have a regimented planning schedule. Each week, each month, each year, they plan their investments.”

6. They own their own business or work for themselves.

Not everyone that gets rich owns their own businesses.

But in The Millionaire Next Door, they discovered a lot of folks who ran their own service businesses such as landscapers, plumbers, electricians, commercial cleaners and so on.

One of the key takeaways of this book for me is many millionaires attributed their dedication to financial planning as a requirement of doing business.

Because their business finances and personal finances are so closely intertwined, they really have no choice but to consistently examine their finances in order to survive — and thrive.

There’s many more lessons in the book but I wanted to mention some of the biggest takeaways for me.

Thumbs Up

I initially read The Millionaire Next Door around the year 2000.  I don’t remember the exact year.  But it was very impactful in my life, so much so that I’ve read it several times since then.

It’s a mindset book as much as it’s a nuts-and-bolts how-to book.  Much of the advice is tried and true stuff your parents or grandparents would tell you.   You’d be wise to listen to it, as tried-and-true tactics provide the best template to follow for proven success.

At the same time, the data from their surveys also uncovers many surprising similarities among millionaires.   Tendencies and habits that challenge conventional wisdom and make you rethink your employment, lifestyle and personal finance decisions.

It’s definitely one of my favorite personal finance books, which is why I wanted to share the lessons I’ve learned from it here.

The Millionaire Next Door is a must-read, no matter where you are in your personal finance journey.  It really provides the proper mindset needed to successfully manage your money.

It sets the right foundation for your money goals.  When you see the common habits of hundreds of millionaires, along with the logic behind those habits, it’s becomes painfully obvious the personal choices you need to make to become a millionaire yourself, or at least improve your personal finances significantly.

Have you read The Millionaire Next Door?  What is the biggest lesson you learned from reading it?

<!– –>

Source: incomist.com

Rates Under Pressure Despite Weak Jobs Report

Economic data is traditionally one of the key contributors to interest rate movement. Of the regularly-scheduled reports, none has more market-moving street cred than The Employment Situation–otherwise known as “the jobs report” or simply NFP (due to its headline component: Non-Farm Payrolls).

The relationship between econ data and rates can wax and wane.  Covid definitely threw a wrench in the works, and economists still don’t know exactly how things will shake out.  In general, the market is trading on the assumption that things continue to improve even if the data isn’t making that case today.

In fact, today’s jobs report specifically suggests something quite different.  The economy only created 49k new jobs in January, and the last few reports were revised much lower to boot.  Taken together, these reports effectively put an end to the “correction” phase of the labor market recovery.

20210205 nl0.png

In other words, payrolls plummeted at the onset of covid (“contraction” phase).  They’d been bouncing back in record fashion through September, but have since returned to closer to zero growth.  That’s not great news considering we’re still roughly 10 million jobs away from pre-covid levels.

20210205 nl3.png

Based solely on the data above, interest rates shouldn’t be eager to rise.  A 10 million job deficit is a big deal and it speaks to a level of economic activity that promotes risk-aversion (which, in turn, benefits rates).

But rates have other factors on their mind.  In fact, we don’t even need to move on to other factors to consider one counterpoint.  Simply put, the labor market recovery is still playing out.  While it’s true we’ve seen the big contraction and correction, there’s a lot of uncertainty surrounding the coming months. It’s too soon to declare the death of the labor market based on the past few months–especially when seasonal adjustments are considered.

The following chart zooms in on the monthly job count to show the recent volatility and the normal range for solid job growth.  One could easily imagine returning to that range as lockdown restrictions are eased and vaccine distribution improves.  To a large extent, the bond market (and thus, interest rates) is operating based on its best guesses about the next 6-12 months as opposed to what it mostly already knew about January 2020.  Bottom line: if job growth is going to end up in that “solid range,” we wouldn’t necessarily know it yet.

20210205 nl1.png

Moving on from jobs data, the bond market has other timely concerns.  Next week brings another round of record-setting Treasury issuance.  Treasuries = US government debt.  The more money the government needs to spend (and the less revenue it takes in), the more Treasuries it must issue.  The greater the issuance, the more upward pressure on rates–all other things being equal.  

At the same time, congress passed a budget resolution that paves the way for the $1.9 trillion covid relief bill to pass in as little as 2 weeks.  Stimulus hurts bonds/rates on two fronts by increasing Treasury issuance and by (hopefully) strengthening the economy.  A stronger economy can sustain higher interest rates, in general.  

With all of the above in mind, it’s no great surprise to see a continuation of a well-established trend toward higher yields in 10yr US Treasuries.  The 10yr yield is the benchmark for longer-term rates in the US and it tends to correlate extremely well with mortgages.  As such, this chart would normally be a concern for the mortgage market.

20210205 nl55.png

But as we discussed last week, mortgage rates have diverged from Treasury trends in an unprecedented way.  

20210205 nl5.png

Despite the departure, the point of last week’s newsletter was to provide another reminder that mortgage rates can’t keep this up forever.  Indeed, when we zoom in on the actual day-to-day changes in 10yr yields and mortgage rates, we can see strong correlation again–just with much smaller steps taken by mortgages.

20210205 nl6.png

The takeaway is that it’s no longer safe to bank on a series of increasingly lower all-time lows in mortgage rates.  As long as the broader bond market remains under pressure, so too will the mortgage market–even if it takes less damage by comparison.  If these trends continue, mortgage rates may not rise as fast as Treasuries, but they’d still be rising.

For now though, the sun is still shining on the mortgage market.  Both purchase and refi applications are soaring, and new housing inventory can’t come fast enough.

20210205 nl4.png

Next week’s focal point for interest rates will be the Treasury auctions in the middle of the week–especially the 10yr Note Auction on Wednesday.  Last time around, that auction marked a turning point for a rising rate trend that shared several similarities with the current one.  

Source: mortgagenewsdaily.com

Does Unemployment Affect My Credit Score?

This content is for the first stimulus relief package, The Coronavirus Aid, Relief and Economic Security Act (The CARES Act), which was signed into law in March 2020. For information on the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, the stimulus relief package currently pending legislation, please visit the “New Coronavirus Relief Package: What Does it Mean for You and a Second Stimulus Check” blog post.

The COVID-19 pandemic has changed the economy in many different ways. One of the biggest changes has been changes to employment for many people. In some cases, many have been laid off. In other cases, people have been furloughed or had their hours reduced. The number of people receiving unemployment compensation has also hit record numbers. In this article, we’ll take a look at how filing for unemployment and/or receiving unemployment compensation can affect your credit score.

How does unemployment compensation affect your credit score?

The process for filing for unemployment is different in each state. Generally, you will need to file paperwork with your state’s unemployment office, either in person or online. The amount of unemployment compensation you receive generally depends on the salary you earned at your most recent job.

The CARES Act of 2020 made several changes to the unemployment process. First of all, it waived the requirement that several states had in place where one must be actively looking for work to receive unemployment compensation. It also broadened the definition of who was eligible for unemployment and gave an extra $600/week to most people receiving unemployment compensation.

The good news is that filing for unemployment or receiving unemployment compensation does NOT appear on your credit report. Generally, credit reports will not update your employment information unless you apply for new credit. And remember, only information about your financial accounts affects your credit score.

Is filing for unemployment bad for your credit?

As we discussed, the mere act of filing for unemployment or receiving unemployment compensation is not bad for your credit. Being on unemployment does not affect your credit score and in most cases will not even appear on your credit report at all.

Where being unemployed can hurt your credit is all of the ancillary effects from being without a job. Generally speaking, unemployment compensation is less than the salary that you were receiving (though the extra $600 from the CARES Act has changed that for some people.) With less income, that will obviously have a big impact on your overall household budget

What can damage your credit while you’re unemployed? 

Even though the act of filing for unemployment or receiving unemployment compensation does not affect your credit score, your credit can still be damaged while you’re unemployed. Two of the factors that make up your credit score are your total balances and your credit utilization ratio. Both of these can be affected if your finances are impacted due to a loss of income.

If you find yourself to continue living below your means while your income is reduced, it is likely that you may end up with higher balances on your credit cards. This results in the increase of your credit utilization ratio, leaving a negative impact on your credit score. 

How to protect your credit when on unemployment

There are a few steps you can take to help protect your credit while unemployed. The key here is to minimize the effects that being without your regular salary has on the rest of your finances. 

One good way to protect your credit while on unemployment is to make sure to have a solid emergency fund. Ideally, you should aim to have 3 to 6 months of expenses in an emergency fund. But if you haven’t been able to create one yet, it’s no help saying that you should have! If your emergency fund or savings won’t cover your time without employment, you have a few options.

  1. Cut down on your expenses
  2. Ask a favor from close friends or family 
  3. Accept that your credit score will be impacted

The good news is that if your time with a limited income is short, your credit score should bounce back in no time as well! 

Does unemployment affect your ability to get new credit/loans?

Yes, it will have a significant impact on your ability to get new credit cards or other loans. Most places that offer credit ask for your current employment status. This makes sense since they need to assess your ability to repay the loan or credit that they are offering.

Different banks and creditors will have different policies for evaluating the information that you provide to them. In many cases, the bank will ask for proof of employment, such as your paystubs. This is especially true when trying to qualify for a home mortgage. If you’re not able to provide current pay stubs, this can have an impact on your ability to get a home loan, even if you’ve already been pre-qualified or approved. 

Hopefully, this information was helpful if you are in a situation where you are wondering how unemployment affects your credit score.

Learn more about security

Mint Google Play Mint iOS App Store

Source: mint.intuit.com