Last month, I wrote my reviews and lesson learned from the book The Richest Man in Babylon here.
This time, I want to talk about another book that has helped me gain a lot of understanding in wealth accumulation. This book called The Millionaire Next Door, written by Thomas J Stanley. I found the principles in this book is quite sound and interesting. In fact, I am applying the principles from this book together with what I learned in the book The Richest Man in Babylon to help me in my wealth accumulation journey.
Below are the 5 key principles that I had learned from the book and how I apply them in my life.
1. Spend less than you earn and have a budget
I used to think that this principle is just common sense. In reality, it is sometimes difficult to achieve, especially if I have some immediate desires to fulfil, for example going for that holiday, buying that new car etc. I find that spending less that you earn requires discipline and I have to really track where the money is being spent on. What I have learned here is to have a monthly budget and a system to allocate all my earnings.
As my income is on a commission basis, the montly budgeting is not so straightforward for me. What I have done is that at the beginning of each month (you can find this principle in The Richest Man in Babylon article), I will tally all that I have earned for that month, then set aside a portion of it for savings first. For the remaining amount, I will balance between all the other spendings.
Note that if anyone spends more than what they are earning, they will never be able to increase their financial net worth.
2. Avoid buying into status items or lifestyle
In the book, I learned that having financial independence is more important than displaying high social status. Displaying high social status will likely comes with a cost of higher expenditure and consumption. Objects of high social status such as branded consumer goods are depreciating assets and will not contribute to the overall financial net worth. The book also mentioned the need for some people to keep buying the high social status objects to keep up with the people around them. This will keep them in the cycle of consumerism, and in the end, needing an even higher level of income to keep up with the lifestyle.
Its not that you should not buy any branded goods. If you think the items you are buying will really bring value to you, surely you should buy it. However, do not be possessed by possessions.
3. Your Income Level is not your Wealth Level
Having a high level of income does not necessarily mean that a person is wealthy or financially free.
A person who is making $1 million a year and spends $1.1M (on consumables items).
A person who is making $500k a year and spends $200k.
Who will be wealthier at the end of the day? People with higher level of income will definitely stand a chance to become wealthy faster. However, point 1 of this article still stands.
4. Willingness to take on financial risk if the returns is worth it
All investments comes with risk. However in order to get a better returns from the savings, itswill require the person to take on some financial risk. As in my previous articles on Debt Ratio, if the investment risk is well managed and the returns are good, then one should take on the investment. Money left in the bank today are not giving a good return, and in the long run, one will lose out to inflation. Do take a long term view on investment and sometimes some risks are necessary to take on.
What I have done is that I will set aside some money every month for investment into property, stocks and other investment assets, and I always hold a long term investment view.
5. Allocate time, energy, and money in ways to building wealth
Most millionaires work hard and spend a lot of their energy in ways that will build their wealth. They dedicate their time to build their businesses, planning for their investments and understanding how they can build massive wealth faster. Learning from these examples, I dedicate myself to allocate time daily to understand the various investments instruments like for example, property investments etc.
I hope my learnings can help you better in your wealth building journey, and I will really encourage you to spend sometime to read through the book. All the best to your wealth accumulation, perhaps one day we can be neighbours and the millionaire next door!
If you are looking for long read to equip yourself with property investment knowledge, I have written an eBook here on 5 insights on profitable property investment based on my own experience. You can download it for free, and in fact I would very much like to hear how it can help you.