16 March 15

Getting rich – slowly

Almost 20 years ago, two US academics published what could be described as a guide to getting rich slowly – the antithesis of the all-too-common get-rich-quick approach.

Their book, The Millionaire Next Door, sold in the millions and carried its authors, Thomas Stanley and William Danko, into the ranks of the extremely-well-off.

It is still on sale in Australian bookshops and remains near the top of the best-selling personal finance books of all time.

This get-rich-slow book was based on extensive research going back more than 20 years into how many of the wealthy manage to accumulate wealth.

In short, the authors confirm what many of us suspect: a costly car(s) and a big house in an upmarket suburb are not accurate indicators of wealth; it often indicates the opposite.

As New York Times columnist Ron Lieber explains in his latest personal finance column, the “enduring” lessons of The Millionaire Next Door based on their research is: “Most of the rich grow wealthy because of modesty, thrift and prudence.” They are content to live in no-frills homes and they have an “allergy” to luxury cars, according to the thesis.

Lieber decided to revisit this personal finance classic upon learning of author Dr Thomas Stanley’s death.

And by coincidence, an article in Fairfax newspapers this month quoted a 27-year-old investor who named his father’s gift some years ago of The Millionaire Next Door as major influence on his attitude to saving and investing. (Not surprisingly, this young investor is enthusiastic about low-cost Exchange Traded Funds (ETFs) – matching the cost-conscious, investment-focused approach advocated by the authors.)

“It [the book] stands today as a sort of promise,” Lieber writes, “that everyday people have a shot at accumulating true wealth through habits and not just oversize risk.” But he emphasises that much depends on personal circumstances including having and keeping a job and not suffering health setbacks, among other things.

Nevertheless as Smart Investing regularly discusses, such straightforward, commonsense actions as not taking excessive risks, keeping costs under tight control and understanding the great benefits of compounding as long-term investors earn income on income as well as on their original capital can really make a difference.

One of the no-nonsense chapters in The Millionaire Next Door is titled: ‘You Aren’t What You Drive’. That just about summarises its philosophy.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia. 

This material has been reprinted with the permission of Vanguard Investments Australia Ltd

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