Welcome to another edition of the Mueller Report!
Over the past two weeks I have been reading two books about wealth for a discussion group I am leading at my church about wealth and Christianity.
The Millionaire Next Door: the Surprising Secrets of America’s Wealthy by Thomas Stanley and William Danko
Financial Peace by Dave Ramsey
Both books are conversational and accessible. The writing of the Millionaire Next Door is clearly much better. And the content is based on extensive survey data and analysis. Financial Peace focuses on personal experience and self-help. Parts of it are clumsy and there are a few rather embarrassing mistakes (occasional typos, getting the title of an extremely popular book wrong, etc.).
Still, there is no denying the immense impact Dave Ramsey and his ideas have had in Christian communities across the country - most of it positive. At some point I hope to have longer reviews of each book. For now, here are three basic insights I gleaned.
Insights
1) You become wealthy by saving money. Period.
On this point both books are in complete agreement. You cannot become wealthy, no matter how much money you make or how much property you own, unless you regularly and diligently save money year after year. Stanley and Danko show this via survey data, Ramsey by example. Dave Ramsey shares that before launching his financial advice empire, he went through bankruptcy himself after having acquired over $5,000,000 worth of real estate by his late 20s. He went bankrupt because he spent excessively, took on a lot of debt, and was therefore vulnerable to a major economic downturn.
Both books also stress the idea of taking a long-term view. There are no get rich quick schemes to be found. As Stanley and Danko point out, a huge majority of the millionaires they surveyed were in their 50s or older. While it’s not impossible to become a millionaire before reaching 50, compound interest and regular patterns of savings snowball over time. In the long-run in developed countries, people are primarily poor because they have not controlled their spending, lived within their means, and saved regularly.
So start saving and investing now if you haven’t already!
2) Income and wealth are very different. You can tell relatively little about someone’s wealth by external appearances.
Stanley and Danko compare millionaire and non-millionaire lifestyles on many dimensions: cars, clothing, houses, saving, etc. They argue that, in general, millionaires are less likely to drive expensive cars, buy expensive clothes, take expensive vacations, etc. than non-millionaires. So then, who are the people we see with designer suits, massive houses, expensive watches and cars, etc.? They are people with high incomes, and often a lot of debt.
One surprising category of folks who are not very wealthy, especially compared to their income, is doctors. Stanley and Danko profile a doctor who earned around $500,000 annually as a specialized surgeon. You would think someone with this kind of income, easily in the top 1% in the U. S., must be wealthy. But that would be a mistake to assume. How does someone with this kind of income not accumulate wealth?
They spend all their money and take on lots of debt.
In this case, the doctor bought an expensive home and pays close to $100,000 annually on mortgage payments. He has five luxury vehicles, three he bought brand new and two others he leases. He pays large sums of money for elite private school for his children (and then regularly gives them money when they are older). He and his wife spend tens of thousands of dollars on clothing each year. And we haven’t even talked about vacations to Europe or the boat(s)!
Both books point out how easily people spend money - regardless of whether they make $50,000 a year, $500,000, or $5,000,000. This, by the way, is why lottery winners and professional sports athletes often end up broke - they don’t know how to manage or save money.
3) Ultimately what matters is lifestyle and contentment.
One of the most important things to keep in mind when trying to accumulate wealth is having a good lifestyle and being content with it. Most of the millionaires Stanley and Danko surveyed were living in almost identical fashion to when they were just starting out and had very little wealth. (By the way, a large majority of millionaires did/do not come from wealthy backgrounds - that is not the case for high income earners).
They tend to live in the same modest houses and drive the same modest vehicles even as their wealth has grown decade after decade through savings and investment. Interestingly enough, they also tend to have more stable marriages and more independent and well-functioning adult children than their peers (in terms of income or occupation) who have not lived lifestyles accumulating wealth.
In contrast, their peers who did not have much wealth regularly fell prey to “keeping up with the Joneses.” As they earned more money, they spent more money. They moved to nicer houses in nicer neighborhoods, they spent more money on food, clothing, vacations, private schooling, country club fees, etc. And they spent relatively little time thinking about saving, investment, or retirement.
Parting Thoughts
Perhaps the most encouraging point made in both books is that just about anyone can become wealthy if they “play good defense” - that is, if they are careful to control their spending and live within their means. Many people who have never earned six figures in a single year become millionaires - they control their spending, save aggressively, and invest. They rarely borrow money or carry balances on their credit cards (Ramsey’s schtick).
Reading these books have made me think more seriously about how I spend money - are we eating out for a good purpose or because we don’t want to take the effort of making dinner or simply want to indulge a craving? Do we really need a new ______, or can we keep using what we have longer?
The goal is not to be miserly, but to be thoughtful about living within our means, regularly contributing savings to investment, and practicing contentment with the resources and goods we do have. Learning contentment fits our Christian calling too. In many ways, wealth should be a by-product of good stewardship rather than an end. As we live self-controlled and prudent lives, we should be giving and saving (the relationship between the two warrants a separate discussion) regularly. And we should guard against “lifestyle-inflation” - thinking we should “upgrade” our apartment or house or car or clothing because we got a bonus or raise or promotion.
It is far better to think about saving and investing when you are young than when you are old. The older you are, the less you can do to accumulate wealth for retirement. Instead of having financial peace, as Ramsey advocates, you will find yourself anxious and increasingly shaped by the external constraints of what you can afford.
If you find yourself struggling to save or accumulate wealth, I recommend either or both these books to you. The Millionaire Next Door has much more analysis of lifestyle, Financial Peace is more basic self-help: do this, don’t do that.
With that, I’ll talk to you next week!