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June 26, 2009

Book Review: The Millionaire Next Door

Filed under: Book Review — Tags: — thebalancedspreadsheet @ 2:59 pm

From time to time I would like to do a book review of what I have been reading.  I try to read a lot during my spare time and I enjoy reading a lot of non-fiction books either on sports, religion, or finances.  Since this is a financial blog, I will review finance books that I found interesting and would recommend.  Today’s book is The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas Stanley and William Danko. 

This book was written in 1996 and despite being over a decade old; the studies and surveys done in this book are still applicable today.  For the book Stanley and Danko surveyed over 1,100.  They found that there are seven main factors that cause people to accumulate wealth:

-They live below their means

-They allocate their time, energy, and money efficiently, in ways conducive to building wealth

-They believe that financial independence is more important than displaying high social status

-Their parents did not provide economic outpatient care

-Their adult children are economically self-sufficient

-They are proficient in targeting market opportunities

-They chose the right occupation

Although the book consists of eight chapters, the book is broken up into two halves.  The first half starts out by putting people into two categories, prodigious accumulators of wealth (PAW’s) and under accumulators of wealth (UAW’s).  PAW’s are those who are best at building their net worth compared to others in their age/income bracket.  UAW’s are the opposite.   The next few chapters focus on the lifestyle choices of many PAW’s.  What kind of clothes do they buy, how much of their income do they spend/save in a year, what kind of automobile do they drive, and how much time do they spend on their finances a year.  The book concludes that many millionaires don’t look like the “typical” millionaire.  PAW’s tend to not buy expensive clothes such as fine suites and fancy watches.  They also tend to not drive as nice of a car as you think they would.  They found that only 23.5% of millionaires have a current year model car and that half on the millionaires had never paid more then $30,000 for a car.  I know that was in 1996 dollars but that stat to me was pretty surprising.  Not so surprising was that PAW’s spend a lot of their time researching investments and keeping an up to date budget.  While UAW’s do not spend nearly as much time on their finances.  The authors made a good point when comparing PAW’s to UAW’s.  A lot of people know how to play good offense (have a high income), but few know how the play defense (safe and invest the income, do not go into debt).  They make the point that it is better to have a good defense then a good offense.

The second half of the book deals with the affluent and how they handle money with their offspring.  To me this part of the book was the most fascinating and eye-opening.  Stanley and Danko found that most of the estates that will have to pay the death-tax tend to give yearly gifts to their children.  They called these gifts, normally $10,000 a year, economic outpatient care (EOC).  Those who receive EOC have a tendency to earn less then their peers in their profession as well as underachieve relative to their peers in net worth.  They also tend to be hyper-consumers instead of being savers like their parents.  The case studies they had in the book really hit this home to me.  It seemed to me that EOC was doing more harm then good.  The book then finishes up by predicting what professions were growing and where the next generation of millionaires would come from.

All in all this book is a classic that I think should be on the short list of must read personal finance books.  It has great insight into the behaviors of millionaires.  It also shows that there is no special secret behind becoming a millionaire.  Basically spend less then you make and invest the rest.  Stanley wrote a follow-up book called The Millionaire Mind that I have heard is also good.

For those of you who have read the book do you have any comments?  Agree or disagree with any of the findings?  Leave a comment.

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June 20, 2009

First Budget

Filed under: Personal Finance, Real Example — Tags: , — thebalancedspreadsheet @ 10:09 pm

One of the first things my wife and I did when we got back from our honeymoon last month, well except do lots of laundry, was the monthly household budget.  Now for me who has been doing my monthly spreadsheet budgeting for almost five years this was something I really was looking forward to.  I had formed what I thought our budget would look like based taking my budget as a single and making a few adjustments here and there.  She had her thoughts as well.  In the end we came up with a budget that we BOTH could agree upon.  During our engagement my then Fiancée and I decided to live entirely off of my income, due to the fact that we are planning on her to be a stay-at-home mommy in the future.  All of her income right now is going to extra savings, making additional mortgage payments, and investing in Retirement accounts.  Below is our budget based on my paycheck alone with the % of income devoted to each category

  Necessities Mortgage 26.63%
    Groceries 4.63%
    Utilities 4.63%
    Condo Dues 3.94%
    Gas 3.47%
 Necessities Total   43.30%
       
  Fixed Taxes 17.09%
    Tithe 10.00%
    Extra Giving 2.78%
    401K 9.00%
    Car Insurance 3.05%
    Health Insurance 3.01%
    Phone 2.55%
    Parking 0.69%
  Fixed Total   48.17%
       
  Luxuries Misc 2.40%
    Eating out 2.32%
    Blow Money 1.16%
    Clothes 1.16%
    Entertainment 0.93%
    Friends 0.58%
  Luxuries Total 8.53%
Grand Total   100.00%

We divided our budget into three categories; necessities, fixed expenses that are known every month, and luxuries.

Necessities: Our necessities are the basic needs in life: Food, lights, water, shelter, and transportation.  The two big areas we looked at were the mortgage payment and the grocery budget.  The mortgage payment represents is about a quarter of our pre-tax income.  Our goal would be for it to be a quarter of our net income after taxes, which right now is 31%.  The grocery budget is the one that we are keeping our eye on the most.  We simply doubled the budget that I used when I was single.  My wife and I are pretty simple eaters, nothing extravagant or anything like that except we do like to have a bowl of ice cream every now or then.  Overall though our necessities only make up 43% of our monthly budget, which we are pretty happy about.

Fixed: This category had the most changes to it.  The taxes actually decreased due to being withheld at a married status.  The tithe and 401(K) contributions remained the same.  The three main things that increased were car insurance, health insurance, and cell phone bill.  Combined our car insurance actually decreased but when compared to just my income it increased by about a point.  Health insurance went up mostly due to increase in HSA contributions.  Our health insurance is a high deductible HSA.  The deductible is $5,000 so we’re really only covered for catastrophic events.  We’re trying to put as much as possible into the HSA while we are able to and hopefully have enough to cover our entire deductible if needed.  Finally the phone budget increased mostly due to us not yet being on a single phone plan.  We don’t have a land line just our own individual cell phone.  I think once we combine into one plan this should decrease some.  All in all the fixed category is about 50% of our budget which might seem high but to me that is a good thing as I like predictability in the budget.

Luxuries: Although being the smallest category, we naturally had the most discussion over our luxuries items.  For us, we had to remind ourselves what really is a necessity and what is a luxury.  While eating out and buying new clothes are fun and something we enjoy, they truly are luxuries.  In the end after some discussion we came up with amounts that are pretty conservative but yet allow us to enjoy things that we like from time to time.  However we will continually need to monitor these amounts as they can fluctuate from month to month.

It was good to get together with my wife and develop our budget.  We had some minor disagreements but ultimately came to a budget that we all could agree on which is very important.   I am sure that over the months and years that our budget will have some major changes with it, but it’s good to know that for now we can have a balanced spreadsheet.

So what about you?  How does your budget compared to ours?  Anything we think we are spending too high or too low on?

June 13, 2009

Hello world!

Filed under: Uncategorized — thebalancedspreadsheet @ 4:26 am

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