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My Thought after Re-reading "The Millionaire Next Door"

8:00 AM  Pisstol Aer   Labels:
I pick up this book, "The Millionaire Next Door", to re-read after my first read 9 years ago. The reason for me to re-read is to recap the ideas and findings about millionaire highlighted in this book.

As the contents of this book have been widely covered by many bloggers, I would like to present a checklist instead to allow us to detect our progress towards financial independence.

Check point #1: Are you PAW (Prodigious Accumulator of Wealth)?
PAW means you are an excellent wealth accumulator comparing to your peer. It is a kind of mathematical formulation. Basically, PAW is having net worth that is 2 times higher than your expected net worth while your expected net worth is dividing your pretax annual household income from all sources except inheritance by 10 times your age. If your net worth is less than 2 times or equal to your expected net worth, you are AAW (Average Accumulator of Wealth). Or, else, you are a UAW (Under Accumulator of Wealth). Therefore, to be a PAW is the sure way to achieve financial independence.

Check point #2: Do you live below your mean?
This is the prerequisite to become a PAW.

Check point #3: Do you live frugally?
It means you are focusing on what you need only. My view of being frugal does not mean stingy but to spend on whatever is needed and avoid unnecessary casual spending.

Check point #4: Is your girlfriend/boyfriend, husband/wife frugal?
It is important that your frugal life needs support from your close one. It will be quite impossible for you to become a PAW if your counterpart is a hyper-spender.

Check point #5: Do you have annual household budget?
Without a budget may means doing something without a plan. You will not able to know how much you should save and spend. You have no basis to measure your progress and evaluate your result. You have no clue how to move towards financial independence.

Check point #6: Do you know your spending on food, clothing & shelter?
As I have highlighted in my previous post, it is important to have bookkeeping on each item you spend so that you will know where were your money gone. If you don’t, you will be unable to effectively control your spending. How do you live frugally in this case?

Check point #7: Do you have clearly defined set of financial goals?
It must be done first of everything. Without a goal is just like a man working without spirit. You will be totally directionless. Your goals are your final destinations you want to be there.

Check point #8: Do you spend time on planning your financial future?
This may include how much time you have allocated to plan, furnish, review and fine-tune your financial plan. More time allocation for this, you will see your future more clearly and enhance your certainty to there.

Check point #9: Are you asset poor or cash poor or both?
I have been highlighting having cash on hand or in savings account will earn you almost nothing. Yes, nothing. It is advised to invest your cash in other assets that grow and generate returns. Therefore, the authors suggest wealthy people should be asset rich and cast poor. My suggestion, keep at most 6 months worth of your essential living expenses in cash as emergency buffer will be more than enough. Invest the rest.

Check point #10: Do you live in a high-status neighborhood?
If you are, good luck. This is because you will be most likely had to spend so that your status will be at par with your neighbor around. Will you still have the ability to have your expenses below your mean that lead you to PAW?

Check point #11: Are you driving luxurious car(s)?
If you are, good luck again. You might spend more than other lower class car owners in town. Hyper-spending will not lead you to PAW. My suggestion, we need quality but affordable car. How the quality and affordable are being defined is subject to you.

Check point #12: Do you receive EOC (Economic Outpatient Care)?
That is the support received from your parents. A person that keeps receiving EOC is more likely to be a hyper-spender, even though it is not 100%. Why a person needs EOC? According to the authors, it is due to his/her parents think that their son/daughter needs assistance to buy their first house, first car etc. If the person receives EOC has been well disciplined in spending, by all mean, give them. However, as parents, we shall not provide any EOC to those hyper-spending children. If we do, we are actually weakening the weak.

Check point #13: Are your parents frugal?
Children learn life principal from their parents. If we live frugally, our children will learn and put into action.

How many points in the list above have you achieved? If you have all, congratulation, you are on the way to your financial independence. If you have most of them, keep it up, you can do them all. If you have less or none, pick up this book and learn.

My final note for this post is that, as of my opinion, it is not necessary to have a few million to achieve financial independence. It is subject to how much your fund can generate passive income to sustain your expected lifestyle. Of course, you have to accumulate your fund before that. If you have goals and are a PAW, your fund target is not far away.
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My Thought after Re-reading "The Millionaire Next Door"
My Thought after Re-reading "The Millionaire Next Door"
Reviewed by Pisstol Aer
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Rating : 4.5