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A Lesson From the Millionaire Next Door

January 20, 2021
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I’ve read the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko multiple times and it never seems to get old.  It’s loaded with very factual, qualitative statistics on millionaires in the United States.  According to statistics backing the book, “more than 80% [of U.S. millionaires] are ordinary people who have accumulated their wealth in one generation.”

The most important factor in building that wealth has been what’s called underconsumption.  Are you living in the most expensive home you can afford? Are you driving the nicest car you can afford? If so, even if you’re earning a lot of money, there’s a good chance you are what the authors call a UAW, or “under accumulator of wealth.” Homes and cars are two of the main items that can keep you from accumulating wealth, but there are many others, of course.

One thing that really surprises me is how many people spend far more on purchasing new fancy cars than on saving for retirement.  Most of the time they don’t even realize that they are actually doing this.

Recently, I did a quick search of local Ford F-150 pick-up trucks. The average purchase price for a new F-150 Lariat, 4-door super crew, 4-wheel drive is around $60,000. In contrast, the price of a used 2020 model is approximately $40,000, which is 34% lower than the new model and equates to $20,000 in savings.  The monthly payment on a new $60,000 auto with a 5-year loan is approximately $1,081/month, versus $721/month for the used $40,000 vehicle.  That’s a savings of $4,320 per year, and that doesn’t even factor in lower insurance and vehicle property taxes.  The savings are far greater if you purchase a slightly used 3 to 4 year-old model for around $25,000 – that’s a savings of 60% compared to buying new.  Your monthly payment on the $25,000 vehicle is roughly $420 a month on a 5-year loan, saving you $7,932 annually. Again, you’d pay much lower insurance and property tax on the 3 to 4 year-old model.

Now for the intriguing part - what if you invested that $360 monthly savings each month for 30 years with a 5% average annualized return?  You’d end up with approximately $299,613.  If you were really diligent and opted for the deeper savings on the 3 to 4 year-old vehicle and invested the $661 savings a month for 30-years at 5%, you’d amass $550,123. *

                 

Many households in our neighborhood own 2 to 4 cars. By doing some very simple math you can see how you could save over a million dollars on this strategy alone.  You don’t have to short sell your dreams of owning that fancy name brand car, this strategy works with all sorts of financial purchases.  The key is to underspend not overspend throughout your life, so that you can truly enjoy the things that make you most happy.

Driving a less expensive car is one of biggest levers people can pull to free themselves up financially to save more.

*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.  Stonegate Financial is not a registered broker/dealer and is independent of Raymond James Financial Services. Any opinions expressed are those of Terry Wiles and not necessarily those of Raymond James.