Neglected Lessons From The Millionaire Mind

Dr. Thomas J. Stanley, the author of “The Millionaire Next Door” and “The Millionaire Mind” who tragically died in a car accident a few years back, dedicated the research portion of his life to accurately assessing the behaviors of the self-made wealthy and helping to debunk many of the media’s sensationalist representations and depictions of how the wealthy actually behave.

The most commonly cited aspects of his research are the facts that the rich who enter the top 1% of America based on net worth only actually spend about eight years of their life at that classification level (i.e. “the 1%” is a constantly shuffling deck) as well as the fact that self-made millionaires love their Toyotas. I don’t remember the specific figure and don’t have the book available—but my impression is that the figure was absolutely silly—something like 15-20% of millionaires stuff their garages with Toyota-manufactured vehicle.

There were two other lessons that I found worthy of discussion.

The first is that there is a huge competitive advantage if other’s assessment of your competency is not tied to your purchase of high-priced material goods. No one really pays attention if their kid’s teacher, coach, or the computer guy that hooks up their house drives a 2004 Camry. It does not affect the competency analysis.

But when people hire a lawyer, dentist, or doctor, they subconsciously apprise their competency based on the quality of the buildings where they work, clothes they wear, and cars they drive. People assume that the attorney driving the 2018 Mercedes is better than the attorney driving the 2004 Camry, even though strictly speaking it should be rationally irrelevant. Dr. Stanley’s hypothesis was that you could assume the professionals spending big dollars must be good enough to generate the money to do so, whereas the same signaling device can’t be assumed about teachers or engineers because of the high proportion of excellent teachers and engineers that drive 10+ year old vehicles.

In your own life, the extent to which you belong to a class that creates a set of expectations to conform, and whether you actually choose to conform to those expectations or not, is critical to asset-building.

Dr. Stanley didn’t explicitly say this, but my takeaway was to the effect of this: “Most middle and aspiring upper class Americans have the capabilities to set their monthly expenses between $3,500 and $5,500 per month. Those who live their lives on the lower end, even though the same income as those who spend on their higher end, use that extra $2,000 surplus to invest $24,000 extra per more. Over a thirty-year stretch and 8% annual returns, results in a $3 million difference. This isn’t to advocate miserliness, but to advocate understanding thoroughly what can be gained and what can be foregone.”

The other neglected lesson that is rarely discussed is Stanley’s observation that the wealthiest Americans are fixated on full expected lifestyle costs when making purchase decisions. As a general rule, the 1% analyzes the number of expected uses of a service or good over its likely lifetime rather than focusing on the immediate observation of what appears cheapest.

Product costs of a service or good over an expected lifecycle are rarely discussed in the financial media due to the fear of appearing sententious—i.e. there are many Americans who cannot afford higher-priced goods, and there is no upside in being hissed at for being-out-of-touch in advocating the purchase of higher-priced options that are not universally attainable.

One of Dr. Stanley’s examples was the context of furniture. He pointed out that wealthy individuals tend to purchase a home in their 40s, and rarely move after that. He further referenced their $12,000 living rooms filled with furniture capable of lasting for generations. By keeping it for decades, the cost is not noticeably different from the more frequent movers that select the lower-cost options in the hundreds. The wealthiest one percent appear to spend 10x as much on something that is 10x as nice and over the decades only costs 1.5x more than the repeat purchases of lower cost items, making the value proposition enormous.

Broadly speaking, these lessons fall under the aegis of “self-discipline.” There was an old story about a Roman tax collector that was approached for a bribery scheme by his territory’s wealthy businessmen about lowering the taxes for the richest and raising them for the poor. The Roman tax collector, who was eating nothing but white turnips for dinner, is said to have remarked: “Do you really think a man who disciplines himself to eat turnips for dinner lacks the discipline to reject bribery?”

Here, the self-discipline to spend less than one earns, particularly in the presence of social proof and cultural expectations to the contrary, coupled with the introspection to recognize when paying a seeming premium is worth it, is a critical reason why various couples earning the same household incomes ($75,000-$135,000) end up with radically different accumulations over stretches of time. This is especially true as the early advantage of a higher savings rate perpetually compounds in the form of dividends, interest payments, and rents that have a multiplier effect over time as the benefits of a higher savings rate manifest themselves.

Originally posted 2018-06-11 01:20:25.

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