Tuesday, September 27, 2016
A Different Way to Think
Recently I was listening to a Brian Tracy video on methods to increase your income through focusing your personal efforts on what is important to the bottom line and delegating or outsourcing those activities that don’t generate income. Along the way Tracy went off on a unrelated rabbit trail that I found quite interesting. Brian Tracy actually knows Thomas Stanley and William Danko, the authors of the landmark study, The Millionaire Next Door. While talking with one of them, I believe it was Danko, Tracy learned that Danko overheard a conversation between several millionaires involved in his study. They were saying things like, “I have two.” Or, “I have four.” Puzzled Danko asked them to explain what they were discussing. The answer, the number of years they could support their current lifestyle without any additional income or capital gains. Believe it or not, there are personal finance authors that encourage their readers not to have an emergency fund. I noticed one of these dreadful recommendations came from a website supported by (you guessed it) the banking industry. “Go ahead little girl, put that surprise auto repair on your credit card. It will not harm you.” It turns out that Stanley and Danko’s self made millionaires don’t think like that. Instead of having the usually recommended three to eight months in an emergency fund, these individuals are thinking in terms of years. Of course, the classic emergency fund is money held in an insured near cash instrument like a savings account or money market fund. I am not suggesting that you put years of expense money in something that pays nearly nothing, but consider that various model portfolios suggest that retired folk keep as much as 10%-15% of their net worth in safe, near cash accounts. Danko and Stanley discovered that financial freedom is a high priority to the men and women who actually achieve financial freedom. Their decisions are frequently made with the goal of freeing up cash for investment opportunities. Even though they could easily pay cash for new cars, they tend to buy relatively high priced late model used cars, taking advantage of the fact that a car’s value tends to depreciate about 19% in the first two years of ownership. Then they keep them for an average of ten years. This practice, alone, has the potential of freeing up significant amounts of money over the course of a forty year career while the allowing those millionaires next door to drive around in some pretty nice automobiles. I consider The Millionaire Next Door a must read for anyone who wants to become financially literate. The subjects of their study are not remarkable people with unusual skill sets. They are your neighbors. They just don’t think about money the same way the average American thinks about money. Because their thoughts are different, their actions are different. Because their actions are different, they get different results. Because they get different results they end up living a different kind of life, one that includes financial freedom. Go thou and do likewise.