What’s the deal with your neighbor? His car’s 12 years old. His house has minimal upgrades. He’s the only guy left on the street who still cuts his own grass. Is he a weirdo? Or is he a millionaire?
Certainly, he’s a bit unconventional. He does things a little different than everyone else. But there’s a good chance he’s also a millionaire. In fact, as explained in the book “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko, this humble neighbor of yours fits the profile of a millionaire. No kidding…
“The book defines the ‘millionaire next door’ as someone who doesn’t look the part,” explains Philipvan Doorn at MarketWatch. “He or she makes no ostentatious display of wealth. There’s no fancy car, no $5,000 watch, no McMansion. This wealthy person lives in a regular middle-class or lower-middle-class neighborhood.
“According to statistics backing the book, ‘more than 80 percent [of U.S. millionaires] are ordinary people who have accumulated their wealth in one generation.’” Indeed this is a notable achievement. So what’s the secret…how did they do it?
“The most important factor in building that wealth has been what’s called underconsumption.”
The Formula for Success
Naturally, the secret to becoming a millionaire is simple. It involves a two pronged strategy: (1) You must spend less than you make; and, (2) You must make more than you spend.
Here at the Economic Prism, underconsumption is a strategy we can comprehend. It doesn’t involve charting wave patterns. Nor does require selling put options. It is so simple even our dense skull can understand it. But while it may be simple in concept…it ain’t easy in practice.
To spend less than you make, you must be prudent, discerning, and farsighted. To make more than you spend, you must be diligent, industrious, and productive. Another way to look at it, the formula for success, as elucidated by J. Paul Getty, is to “rise early, work, hard, strike oil.”
Of course, rise early and work hard are two things you can control. Strike oil takes some luck. But, nonetheless, rising early and working hard, greatly increases the possibility you will strike oil…or hit it big in whatever you are doing.
Still, there are no guarantees. So for the millionaire next door, it doesn’t matter so much if you strike oil. If you practice underconsumption, you can still become wealthy even if you are only moderately successful.
Will We Get the 1930s or 1970s?
But, again, there are no guarantees. Underconsumption may not get you there. We live in an unstable money world. The value of the dollar can vary wildly from one decade to the next.
The effects of the great monetary experiment that’s currently underway will exasperate these swings. Will we get the 1930s or will we get the 1970s? In other words, will we get inflation or deflation? The answer to this question is critical.
The key lesson from the 1930s is that one should have no debt. One should keep large stashes of cash outside the banking system. One should hoard scraps of aluminum and bags of flour and sugar…and whatever else you can store.
The key lesson from the 1970s is that one is rewarded for borrowing large amounts of money. Overtime the debt burden is lightened immensely, and asset prices balloon out. For instance, the median unadjusted home value in 1960 was $11,900. By 1990, it was $79,100. Over a course of a 30-year loan, monthly payments on a home bought in 1960 were reduced to pocket change. At the same time, by 1990 it took $4.42 to purchase what $1 could buy in1960. Home values increased at a rate near double to the dollar’s loss of value.
Ultimately, underconsumption requires some level of stable money or even slight deflation to work effectively. Even with the moderate levels of inflation experienced over the last 70 years, underconsumption still proved to be a successful strategy.
Given the alarming levels of money debasement that have gone on over the last seven years it is likely inflation will return at some point and that it could greatly overshoot the 1970s. Though we aren’t advocating you run up a bunch of debt just yet. Definitely don’t buy stocks on margin.
To the contrary, it appears stocks and real estate are poised for another fall over the next several years. We may still get a touch of the 1930s as we make our way to the 1970s. Reducing debt and holding some cash in hand may be the shrewder move considering current circumstances. Time will tell.
Sincerely,
MN Gordon
for Economic Prism
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