After decades of research, the authors of The Millionaire Next Door provide interesting insights into the spending habits and lifestyle choices American millionaires.
From Wikisummaries:
Make sure they know that smoking is really freaking expensive. In 2007, a pack of cigarettes cost $4.63 on average in the US. If you smoke a pack a day, you’re spending over $1500 per year on cigarettes. And that doesn’t count indirect costs. Like the fact that you probably won’t be able to get as much money when you sell your car or house if you smoked in it, extra health care costs, or that employment discrimination against smokers is legal and socially accepted in some places.
Keep the same car for a long time, if possible. Same goes for other durable goods, like furniture.
Don’t go shopping for fun or for something to do. Shopping should be something you do only when you need to buy something specific.
Don’t try to “keep up with the Joneses”. Just because your neighbors or your brother-in-law are buying a new car or doing improvements on their home doesn’t mean you need to follow suit. Don’t compete with others for status via stuff, be it expensive cars or fancy electronic gadgets. Don’t compare your lifestyle or stuff to other people’s. The most likely outcome is that it will make you unhappy. The Buddha said 2,500 years ago that getting more stuff won’t make you happy, and that’s still true now.
If you do those things, you will not only save money, you will not be setting a bad example for your kids.
Vices in general don’t tend to be cheap. Alcohol, gambling, these are really good ways to end up with less money. Sex…that sort of depends if you procure it with a direct cost, an indirect cost, or no cost.
Yea, it helps if you get it from Free Girls.
His wife is just as bad. Like marries like, I suppose. I got the impression that they all got a rush buying stuff - there were 3 DVD players - unopened - in their garage.
Or it may be that marriages between people with very different approaches to money are less likely to last than marriages between people with similar money styles.
But you don’t need to be a rocket scientist to have good financial habits, and really smart people screw up also. The person I referred to was not stupid - he had a Masters in EE and was a technical salesman in Silicon Valley. The problems were other than intelligence.
The math isn’t all that hard. You certainly don’t need training in finance or economics to not screw up. Many of the problems people get into are from their predictably irrational behaviors (to steal Dan Ariely’s book title.) Being humble is very important. Back a while ago I was sure that Google at $180 was too expensive, but I know I was bad at this and listened to my financial adviser - and made a bunch of money. Loss aversion, for instance is not affected by intelligence or training in economics.
Easy for us who can make good money to say. But not a panacea - I know people making twice what I do (which is a lot) who are always broke.
I’ll agree that growing up in a house with good money habits is very important, but you don’t have to be an educated professional to do that. My father, a child of the depression, never went to college, and his savings habits were great.
I’d extend this to say that good savings habits involve giving up stuff that you can pay for. Many of us can afford a lot more stuff than we buy, and the surplus thus generated goes into savings. Is savings first or last in your budget? (I’m sure it is first in yours.)
But be aware of the difference between price and quality. Marketers know that people get this confused and act accordingly.
All excellent advice. We never pay full price for Starbucks beans - we wait for sales and then buy a ton. Supermarkets have sales cycle, and for nonperishables you can do very well following them.
But when is low and when is high? I think better advice is “don’t panic.” And use dollar cost averaging. We held on during the crash, kept on buying, and now are in excellent shape. Or, it can be phrased as “don’t try to time the market.”
I have an extremely intelligent close friend who lives month-to-month and carries a balance on his credit cards. My friend is a spender, but in no way a slacker; works long and crazy hours while finishing a graduate degree. His current salary is decent, better when you consider he’s in a low cost of living area, and due to family provision he hasn’t paid rent in about a decade. The fact that at this point in his life he has no savings and carries credit card debt is very hard for me to understand, but he is perfectly comfortable with it.
He’s taken the “long route” getting there, but I expect in about five years he’ll be making a very impressive salary. On the expected salary, the $n thousand credit card balance won’t be a problem and he will have far more salary resources to devote to retirement savings than I. I like to think of my more conservative approach of “save up for it if you want it” as being morally superior, but I suspect he’ll do all right in the end. Being in debt doesn’t bother him now and he’s certainly not depriving himself of the fun stuff. 
ETA: for the record, this friend is one of the most generous people I know. He doesn’t just spend on his own pleasures.
All good advice. That’s why I like index funds. There’s no need to try to time the market, and very few funds, even those managed by people who invest for a living and presumably know what they are doing, manage to outperform index funds. Cite.
It’s like cooking a burger. A novice cook will want to poke and prod at it, and smoosh it down onto the cooking surface while it’s cooking. A more experienced cook knows that doing that either doesn’t help, or lets juices escape from the meat, or keeps it from getting a nice brown sear, or makes the patty fall apart, making the finished product worse rather than better. Investments don’t always do better if you poke and prod at them a lot than if you leave them alone, either. They generally do worse, because there are costs associated with making changes to them.
“Don’t panic” is good general advice for a wide variety of situations. Most people do not make better decisions about anything when they are panicked than they do when they are calmer.
Finances are all about priorities. My priorities are (in order):
- Have a decent home.
- Save for College
- Save for Retirement
- Have a yearly Disney World Vacation
- Other
So, everytime I make a purchase, I review how it fits into my priorities. If it is going to negatively impact 1-4, I don’t do it. I shop sales, I only buy clothes when something is worn out or someone has grown out of it (and even then, I shop at thrift shops when I can).
Lots of people would argue with 4, but it is important to me and I sacrifice fancy food and eating out to accomplish it.
The problem occurs when you don’t know what you want in the long term. I want to be able to send my kids to college. I want to be able to retire comfortably someday. If those things are no longer possible to attain then I will sacrifice my vacation needs. Since they ARE all attainable if I work on a budget, I do.
The big problem is, no one stops and thinks about their goals. Short term, medium term and long term. I have and I have managed my finances so I can achieve all of those goals.
So, we bought a cheap house that met all our requirements and we shop sales for food and clothes. This lets us have more freedom to save and to enjoy the things that are important to us.
And honestly, this was not something my parents taught me. They were all about sacrificing so that their children could have a good life. I think it is just as important for the parents to have a good life as the kids.
Maybe, maybe not. Depends on whether he spends every single penny he’s got and then some, the way he does now. I promise you, there’s no salary so big that there’s not somebody pulling it in who is always broke. My husband once watched a colleague who makes about a quarter million a year write a $200 check and ask to have it held till payday. No, I didn’t accidentally leave out any zeroes. Two hundred bucks.
Some people get a big salary increase and their spending stays stable or goes up only a fraction of what their income increases, but those folks are far, far less common than the ones whose spending increases commensurately with their income.
Voyager - Fair enough. Any of those factors I mentioned could go either way. My SO grew up poor and (other than a penchant for Jimmy Choo shoes and Diane von Furstenberg dresses) is almost pathological about being thrifty, even though she makes a six figure salary. Someone else with the same background suddenly provided with that level of income might easily spend themselves into debt.
It’s like the expression “rich beyond your wildest dreams”. IMHO, it means you come into more money than you are used to and can’t comprehend the value of shit. Like if you have to search your sofa cushions to pay your rent each month then come into a six figure salary or some other windfall. Often people just think “I’m rich who gives a fuck?” and then quickly spend well beyond their means. It’s why you see lottery winners and celebrities go from rich to poor.
This happened to me when I got my first job where I was earning “real” money. I spent a lot of money on furniture for my new apartment. Fortunately, there were no real consequences other than not being able to pay off my credit cards for a few months (though I was quite ashamed of this). It’s especially bad when it coincides with having to buy stuff you have no experience in buying (in this case, furniture- I’d lived at home or with stuff I borrowed from home, or lived in a furnished room, until then).
I have a master’s degree in astronomy, and I like to think I’m intelligent.
I really have only one financial secret. I always try to take money out for savings “off the top” as it were. Each month I have the bank automatically transfer X dollars to a savings account. Then, I live off of net income - X. I find it easier to live within my means that way.
This is huge. We see a lot of people on this board who can’t imagine spending a six figure income, all those “that’s rich” threads. And I won’t argue that it’s poor. But when you are used to thinking that $100000 is a LOT of money, and then if you suddenly have that as a household income (often via marriage or partnerships, where your income can double in a day) it can seem impossible to spend that much. But the moment that happens, it’s really easy to spend way more than that. Why should I clean my own house, let’s get a maid service…and a lawn service. Who wants to eat at Olive Garden when you can go to Todd English’s Olives. Vacation… We can afford first class…car, people who make the sort of money we make drive BMWs. It doesn’t take too many of these “we are rich, we can afford it” decisions to find yourself broke.
Maybe. But it is also possible that having more money will result in more expenditures. I managed to save money in grad school. What is he spending money on, anyhow?
There are times when it makes sense to go into debt in the short term. There are times when it makes sense to go into debt as an investment. But the amount one spends is correlated to their comfort level in spending it, which won’t necessarily stay constant with a higher salary.
I wonder if it makes sense to measure someone’s virtual salary - that is the salary that he seems to assume he makes based on spending habits. Those whose virtual salary is more than their real salary get into trouble. Those whose salary is less are savers.
So I’m reading this thread and thinking about where I got my lessons on how to spend money. Then I realized I signed up for this board when I was 15. I’ve spent more time on the internet reading forums like this than watching Youtube videos or on Facebook.
So, um, I guess a combo of my parents and random internet people taught me how to handle money? I don’t remember when I found out that credit cards weren’t like free money, but it was probably reading something like this.
Quite true. My step-sister and her husband both come from money, and they are really upset if they don’t go first class. Their virtual income is very high. On the other hand their daughter married a guy who sold a company and is quite rich, but his virtual income is lower, and he sees no reason to spend the kind of money she feels comfortable spending, though he can afford it a lot more than they can.
My virtual income is quite a bit lower than my real income. I can afford to buy more expensive things than I do buy, but that just seems wrong. The prospect of having credit card debt (of > 0% interest) makes me ill.
There are people who think that, if they know how to make ends meet when they’re making $X, they must also know how to make ends meet if they’re making $2X. That’s not necessarily true. If it were, no lottery winner would ever go broke until after they stopped getting the lottery money. That isn’t what we see happening.
You need to have realistic lifestyle expectations for your income, whatever that income is. Realistic lifestyle expectations include two things:
- A lifestyle that you can afford on your income.
- A lifestyle that you can stand to live long-term.
If your lifestyle expectations meet 1 but not 2, you’re not likely to be able to stick to them, and they aren’t likely to really help you. It’s like a diet you can’t stick to. You could almost certainly lose weight by eating only 500 calories a day. You could probably even figure out a 500-calorie meal plan for each day. But if you’re not satisfied eating that way, you’re not going to stick to it for very long, and it won’t actually end up doing you much good. It might end up making you feel guilty for not eating that way, but feeling guilty doesn’t make you lose any actual weight. Nor does feeling guilty about your spending put any actual money in your savings account. A budget you can’t stick to is just as worthless as a diet you can’t stick to. The ability to make realistic plans is key to being good with money.
It just struck me that no one has mentioned budgeting. I think that keeping track of income and spending through Quicken or a spreadsheet could be very helpful in forcing oneself to face how much they are spending and where. That said, we have never had a budget, because both of our natural proclivities leave us with money left over at the end of the month. I don’t need a budget to tell me that bringing lunch to work is a lot cheaper than eating in the cafeteria. But I think budgeting would pay off for anyone on the edge or who feels they are spending too much and are not sure why.