Can one really become the 'Millionaire Next Door'?

[petershk]

I have no comment on TMND, I try not to criticize someone's holy book. But I believe that your analysis of how to do a popular non-fiction book is correct. Make it overly simple, have a clear positive image, don't stray into subtleties.

These things fit self help, early retirement and foreign living books and blogs extremely well.

How about an ER book that said: be born with at least average+ mathematical abilities, work extremely hard, bypass most of the pleasures of high school and college life, get really good grades, go to medical school, work extremely hard at pretty low pay for another 10 or so years, and if you have chosen your specialty for income you will start making money hand over fist. You will likely have graying temples and a 16 year sleep deficit, but after paying some horrendous income taxes and perhaps getting a divorce under your belt you should start amassing some fair amount of money

Woo-hoo! Sign me up!

Ha

I would buy your book . That's exactly right.

Pretty much all these financial help/how to succeed books are basically just explorations of survivorship bias. You could survey the last 100 powerball winners and ask them what strategies they used to pick their numbers, investigate what attributes they have in common and I'm sure a "common theme would emerge."

I think there are really two equally important elements to financial independence:
1) The will to delay gratification (you can argue if it's learned or genetic, but it's hard to argue you gave that to yourself somehow).
2) Luck. Either you consistently do (1) for a long time or you have some kind of "lucky payout" (part of a successful company, rich relative, etc). Combined with avoiding the opposite (have a major financial disaster - medical, nasty divorce, etc).

I would argue that we have limited control over (1) and almost no control over (2).

Books like TMND, Built to Last, Good to Great, etc don't investigate people/companies that had similar attributes but also failed nor do they follow up on the success cases and see how they ended up over the years/decades that followed. I bet some of the millionaires next door were hit by random one time events that crushed them as well. This forum will also have a similar slant. If you got FIREd and then wiped out, you are less likely to post than if you didn't

 

[Kabekew]

I think there are really two equally important elements to financial independence:
1) The will to delay gratification (you can argue if it's learned or genetic, but it's hard to argue you gave that to yourself somehow).
2) Luck. Either you consistently do (1) for a long time or you have some kind of "lucky payout" (part of a successful company, rich relative, etc). Combined with avoiding the opposite (have a major financial disaster - medical, nasty divorce, etc).

I'd add 3) OR willingness to take risks.

My brother made his millions because he took the risk of working at a startup where he made very little salary (and went into debt just paying normal expenses) in return for equity in the company he believed in. They got bought out as a result of everyone's hard work and 18 hour days. I suppose there was some "luck" involved in keeping in touch with the right fraternity brothers who knew a friend starting a company, but he also made that conscious decision to keep in contact with good people he knew over the years.

Likewise I made mine because I also took the risk of quitting my job and depleting my meager retirement savings at age 35 to develop a software product I knew had a good market. I also got bought out by a big company. You could say I was "lucky" to meet an executive of that company at a trade show, but I had also made the decision to max out my last credit card to pay for a $10K booth at that show where I knew I would make no sales (it was all about advertising and making contacts).

So no, neither my brother or I became FI because of delaying gratification, or from luck, it was our taking calculated risks when we saw an opportunity. I think it's another viable path to FI besides saving and living frugally.

 

[razztazz]

"risks" = "luck" plain and simple. It's implicit in the word and the concept. Sure some risks are better than others but let's not be bullshat.

 

[ejman]

I'd add 3) OR willingness to take risks.

My brother made his millions because he took the risk of working at a startup where he made very little salary (and went into debt just paying normal expenses) in return for equity in the company he believed in. They got bought out as a result of everyone's hard work and 18 hour days. I suppose there was some "luck" involved in keeping in touch with the right fraternity brothers who knew a friend starting a company, but he also made that conscious decision to keep in contact with good people he knew over the years.

Likewise I made mine because I also took the risk of quitting my job and depleting my meager retirement savings at age 35 to develop a software product I knew had a good market. I also got bought out by a big company. You could say I was "lucky" to meet an executive of that company at a trade show, but I had also made the decision to max out my last credit card to pay for a $10K booth at that show where I knew I would make no sales (it was all about advertising and making contacts).

So no, neither my brother or I became FI because of delaying gratification, or from luck, it was our taking calculated risks when we saw an opportunity. I think it's another viable path to FI besides saving and living frugally.

Yes, saving, investing wisely and LBYM can also work when ability, luck and cojones don't do the job in getting to FI. Ability, luck and cojones work quicker though. For me, alas, the first set of attributes did the trick.

 

[NW-Bound]

Talk about taking risks, of course we do not hear about people who took a chance but it did not pan out.

I left my cushy and secure job at a megacorp at the age of 40 to do some work at a couple of start-ups with like-minded friends. I was bored with my job, and thought that we were so good we would not mind working harder and getting better compensated for it.

After a lot of hard works, both start-ups folded, though we did have some interim success and were able to pay our own salary, for a while that is. I would be a lot better keeping my nose to the grinding stone at megacorp, and would retire right now with a pension and also a bigger 401k.

But had I stayed at megacorp, I would still harbor the thought that I could have been a multi-decamillionaire by taking a chance, and I might still be unhappy. In hindsight, we chose the wrong markets to be in, but it was what we knew to do then.

PS. So, I got to where I am now by being frugal, and taking no big risks with my savings. No getting rich quick for this guy.

 

[petershk]

Right.
I think that entrepreneurship is awesome... Done it several times. Twice failed. Once succeeded and hence FIRE is possible.

That said I maintain that success in entrepreneurship is still at least 50% luck. If for no other reason that you don't control competitors, your market , customers, economic circumstances and a whole slew of other factors.

Of course biases work the other way. winners tend to attribute skill and effort... Losers tend to attribute bad luck .

Also I maintain that spending the last 10k and that being a factor is both luck and delayed gradification .

H

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[audreyh1]

+1 It should be easier today. But one might have to forgo the $500 iDevice, $200 North Face expedition quality fleece, and $200/mo cable package. But it's simply not fair that others can have those things and we can't, right? I mean, we work hard and have a right to enjoy life a little, too!


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I agree. Back in the 90s, it cost me $100 to do a stock trade, even at a discount broker!

 

[audreyh1]

Yep - huge risk, because I was young enough and qualified enough to recover, and a great deal of luck.

It is really easy for a young business to not make it, no matter how skilled or prepared the participants. That's where a big helping of good luck (or avoidance of bad luck) comes in. I think it takes like 10 years for a company to get to the point where the chance of not going out of business finally exceeds the chance of going out of business.

Our entrepreneur CEO used to say "nothing beats dumb luck".

 

[photoguy]

Talk about taking risks, of course we do not hear about people who took a chance but it did not pan out.

I didn't join the workforce until after the dot com crash but pretty much all my older friends and colleagues did their time in startups. I suppose this is the opposite of survivor bias because If they had hit the jackpot I probably wouldn't have met them.

One fellow I know was a very early employee of oracle (low teens) but left to do his own startup because he thought their product was crap. Probably would be worth easily many 10s of millions if he had stayed. He still did very well for himself, just not crazy rich.

For whatever reason the startup bug never hit me. I did interview at a few of them but I was already close to ER and decided it was better to stick it out than take a big paycut and be subject to uncertain payout.







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[audreyh1]

I took my startup risk right out of college. No debt, no kids. I figured I had nothing to lose if I had to find another job in two years because the company didn't pan out. The company was a couple years old already, but they were still getting off the ground. I didn't work for equity or peanuts though - they had a decent salary offer for an entry-level engineer. I just knew that I wanted to work for a small company. I was very lucky that I made a good choice in terms of which company.

They were self-funded for a very long time - no outside vulture capitalists. So the growth was slow and steady (a feat in itself, actually). The major owner/CEO was very reluctant to take the company public. He finally did - that was 14 years later! And we were probably 50x the size when I started and already had worldwide operations.

Someone looking for a fast payout would have given up already. A few did leave looking for a faster payoff and probably regretted it.

 

[Independent]

I'd add 3) OR willingness to take risks.

My brother made his millions because he took the risk of working at a startup where he made very little salary (and went into debt just paying normal expenses) in return for equity in the company he believed in. They got bought out as a result of everyone's hard work and 18 hour days. I suppose there was some "luck" involved in keeping in touch with the right fraternity brothers who knew a friend starting a company, but he also made that conscious decision to keep in contact with good people he knew over the years.

Likewise I made mine because I also took the risk of quitting my job and depleting my meager retirement savings at age 35 to develop a software product I knew had a good market. I also got bought out by a big company. You could say I was "lucky" to meet an executive of that company at a trade show, but I had also made the decision to max out my last credit card to pay for a $10K booth at that show where I knew I would make no sales (it was all about advertising and making contacts).

So no, neither my brother or I became FI because of delaying gratification, or from luck, it was our taking calculated risks when we saw an opportunity. I think it's another viable path to FI besides saving and living frugally.

Similarly, the people who win the lottery say they wouldn't have won if they hadn't been willing to take the risk. They probably bought many tickets over many years before they won.

But, that's just another word for saying their financial payoff is the result of "good luck". Other people, who did exactly the same thing, lost the price of all those tickets.

"Luck" refers to situations where two people, making the same decisions on things they can control, end up with different results.

I agree with Kabekew that if you only study the people who had good luck, and don't include in your study the people who used the same strategy but had bad luck, your study is flawed by "survivor bias". It's not worth a lot as a guide.

Many people think they can make money by quitting their jobs and sinking every last dollar into their own business. Most fail (yep, that's a guess). IMO, that's a "viable" strategy only if people understand the downside.

 

[petershk]

The inability to tie decisions and effort to a predictable result is what makes life and business interesintg imo. Therefore it's best to ensure you enjoy the process and hope for a good result. I had 2 failed startups and they were both fun. Not as much fun as if they were successful but more fun than NOT doing it.

Seeing a third that I joined early be incredibly successful is more rewarding and I can honestly say that it's nearly impossible to attribute it to the people, the vision, the culture and all the other stuff business books love to praise.

Made the right thing at the right time. And then had good enough people and culture to not screw it up.

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[daylatedollarshort]

We know a family who made millions from a start up but didn't have a LBYM lifestyle and the money is all gone. It just went the way of lottery winners.

TMND may not be a complete picture of millionaires, but if you draw a Venn diagram of sets of millionaires from the book and people who never were millionaires, there are insights to be gleaned, survivorship bias or not. The traits the TMNDs all had in common were living below their means (whatever their means were) and being the Joneses, not trying to keep up with them. This doesn't mean everyone who lives below their means will become a millionaire or stay one, but it is hard to do without those particular traits. And the surveys of jobs or businesses owned by millionires was interesting to me. It does seem to take a relatively high income to become a millionaire. There were not a lot of low wage jobs listed as occupations, despite the news stories of janitors leaving endowment funds.

We take it for granted now, but at the time the book came out most people didn't realize the inverse relationship between purchases of luxury items and consumer goods could have to savings and net worth. The old image of a millionaire was Thurstan Howell, III, not a rice farmer or scrap metal dealer.

 

[Sunset]

We know a family who made millions from a start up but didn't have a LBYM lifestyle and the money is all gone. It just went the way of lottery winners.

TMND may not be a complete picture of millionaires, but if you draw a Venn diagram of sets of millionaires from the book and people who never were millionaires, there are insights to be gleaned, survivorship bias or not. The traits the TMNDs all had in common were living below their means (whatever their means were) and being the Joneses, not trying to keep up with them. This doesn't mean everyone who lives below their means will become a millionaire or stay one, but it is hard to do without those particular traits. And the surveys of jobs or businesses owned by millionires was interesting to me. It does seem to take a relatively high income to become a millionaire. There were not a lot of low wage jobs listed as occupations, despite the news stories of janitors leaving endowment funds.

We take it for granted now, but at the time the book came out most people didn't realize the inverse relationship between purchases of luxury items and consumer goods could have to savings and net worth. The old image of a millionaire was Thurstan Howell, III, not a rice farmer or scrap metal dealer.

Like this guy, an ordinary fellow who educated himself on how to save while working a regular job in St. Louis: Saved $1 million and living my dream retirement - Mar. 9, 2015

Heck, he might even be on this forum !!

 

[razztazz]

Talk about taking risks, of course we do not hear about people who took a chance but it did not pan out.

PS. So, I got to where I am now by being frugal, and taking no big risks with my savings. No getting rich quick for this guy.

Bingo. people wrongly talk about "taking risk" in terms of "not only will it make you successful but it will be the thing that makes you more successful"

That's not how risk works. The reality is that any risk that increases the magnitude of the outcome also increases the potential for a bad outcome. If you're swinging for the fences you'll have a low batting average overall in
all likelihood. So how do you want the game to end?

In fact risk is for small fry and the desperate. Those who do not control outcomes. In amassing wealth and retiring early we are trying to control the outcome. "Risking" something that does not substantially alter outcomes or your present position eg quitting one job for another. Going back to school to upgrade skills, starting a business that does not include a real possibility of total unrecoverable loss is NOT any kind of a "risk". If you don';t succeed you will still carry on. No true risk. A roll of the dice where you can win big but really cannot lose.

PS: Don't argue with the baseball metaphor. I know it's imperfect.

 

[daylatedollarshort]

Like this guy, an ordinary fellow who educated himself on how to save while working a regular job in St. Louis: Saved $1 million and living my dream retirement - Mar. 9, 2015

Heck, he might even be on this forum !!

Good article. Thanks for the link.

 

[NW-Bound]

... In fact risk is for small fry and the desperate. Those who do not control outcomes. In amassing wealth and retiring early we are trying to control the outcome. "Risking" something that does not substantially alter outcomes or your present position eg quitting one job for another. Going back to school to upgrade skills, starting a business that does not include a real possibility of total unrecoverable loss is NOT any kind of a "risk". If you don';t succeed you will still carry on. No true risk. A roll of the dice where you can win big but really cannot lose...

When I left megacorp, I knew that I would always be able to find work, if the startups did not pan out. The risk I knew I would face was that once I tasted freedom, I would never want to go back into a cage. That turned out to be very true, as I never took a regular full-time job again, despite job offers.

That worked out well, because I was able to work only as much as I wanted, and spent a lot of time traveling with my wife when she was also burnt out at work. Recently, looking back at our photos, we found one year when we did 2 European trips and 3 domestic trips, using frequent miles that my wife accumulated. Now, ten years later, I don't think I can do that anymore.

Anyway, about "no can lose", I did lose financially relative to staying at megacorp, but the life experience that ensued from that escape has been worth it. And I still ER'ed while many of my coworkers are still stuck at megacorp, some I hear get so desperate that they play with penny stocks trying to make up for lost time. They should have more than I do, with their regular income, matching 401k, bonus, and pension. But they don't. Yes, it may be strange but true.

PS. I just realized that I described above the audience that TMND would most benefit.

 

[Mulligan]

Like this guy, an ordinary fellow who educated himself on how to save while working a regular job in St. Louis: Saved $1 million and living my dream retirement - Mar. 9, 2015

Heck, he might even be on this forum !!

This goes back to what I have always thought. Personal finance is not learned in a stand alone vacuum in a classroom. It is learned through living it from childhood on.


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[Fred123]

Like this guy, an ordinary fellow who educated himself on how to save while working a regular job in St. Louis: Saved $1 million and living my dream retirement - Mar. 9, 2015

Heck, he might even be on this forum !!

He was the apparently the controller for the largest retail natural gas distributor in St. Louis and probably made 6 figures. Is that an ordinary job? But, it does fit the TMND pattern -- well-above average compensation and frugality. Also interesting that he retired at 55 with only $800k. Unless he has a pension, he might be in a bit of trouble later if the market declines.

 

[growing_older]

I bet some of the millionaires next door were hit by random one time events that crushed them as well

I was hit by a few random crushing events. Too much tech stock in a crash. Lost several jobs when companies went under and jobs were hard to find. Horrible divorce. But with enough LBYM and savings I was also somewhat resilient to these kinds of problems. I still made MND because I actually enjoy my modest lifestyle and I didn't upgrade every time my salary did.

So no, neither my brother or I became FI because of delaying gratification, or from luck, it was our taking calculated risks when we saw an opportunity. I think it's another viable path to FI besides saving and living frugally.

In my circle of the tech world, this is common. Serial entrepreneurs try startup after startup trying to hit a big one. I was part of a few (none made it) and turned down a lot, some of which were ridiculous but everyone was trying everything. So I have friends who are 10x or even 100x millionaires from this kind of thing. But I also have lots of friends who, like me, never hit the right startup at the right time. The LBYM among them are likely in the same boat as me, that is MND and financially secure, and the non-LBYM who viewed themselves as temporarily low on funds until their startup riches began to flow so might as well spend it because they were sure they would hit it eventually, are not so well off. They are still working (harder and harder to find good tech jobs in your 50's) or still pitching ideas hoping their future hit will come.

 

[Walt34]

Like this guy, an ordinary fellow who educated himself on how to save while working a regular job in St. Louis: Saved $1 million and living my dream retirement - Mar. 9, 2015

Heck, he might even be on this forum !!

At the other extreme is this guy - made 4.4 million before taxes in one year and is now literally asking people "You want fries with that?"

Former NBA Player David Harrison Admits He Worked at McDonald's After Retirement | Bleacher Report

 

[utrecht]

This thread has kind of gotten off course. Back to basics. The title of the thread is "can one really become the millionaire next door?"

My wife and I just retired. We were both police officers. We are also millionaires. We also have generous pensions, but I'm talking about liquid investments that we were able to save by living below our means for many years and saving and investing the rest. So I would say, "Yes", one can really become a millionaire next door. We never made excessive salaries. We never had stock options, worked at start-ups, got signing bonuses, got severance packages. None of that. There's no secret to doing it. Spend less than you make and invest as much as possible and properly. Not in a million years would any of our friends, neighbors or relatives think we are millionaires.

 

[Fred123]

This thread has kind of gotten off course. Back to basics. The title of the thread is "can one really become the millionaire next door?"

My wife and I just retired. We were both police officers. We are also millionaires. We also have generous pensions, but I'm talking about liquid investments that we were able to save by living below our means for many years and saving and investing the rest. So I would say, "Yes", one can really become a millionaire next door. We never made excessive salaries. We never had stock options, worked at start-ups, got signing bonuses, got severance packages. None of that. There's no secret to doing it. Spend less than you make and invest as much as possible and properly. Not in a million years would any of our friends, neighbors or relatives think we are millionaires.

Police officers make a pretty good salary, at least in urban areas. Here in Seattle, police officers make $90K/yr after 5 years. For the two of you, that would be 180k, 3x the King County median of 60k household income. And that doesn't include overtime. I'm still waiting for an example of someone with near median income who accumulated $1M without a significant amount of investing luck.

 

[Walt34]

Police officers make a pretty good salary, at least in urban areas.

It varies wildly. Here in WV most make less than $20k/year to start and top out well below $$50k/year unless they make very senior rank.

I understand (but do not know for sure) that in some New York City suburbs starting pay can be at or near six figures.

COL in the local area figures heavily in police salaries.

 

[Gumby]

Police officers make a pretty good salary, at least in urban areas. Here in Seattle, police officers make $90K/yr after 5 years. For the two of you, that would be 180k, 3x the King County median of 60k household income. And that doesn't include overtime. I'm still waiting for an example of someone with near median income who accumulated $1M without a significant amount of investing luck.

Why are you waiting? Is it some sort of contest?