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Dustin Palmer Personal Finance 1050 The Millionaire Next Door The Millionaire Next Door by Thomas Stanley and William Danko summarizes what the typical millionaire in American society is today. This book teaches that there is a large and growing number millionaires in the United States but they are not always the person you would envision and don’t necessarily get there the way one might imagine. While affluent inheritors were demonstrated more common were the first generation millionaires who meticulously saved and invested their not always high salaries. These people were not likely to purchase exotic luxury cars or posh mansions. Even their attire is relatively modest despite high incomes, with much shopping occurring at JC Penny or Sears. Above all this book demonstrates that it doesn’t take a millionaires salary to become a millionaire, so long as the individual’s importance is placed on wealth more than status. “The average American millionaire is a 57-year-old married man with three children, an old car, a $320,000 home, which he bought years ago for substantially less, and an annual household income of $131,000.” This is not a lucky college kid building Facebook, this is not Justin Timberlake or Brad Pitt, this is the older gentleman next door who owns that small janitorial business that you’d never think to look twice at if looking for wealth. This is because he was able to save and invest his money that otherwise would have gone into a larger house, a nicer car, and the payments on those equally functional but more lavish items thereafter. He also didn’t lose money in a divorce or on alimony, as having had the same wife is another common feature of millionaires. In fact the families of millionaires as displayed in this book seem to have a very large influence on whether or not someone will become a millionaire themselves. The average millionaire is normally a saver, as is his wife, if not more so according to many in the book’s survey. His family is also likely to feel the effects of this as their parents saving will teach them about the importance of frugality in their lives, indeed many millionaires came from households were unnecessary expenditures were kept to a minimum, which taught them to save and didn’t get them accustomed to the more expensive upper middle class lifestyle. In contrast those whose parents had high incomes and continued on to have high incomes themselves didn’t necessarily save much wealth, despite their high earnings, due to the fact that they had learned to earn to spend and would likely teach their children the same thing as they maintain the lifestyle they had grown up with. This saving is important, however another equally important feature that millionaires share is using this saving well, specifically by putting it into prudent investments. Investments are essential for the aspiring millionaire, most millionaires I the survey had investments, about all in stocks and bonds and many in businesses. Undoubtedly part of the reason that your average millionaire is fifty seven years old is because investments build over time, as interest builds on interest money collects pretty fast over the years. For example using the rule of seventy two if you were to get a six percent return on investment your initial investment would double in twelve years, as you are to duvude seventy two by interest earned to find out how long it takes an investment to double. Six percent investments, especially longer term ones are relatively safe and even at this lower than a good stock portfolio interest an investment would have double about twice by the time age fifty seven is reached depending on how early the investments started of course. This naturally makes it much easier to accumulate wealth through investments as your age progresses, resulting in older millionaires. While millionaires are prone to be good investors they aren’t, as some may falsely assume, jackpot winners that invested in Google upon inception, at least not often. Many of the affluent maintain their portfolios themselves but most at least employ help as well, this being one of the fields that millionaires aren’t frugal in. Millionaires, known by this book as avid savers, do have several fields which loosen their wallets, such as financial advising. Millionaires are prone to seeking out the best financial advisers through networks of associates, to increase the pressure on the adviser to perform well. This is important because as discussed before the interest received from investments plays a large in role in whether one becomes wealthy or not, as some investments such as speculative investments have larger possibilities of losing money, which also warrants higher potential earnings. A good adviser is much better at targeting these market opportunities than your average business owner so millionaires are willing to pay for the right one. The other fields the book declared millionaires to spend more in were education and health care. Education is important to the millionaire community despite not all of them even having graduated high school. Most have funds put aside for their children’s and even grand children’s education and many received similar payments from their parents when they were obtaining their secondary and graduate education. Although education is a correlate to earning power this doesn’t necessarily ensure a new generation of millionaires as many high paying jobs come with high spending lifestyles the parents didn’t have. Other than educational subsidies most millionaires did not report receiving any significant gifts from their parents. The children that do receive these gifts are not commonly millionaires despite having similar or even higher incomes when the gift is factored in. This can be accounted for by the simple fact that it’s much easier to spend someone else’s money, and even outspend your own if you have someone to break your fall. When children are taught the value of thrift and are instead given an education to increase their own potential for earning capitol they become much more likely to accrue wealth and do not become financially dependent on their parents like their counterparts are prone to do. Even material gifts can be a drain, an anecdote quoted in the book involved an excellent multi-millionaire investor denying the gift of a Rolls Royce from some colleagues. He didn’t do this to be rude, but because he understood that such a symbol of status would affect other parts of his life, he wouldn’t be able to fish in it or be forced into insuring and maintaining two cars, which didn’t even seem to be an option for this millionaire. He also considered the effect it would have on his employees, seeing their boss pull in such a high class vehicle would denote his economic status directly to them, which is much higher than their own and they may start feeling used. Such status symbols seemed to be a key difference between millionaires and high income non millionaires, the latter being the only group to truly put emphasis on it of course. While gifts from frugal affluent parents seem to be a rarity one scenario which seemed to spur giving was the allocation of inheritance before death to decrease estate taxes on loved ones. All fears expressed by prodigious accumulator of wealth millionaires had something to do with the federal government, one of the foremost being taxes. Taxes are a problem for many and as your realized(taxable) income increases, so do your taxes. There are many ways to lower taxes, like lowering estate taxes by giving non taxable gifts to your beneficiaries each year, but one of the best ways to do this is by lowering your taxable income. The prodigious accumulators of wealth in this book were said to have the majority of their wealth in savings, so while the percentage of taxes on their earned income was high the taxes on their total wealth and earned unrealized income in unsold stocks and other investment appreciation was actually quite low in juxtaposition to their taxes on realized income. If you were to have a home that lived mostly off realized income with hardly anything left to share, or worse surviving on credit, and your taxes increased, you’d be forced to downgrade your quality of living, whereas those with a low taxable income would not. Should one be able to join the ranks of America’s growing millionaire population a very important topic would be sure to crop up, what to do with their estate after they die? It’s important that you write a will because should you die intestate then your states laws of descent and distribution become your will, nullifying any wishes you may have had but failed to formalize legally. As mentioned an important consideration in estate planning is taxes, which can be lessened by decreasing your net worth by the time of your death. Distribution can be a tough area as many may feel compelled to help their weaker offspring, but the millionaires from this study seem to conclude it’s best to only give the money to them when they’re already financially stable or in educational trusts, in continuity with their emphasis on education.