This week, Money360 is conducting a detailed review of the often-lauded personal finance book The Millionaire Next Door. First published in 1996, the book has held a consistently high level of popularity for more than a decade. What valuable insights does this book contain? By the end of the week, perhaps we’ll discover its secrets.
Yesterday, we learned that the typical millionaire doesn’t spend money without serious consideration. Today, we discuss how The Millionaire Next Door describes the financial habits of the parents in terms of how they influence their children.
One chapter focuses on that most venerable of status symbols, the automobile. Millionaires tend to buy late-model used and underdramatic automobiles and use several techniques to obtain optimum value on the car. It’s important to note that “optimum value” doesn’t always mean the absolute lowest price, but instead refers to the lowest price that can be found with a reasonable amount of work invested in the hunt. One technique that particularly stood out was the concept of faxing requests for offers on a very specific model to several different dealers, then taking the best one of the lot – a very effective way of effortlessly creating a blind auction.
After this, the book spends two chapters criticizing in great detail the process of giving what the book calls “economic outpatient care” to children. In short, the book is highly critical of any sort of financial support to adult children. This philosophy is broken down into four clear points:
1. Giving precipitates more consumption than saving and investing.
2. Gift receivers in general are never able to fully distinguish between their wealth and the wealth of their gift-giving parents.
3. Gift receivers are significantly more dependent on credit than nonreceivers.
4. Receivers of gifts invest much less money than do nonreceivers.
Taken as a whole, these four points clearly indicate the solution to the problem: people who wish to instill good financial sense in their adult children do not provide them with any significant economic support. In general, I agree with this philosophy.
Unfortunately, the age bias that I discussed yesterday rears its ugly head again in this section. Virtually all of the advice that deals with how to distribute money to children focuses on adult children; there is little discussion on how the average millionaire instills strong financial values in their own children. I already intend to cease regular economic support of my child upon the arrival of his eighteenth birthday, but how can I prepare him for this change? The book offers few clues, generally only ones that apply to both adults and to younger children.
There is one interesting phenomenon mentioned here that I’ve noticed repeatedly in my own life: parents tend to give more money to children with poor financial skills than to children with strong financial skills. Even in my own family, this is true; parents often give what little they have to the child who shows the least independence, while the child that works hard and shows the most independence get little assistance. On some levels, this makes sense, but on others, it merely reinforces poor behavior in the financially dependent child and can inspire resentment in the financially independent child. This further reinforces the idea that economic outpatient care is a bad idea.
In the next part of this five part series reviewing The Millionaire Next Door, we’ll tackle the final two chapters of the book in detail, which look at the choices that millionaires make in finding additional sources of revenue.
The Millionaire Next Door is the first of fifty-two books in Money360’s series 52 Personal Finance Books in 52 Weeks.