The Millionaire Next Door: Are You all Hat and No Cattle?

“All hat and no cattle”

Or to decipher this verbal riddle for those of you still scratching your head, this phrase is the somewhat more subtle equivalent of an individual that is not able to “walk the talk”.

In The Millionaire Next Door, by Thomas J. Stanley and William D. Dankoit’s, “all hat and no cattle” is a phrase that’s used to help illustrate the difference between two groups of people in this country that the book highlights: prodigious accumulators of wealth (PAWS) and under accumulators of wealth (UAWS).  And while The Millionaire Next Door is more a sociological profile of millionaires in this country (their purchasing habits, education, employment, investing preferences, etc) than a manual on the step by step process to achieving millionaire status, I think there are some worthwhile takeaways from the book that make it well worth the read.

But before proceeding lets take a closer look at the two groups of people that the authors of this book choose to focus on: PAWS and UAWS.

Which One are You?

The authors of The Millionaire Next Door use a formula that looks at the relationship between an individual’s annual income and cumulative net worth.  Here’s how it works:

A $500,000 per year corporate CEO can be an “Under Accumulator of Wealth”  (UAW) if his/her net worth is less than the product of their age and one tenth of his/her realized pretax income. Take for example a 40 year old CEO earning $500,000, according to the formula established by the authors he should have (40×50,000) or about $2 million in net worth.  Prodigious Accumulators of Wealth (PAW) is just the opposite of the UAW, accumulating usually well over the product of the individual’s age and one tenth of his/her realized pretax income – a 50 year old CPA earning $80,000 and having a net worth of $750,000 (a far more prodigious accumulator of wealth than the higher paid CEO).

I remember the first time I read this formula and thought – “Oh sh*t?!  I wonder if they have a category for NAW’s … Non Accumulators of Wealth?”  Perhaps you’re having that same reaction?  The vast majority of us are most likely UAW’s at best, NAW’s at worst.   But consider this an opportunity to pull your head out of the sand and start putting some serious thought into how you spend and save the income you work so hard for.  Above all – remember that the  first rule of Financial Fitness is knowing where your individual strengths and weaknesses are and making the conscious decision to continue with what’s working and abandon what’s not.

The Millionaire Next Door – Key Take Aways

1) Spend Less than You Earn. I know, I know … these personal finance books and guru’s with their earth shattering suggetions.  But the reason this advice is so common is that so few of us actually follow it.

2) Avoid Buying Status Objects or Leading A Status Driven Lifestyle. This is the big one – and also where the saying “All hat and no cattle” comes into play.  Many households in this country are just playing the part of PAW’s – they spend money freely, have large houses, are always keeping up or surpassing the Jones’, and because they’re status driven, these folks will do whatever it takes financially to convincingly play the role of society’s ‘well to do’.  But as the authors suggest, if you were to take a closer look at the ACTUAL financial fitness of such households you’re likely to find that they spend all (or more) of what they make, save relatively little compared to their income levels, and are likely UAW’s with an anemic net worth.  It’s the financial equivalent of rims, tinted windows and a $5000 speaker system on a car worth $500.

So What Does a Millionaire Look Like?

The typical millionaire (or PAW ) might look and act far different than the image of financial success that we are often fed in this country (largely because the companies selling you stuff count on the fact that you’re a UAW and play to our need to pursue a false sense of status …. which is how the owners of these companies become PAWs).   But if we had to profile the average American millionaire, here is what he/she would look like according to the authors:

* Uses credit carefully and typically saves for purchases instead of charging them

* Drives used American made cars (most spend under $20,000)

* Lives in a middle class neighborhood in a home below his/her means

* Describes himself/herself as a ‘tightwad’ and looks to stretch the value of their income

* Avoids flashy consumer projects (boats, watches, fancy restaurants) preferring to build actual wealth as opposed to the appearance of wealth

* Frequently owns his/her own business and is self-employeed

* Chooses to invest and not speculate – meaning that PAW’s purchase sound investments in proven companies and hold them, prefering to avoid frequent trades, speculation, and finicky short term movements in the market

* Spend time actively increasing their financial literacy.  PAW’s proactively study and plan their financial fitness and objectives.  And while the authors didn’t cite it, I like to think a few of them read The Dollar Stretch

* Prioritize financial indepence over status

When I first read The Millionaire Next Door I went from depressed at my sad financial state of affairs to encouraged by the fact that there were immediate fixes that I could implement to improve my financial status.  It was after reading this book – which years ago I picked up thinking their was some magical forumala to becoming a millionaire – that I realized the surest way to building wealth was a slow, deliberate, and well thought out financial plan spread out over years, not days.

And that’s a very refreshing thought if you’ll get the silly notion of ‘getting rich quick’ out of your head.  Getting rich quick is a financial myth … a myth designed to get you focused on an unrealized objective instead of the actual steps needed to get there.   It’s a myth perpetuated by clever capitalists who realize the majority of us don’t have the discipline or the patience to implement proven methods towards building wealth.  We’re a nation seeking a short-cut: but the reality is that there isn’t a drive-through window or iPhone application for building wealth.

The Rant

And that’s the appeal of The Millionaire Next Door.  While the book has its flaws (and there are a few), they are easily outweighted by the fact that it provides readers with a wealth building method that has been proven time and again by the numerous millionaires it profiles:

Spend less than you earn AND Avoid leading a status driven lifestyle.

You are not a celebrity.  You are not the Real Housewife of whatever county you live in.  You are completely average.  The truth is that nobody pays as much attention to what you wear, where you live, what you drive, and what you do, as you think they do.  It is time to grow up.  And grown-ups don’t play and pretend: they do.  So stop playing the part of financially well-to-do, learn to tell your inner spoiled/insecure child “NO”, and take that first step towards building actual wealth and financial security.  You deserve it and so does your family.