The Millionaire Next Door: How to be Wealthy

Because I care about my financial future, but am overwhelmed by it, I've set a goal to read at least 4 books on finance and economics this year.

The Millionaire Next Door: The Surprising Secrets of America's Wealthy was recommended to me by a gentleman who won an early retirement through steadfast no-frills investing.

Below you'll find

• 2 Big Takeaways
• and about 11 helpful tactical notes

What an amazing book! It turned out to be a perfect recommendation that meets me exactly where I am.
I come from a family that could sometimes be frugal, but didn't really know how to build wealth, and I've only just begun learning about how money works.

BIG TAKEAWAY #1:

Net Worth Formula

My biggest takeaway is that my Net Worth is less than a fifth what it should be considering my age and income, according to the authors' formula:

ExpectedNetWorth = (Age/10) * AnnualIncome

So if you are 30 with an annual income of $100k...
Expected Net Worth is $300k
(30/10) * $100,000

When I calculated mine according to the same formula, I found that actual Net Worth is less than 20% of expected!

For the first time, I have a guidepost to judge my progress.
I am hopeful that I can move up to 30% of expected by the end of the year.
That would be a dramatic change!

BIG TAKEAWAY #2:

Reducing Realized Income is the top way to increase net worth.

The book doesn't go into detail on HOW to do this, but it does detail the impact. Basically, if you are in a tax bracket where something like 40% of you personal income is taxed, there are ways to not 'realize' that income. To not have it come directly to you.

Investments that grow inside tax-sheltered funds (like Roth IRA and 401k in the U.S.) without being drawn upon are examples of techniques to reduce income. These are the ones most available to most of us.

Less available and much more powerful are re-routing income to other entities like companies or corporations. These are taxed at lower rates. That's a big conversation with a CPA to determine exactly how.

Here are the questions I am asking myself:
What are ways that I can take my earned income and NOT 'realize' it?
And how is 'unrealized' income initially invested?
Am I making enough non-W2 income to be worth setting up a company? If so what kind of company?
And how can a company make investments in my behalf?

Other Notes

High Income is Necessary but Not Sufficient:
The authors point out that most millionaires do not have an income of a Million dollars. Also that there are plenty of people who are High Earners yet Under Accumulators of wealth. My mindset was to increase income only. Now I see that it is even more important to work strategically with that income.

Regular and Increasing Investment:
I have a plan to send 15% of my monthly income split about evenly to:
IRA, Wealthfront (auto portfolio), Robinhood (single stocks app), and some non-correlative market like Peerstreet.
I hope to increase from 15% to 30% invested income over 2018.
Also buy and hold investments rather than attempt to make gains on trades.

Increase Financial Planning Time:
The best wealth accumulators spend an average of 8.4 hours per month planning finances. I'm not exactly sure what they are doing in that time, but I think spending 1 hour per week reviewing my financial plans and reading one great book per month will be a start.

Defined Goals:
Simply have weekly, monthly, annual, and lifetime goals around finance. Mine might be: to spend time each week with planning and building my consulting brand, to contribute 15% to investments each month and attract new or please current clients, annually to see my net worth close the gap with the author's estimate by 20%.

Budget:
Within planning is thoughtfully knowing what money will and will not be spent on. I know that I spend money eating out thoughtlessly, and I don't know how much. I'm much more frugal and willing to negotiate with bigger purchases (like searching for a good deal on a used car).

Marry a Frugal Spouse
I love this one and it speaks a lot to choosing a great partner. It's difficult to be on a journey like this one with a partner who is not.

Entrepreneur Advantage:
Entrepreneurs clearly have advantages. They can route their income creatively, they can increase their income, and they can practice these skills:
"Successful entrepreneurs judge each expenditure in terms of productivity."
"The person who deals with risk every day... Learns to conquer fear."

Reciprocity and Relationships
Successful people are friends with accountants, attorneys, CPAs, lawyers, etc. I just find that interesting. And that they intentionally practice reciprocity by doing things like sending referrals or keeping their business mostly with the same, successful, professionals.

Supply the Affluent
This was another big revelation. In Kurt Vonnegut's book "God Bless You Mr. Rosewater," the main character reports something a lot like this. Something like, "make friends with wealthy people and if they really come to like you, one day they give you a bucket and they show you to the secret river of wealth." Vonnegut uses a funny and cynical tone to share the same truth.

Money and Children Can Be Complicated
There is a lot of great stuff in the back of the book about thoughtfully giving or not giving money to family.

Extreme Frugality, My Only Objection:
There are two or three places where the authors talk about extreme frugality. A millionaire wife who clips coupons seems like a high-income hour lost to a $3 buy-one-get-one deal on arrange juice. Exhausting yourself on a red-eye flight to save $200 before a conference seems like a bad way to prepare for an opportunity to have $100k conversations.

Favorite Quotes:

• "I plan my work... Work my plan. It's why my business is a good one."
• "Seeds are a lot like dollars. You can eat the seeds or sow them. But when you see what seeds turn into... Ten-foot-high corn... You don't want to waste them. Consume or plant them. I always get a kick out of watching things grow."
• "The answer is no. Thee 'pride if new car ownership' is not worth $20,000."
• "How do you go... And tell somebody who [wants to] give you a Rolls-Royce that you don't want it?"
• "What do professionals sell? ...Their intellect"

And that's it. Glad to have read the book, and on to the next one.

What book would you recommend?
What's your wealth-building epiphany?