One of the first financial books I read when I began my journey into the F.I./E.R. realm was Thomas J. Stanley’s “The Millionaire Next Door”. Stanley and William Danko (who are both Ph.D.’s) spent years in the 1990’s researching and interviewing millionaires, and then compiled their findings into an easy and fascinating read. This book had a huge impact on me and truly opened my eyes to the wealth paradigm present in our consumer society. I realized that my whole life I had been judging people’s wealth wrong. For example, growing up, I would see someone driving a Mercedes or BMW and assume they were wealthy. However, as Stanley’s book points out, the Mercedes or BMW was actually an indicator that the person was probably NOT wealthy!
This makes sense, because actual millionaires value financial independence over displaying high social status. So it would be silly to buy a $70,000 car, when you can get the same job done with a $20,000 car (or a $10,000 or $5,000 car for that matter). Buying the $20,000 car would leave $50,000 to buy assets, rather than being tied up in a depreciating vehicle!
A main theme of the book is that millionaires build wealth over time through HABITS. The following is a description of the upbringing of what Stanley describes as a “UAW” (Under Accumulator of Wealth):
His parents had no understanding or appreciation of invested dollars. Nor does he. And his parents passed this lack of wisdom on to him. Mr. Friend argues that his parents were people of modest means, people with no money to invest. Let’s examine this perception. His parents smoked three packs of cigarettes each day. How many packs did they consume during their adult lifetimes? There are 365 days in a year. So they consumed approximately 1,095 packs per year. They smoked for approximately forty-six years. So in forty-six years, they smoked 50,370 packs of cigarettes. How much did the couple pay for these cigarettes? Approximately $33,190-more than the purchase price of their home! They never considered how much it cost to purchase cigarettes. They viewed such purchases as small expenses. But small expenses become big expenses over time. Small amounts invested periodically also become large investments over time. What if the Friends had invested their cigarette money in the stock market (index fund) during their lifetimes? How much would it have been worth? Nearly $100,000. And what if they had used their cigarette money to purchase shares in a tobacco company? What if they had purchased, reinvested all dividends, and never sold shares in Philip Morris instead of smoking Philip Morris products for forty-six years? At the end of forty-six years, the couple would have had a tobacco portfolio worth over $2 million. But the couple, like their son, never imagined that “small change” could be transformed into significant wealth. This change in behavior alone would have placed the Friends in the millionaire category.
Now look, I don’t want to pick on smokers. I have been known to burn a couple heaters myself from time to time when drunk enough. Plus, they are picked on enough, but maybe rightly so…. I was questioning the math in the example ($0.66/pack?), but this book was written in the ’90s, and cigarettes used to be super cheap before the Government starting taxing the hell out of them! Additionally, the Friend’s in the book smoked A LOT of cigs; three packs per day seems pretty aggressive. Today, the average pack in the U.S., with taxes, costs $6.05. Let’s assume a individual smoker averages 1 pack/day. If the same individual were to instead invest the money in stocks and get a 10% return over the 46 years, they would end up with $2,133,061. Holy shit! Stop smoking and start investing!
Factor in additional health care expenses and decrease in quality of life that a lifetime of smoking is likely to bring, and we can see that this one habit is extremely costly.
Now, you may be sitting there thinking “well good thing I don’t smoke then!” And I say to you: great job! However, that is really not the point. Think about what other habits you have that may seem like ‘small expenses’, and apply the same logic. Coffees, restaurants, expensive cars, cable TV, clothes, etc. There is probably some fat to be cut somewhere in there. The pack/day habit at $6.05/pack comes out to $184/month. Can you find $184/month somewhere to cut? That one cut alone could mean millions of dollars over your lifetime.