This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Thursday, October 25, 2007

The Millionaire Next Door Pt 1: Big Hat No Cattle?

Posted By Paul

Hi Everyone,

I've started reading this cool book called The Millionaire Next Door.

The basic idea behind the book is that the authors did a lot of research on wealthy people and were surprised by what they found. They found that many of the things people envision when they think of a millionaire (where a millionaire is defined as a household that has a net worth of one million dollars or more) are false.

I plan on doing several posts as a sort of on-going review of the book, but I wanted to start off with one of the first ideas that the book describes. The idea is that there are numerous people out there who:

1) Live in upscale neighborhoods.

2) Drive expensive foreign cars.

3) Wear expensive clothes.

4) Aren't millionaires

The book describes this phenomenon using a cattle rancher term of: "Big hat, no cattle." Meaning a person who has the trappings of a very successful life, but who is living paycheck to paycheck and has very little net worth.

This reminded me of an article in an earlier post: Life And Debt In Suburbia.

So keep in mind as you look at your life with a frugal eye, that you shouldn't focus on just your income when evaluating your life. Let's say you make $300,000 a year, but you spend $295,000 of it every year. Each year you'll manage to save $5,000. Compare that with someone who makes $50,000 a year but manages to live off of $42,500. They save $7500 a year. The first person has a great income, but the second person is actually accumulating more wealth and one of the points of this book is that it's wealth accumulation that's important when looking at financial independence.

Don't let yourself be one of those people with a big hat and no cattle.

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