If someone asked you how to live the American Dream, what would you tell him or her? Most would respond with something like, “Own a nice house near good schools”, “Have a high-paying job or own a successful business”, “Be able to send Junior to a stellar university”, or “Take nice vacations, like, to Disney World.” These expectations are nothing more than one big fat financial trap. What if we apply the Millionaire Next Door Formula to the American Dream instead?
There’s certainly nothing wrong with wanting to own a house, have a good-paying job, and sending your kids off to a good college. Occasional trips to Disney World seem like a just reward for all that hard work and financial discipline.
On the surface, these fairly modest expectations don’t raise any eyebrows. But it’s not easy to achieve this dream without hard work and a little deferred gratification. More and more, finding affordable housing in neighborhoods with decent public schools has become a quest for the holy grail. College tuition continues to soar, and even Disney World costs a mint nowadays.
Evolution of the American Dream
In reality, there’s a new version of “How to Live the American Dream” that’s taken over the collective consciousness. It’s less about owning a home anymore, especially since the housing crash of 2008. Getting a college degree is even coming into question. Instead of trips to Disney World, we might yearn for a week-long camping trip at the nearest national park. Heck, you might even choose to home-school your kids.
Scaling back is fine, but there are plenty of people who are downright suffering. For them, the American Dream is a complete myth. There’s a serious problem emerging in this country. The ever-growing disparity of wealth is leading to a shockingly brutal level of poverty and homelessness in the world’s most affluent nation.
The reality is, expectations of the American Dream are diminished. Mainly because of a few key factors: The global economy is shaking up the order of commerce that dominated the 20th century. Coal and fossil fuel-powered industry can’t sustain itself the way it had before. Technology is becoming a common denominator for success. Our jobs are becoming more sophisticated.
Oh, and the bar has been raised quite a bit too. Raj Chetty, a highly respected economist notes that it’s easier to attain an “American Dream” growing up in Canada, mainly because there’s “less distance (economically speaking) to travel” from the bottom to the top. In the U.S., our bottom is deep, and our top is stratospheric.
Does the Millionaire Next Door Formula Offer Any Hope?
An eye-opening read when first published, The Millionaire Next Door, is often cited as a guide-book for making it big. Simply follow in the footsteps of your stealthy-wealthy neighbors.
I don’t believe a simple book can solve the disparities faced by our society. But it may be a helpful source of inspiration for some who find it harder and harder to achieve their American Dream.
I’m curious to see if those twenty-year-old concepts still hold water. Here’s what I found… (List courtesy of Kiplinger.com)
Millionaires Next Door Don’t Spend Beyond Their Means
Well here’s a “duh!” one to start with, right?!? There really should be no aspect of the American Dream that requires you to spend money to appear as if you’ve made it. And yet, we see it all the time. The power of marketing compels us to buy the latest smartphone or tablet. That same marketing pull keeps us driving shiny new cars.
And now that we know how important life experiences are, we can’t help but get on a jet plane to zip around the world to show off selfies from exotic locales on our Facebook feed. Sweet Jesus.
Can we live an “American Dream” by spending within our means? Absolutely. The Cubert family drives two fully paid off vehicles that are approaching their ten-year-old birthdays and 100K miles each.
We live in a relatively small house (1,400 finished square feet) for our family of four. A vice from before our Mustachian conversion no longer plagues us – we still usefully functioning Apple products c. 2013.
I’ve written about this ad nauseam on this blog: Live a small footprint and avoid the “big three” to have a fighting chance at early retirement. Early Retirement just so happens to be my American Dream, in case any of you newer readers didn’t know. And it is highly achievable regardless of many circumstances.
Millionaires Next Door Educate Themselves
So here’s an interesting concept – Instead of expecting everyone else to educate you, you take the bull by the horns and educate yourself. I took advantage of a workplace tuition reimbursement program to pay for half of my MBA. Before kids, I read for pleasure, and often non-fiction.
The key is to keep an inquisitive mind on a variety of topics. You simply never know where you’ll learn the next valuable life hack.
Reading a book like The Millionaire Next Door is an obvious example of educating yourself. You don’t have to get an advanced degree on how to live the American Dream. But if you achieve your MBA, masters, or Ph.D., it’s a fair barometer of your thirst for self-improvement. Get thirsty, and stay thirsty, I always say. Even when I don’t drink beer.
I’d also argue that keeping a healthy circle of friends and acquaintances is a solid form of self-education. Who you choose to associate with often is a reflection of what your ambitions are. I have friends that are good for a laugh, and laughter is healthy. But I also have friends who know a LOT about real estate, and that friendship has proven to be very fruitful.
Millionaires Next Door Pick the Right Field
Funny. I figured I’d go off and become a rock star Urban Planner. At least, I spent a full five years of undergraduate studies with that in mind. And yet here I am, leading large-scale technology programs in a completely non-civic sector of the economy. Damn you, Sim City. I had dreams of rows upon rows of skyscrapers in the vast ex-urban reaches of Cubelandia…
This one is tricky. As an example, if you have a passion for directly helping others, you could go into the nonprofit sector. Or, you could go into medicine. Both are very meaningful and directly help people in need. But you earn a heckuva lot more as a physician, nurse, or similarly licensed health care professional.
I would argue that you can choose a field that you’re passionate about, so long as you recognize the limitations you might face on the income side of the equation. If you love to write, you may need to make significant sacrifices to save and avoid debt.
And that’s okay. Be prepared though, to have a roommate or two, bike to work, and avoid weekend brunch like a Millennial gone wild.
I give credit to those who thought a particular field was their ideal, only to discover later that it wasn’t, and TOOK ACTION. Look no further than my local blogging friend, The Financial Panther. He’s got a lot going for him. Because of his financial smarts and intuition, he can opt-out of a less than ideal situation and move on to something better.
Millionaires Next Door Save (and Invest) Early
This is where so many of us get into trouble. We find that life throws us curveballs and the only way to dodge them is to whip out a credit card. What if you get sick and you have a terrible health insurance plan or no insurance at all? What if the condom broke? Divorce?
The point is, life can deal you a lot of variables. All you can do is try as hard as possible to minimize the odds of those variables happening to YOU. Worried about your health? Cut the sugar, meat, and alcohol intake by half and call me in the morning. Worried about the cost of kids? Consider the impact of overpopulation on our finite ball of dirt called Earth and get a vasectomy. I did.
It turns out that having the foresight to save income at a young age is THE single most important factor if you want to achieve any form of the American Dream. I didn’t know anything about saving for retirement when first presented with a 401k plan option back in the mid-90s, fresh out of college. All I knew was that retirement would eventually happen.
Over the years I’ve managed to bump up my 401k contribution to 10%, then 15%. I’m now contributing a whopping 6% because I don’t get a company match after that. Also, when you get about $300K socked in your 401k by 40, you’ve pretty much met your “old man money” target. The rest of your dough can go into sexy things, like, oh I don’t know, real estate?
I honestly don’t know that I’d be writing to you now from any blog if I hadn’t realized the importance of saving via 401k right out of college. I had student loans to pay.
And I had a brand new car loan to pay as well. But the materials from Fidelity registered enough with me back then, that 8% of my $27,500 annual salary (as a rookie technical call center agent) would form the core of my wealth snowball today.
Key Millionaire Next Door Formula For Success: Don’t “Swing for the Fences”
In other words, ignore that Bitcoin nonsense. Besides Bitcoin, this lesson applies to anything considered “high risk.” Think about gambling, day trading, investing all your 401K into just one company, etc. It all sounds great if you end up on the winning side. But sadly, the odds are not stacked in your favor.
I’ve come to believe that the best approach is the least exciting one. Investing in low-fee index funds. Sexy, huh?
And here’s the thing when it comes to “low fees”: if you can avoid the temptation to hire a financial planner, and invest directly with, say, Vanguard, you’ll end up with a lot more money in the end. Here’s a handy chart showing the difference between Vanguard’s 0.04% fees for VTSAX (a popular S&P 500 index fund) vs. Joe Planner’s standard 1.5% “advisory” fee:
All this isn’t to say you can’t or shouldn’t take risks. But there is a big difference between taking an ill-informed risk (i.e., high, dangerous) vs. a well-informed one (i.e., low, reasonably predictable.)
Take for instance Real Estate. I took money out of our home equity to make the down payment on each of our five rental properties. Of course, we paid off the HELOC in full before targeting the next rental. What endeavored low risk was a few key factors:
- We had a friend already successful in the space to guide us
- We knew the area we’d be investing in and were well aware of the trend towards moving back to the city (Minneapolis)
- And of course, we read up before we dove in
Each of these three falls under the “Educate Yourself” category we covered earlier. Want to start a small business? Read up on it first. Find others who have struck out and found success, but also those who have failed. That way you can learn from wins and fails alike.
All this helps to lower the risk, so you’re not having to swing for the fences.
Millionaires Next Door Formula For Success: COVERAGE
Insurance. You usually hate having to pay the bills. Until something really bad happens of course.
Insurance is a necessary evil. Not necessarily because insurance companies are evil. They do employ a good share of respectable friends and neighbors after all. The key is to avoid giving insurance companies more than they deserve in the form of premiums. Said another way, if you can afford the minimal mishaps, save insurance for the biggies you CAN’T afford.
The American Dream can be achieved by minimizing the bad variables. But when the dice roll doesn’t land your way, insurance is a safeguard that should help you recover.
No, insurance can’t restore lost limbs. It can’t replace heirlooms lost in a fire. And it can’t bring back a loved one. But it can help you avoid serious financial disaster. Don’t forego term life insurance unless you are certain your significant other can get by without your income. Don’t forego supplemental health insurance in your later years unless you have rock-solid health.
Do ditch the comprehensive and collision coverage. Because you’re not driving a BMW, Audi, or some other bullsh*t waste of money vehicle.
Millionaires Next Door are Wise About Windfalls
I’ve learned the hard way with this one. You know the drill: Get a raise, run out and buy a fancy watch. Get a bonus, put in that dream pool. Fortunately, I learned my lesson early enough that it didn’t squash my ability to pursue early retirement.
Though we almost short-circuited “the plan” when we were expecting twins a few years back. We were within a heartbeat of acquiring our very own unnecessary $500K home. Thank goodness the lender didn’t approve our loan back then.
If you’re fortunate enough to get a nice raise or bonus, consider your lonely debts first. Consider your kids’ 529 plans. Instead of booking a trip to Disney ($$$), treat yourself to a weekend at Wisconsin Dells. Or better yet, go visit friends and family via a fun road trip.
Think of this as the “MC Hammer Lesson.” That guy had so much money from the success of “Please Hammer, Don’t Hurt ’em!” he could have funded a thousand of our early retirements. Instead, he blew it all, and he blew it fast. The only “Hammer Time” for you is to hammer those student loans and credit card debts!
And yes, I owned the tape. Legit.
Millionaire Next Door Formula For Success: Hang Onto Cars and Houses
I probably don’t need to spend a lot of time on this one. Any of you who’ve followed this or similar blogs already know that the key to financial freedom is avoiding blowing your wad on worthless cars and needlessly expensive real estate.
Your best bet is to stay in that starter home and hone your DIY skills to make it better. That’s what we’re doing. Yes, you can make a basement a very livable space.
As for cars? What can I say that already hasn’t been said. I’d suggest though that you kick it up a notch and fit bicycling into your routine. Choose to live closer to amenities so you can bike to get your groceries. We are fortunate to live within walking distance of our basic needs.
I sound like a broken record because I feel like I’ve typed that like a dozen times before here. I’d figure we save hundreds if not over a grand each year by choosing to live near work and other frequent destinations.
Bonus tip: Hang onto your clothes too. Buy durable and timeless pieces. Maintain your shoes with shoe trees.
Double bonus: Hang onto your spouse. Divorce wreaks havoc not only on your personal life but especially on your finances. Be a good listener, show appreciation, and embrace changes.
Millionaire Next Door Formula for Dummies: Avoid Debt!
Last but not least, the big “D” word makes our list. It’s easier said than done. In my view, you have to incur some debt at some point in life. Pretty hard to avoid it entirely, unless you’re a trust fund kid.
There’s such a thing as good debt. When you leverage low-interest loans to achieve a college degree is a great example. Another is using other people’s money (i.e., a mortgage from the Bank) to obtain rental properties. Of course, you should work to pay off the student loans as soon as possible. The rental debt you can let ride.
Mainly, don’t look for ways to add debt to your ledger. If you need a car, look for one you can afford to pay for in cash. If you need a car and don’t have the cash, at least avoid anything over $20K, and PLEASE consider used.
When searching for your first home, be sure you can afford the mortgage. You may need to rent for a while, especially if you live in a crazy expensive part of the country, like D.C., San Francisco, New York, Seattle, etc. Even Minneapolis is getting out of control.
When it comes to paying for your kids’ education, don’t shy away from making them work for their fair share. That includes working hard in school to be eligible for scholarships. It also means summer jobs and maybe them taking on a little student loan debt themselves.
The Millionaire Next Door Formula to “Solve” The American Dream
The American Dream means something different to every one of us. For MC Hammer, it meant a giant house with helicopters, private jets, and two swimming pools. For others, it’s all about financial freedom.
At the end of the day, is your time, money, and effort being put towards something purposeful, like helping others? Are you striving for material wealth and symbols of that wealth, or stronger, healthier relationships?
Fancy houses, fancy cars, and fancy trips are interesting. But ultimately, the things we look back with contentment and joy are the bonds we’ve made with friends, family, those we’ve helped, and those who’ve helped us. If someone asks you how to live the American Dream, answer with that.