Have you ever wondered about your neighbor? His car is over a decade old, his home lacks modern upgrades, and he’s the only one in the neighborhood still mowing his own lawn. Is he simply quirky, or could he actually be wealthy?
While he may seem unconventional, there’s a strong possibility he is wealthier than he appears. In fact, the book “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko discusses how individuals like your neighbor often fit the millionaire profile surprisingly well.
“The book defines the ‘millionaire next door’ as a person who doesn’t flaunt their wealth,” explains Philip van Doorn from MarketWatch. “This individual avoids extravagant displays of wealth. They drive everyday cars and live in standard neighborhoods.”
According to the statistics cited in the book, “over 80 percent of U.S. millionaires are ordinary people who have built their wealth within a single generation.” This achievement is indeed remarkable. So, what’s their secret? How did they accumulate such wealth?
“The crucial factor in building wealth is what’s termed underconsumption.”
The Formula for Success
Becoming a millionaire may sound simple. It boils down to a two-fold approach: (1) Spend less than you earn and (2) Earn more than you spend.
Here at Economic Prism, we understand underconsumption as a feasible strategy. It’s not about deciphering complicated financial charts or engaging in high-risk trading. The concept is straightforward, though it can be challenging to implement consistently.
To spend less than you make, you must practice prudence, discernment, and foresight. Meanwhile, earning more than you spend demands diligence, industriousness, and productivity. As J. Paul Getty put it, the formula for success is to “rise early, work hard, strike oil.”
Indeed, while you can control the advice to rise early and work hard, striking oil is often a matter of chance. However, consistent hard work increases the likelihood of achieving significant success in your endeavors.
That said, there are no guarantees. For the millionaire next door, the actual act of striking oil is less critical. By practicing underconsumption, one can achieve wealth even with moderate success.
Will We Experience the 1930s or the 1970s?
Yet again, the path to wealth isn’t assured. Underconsumption alone may not ensure success in today’s fluctuating economy. The dollar’s value can dramatically shift from decade to decade.
The ongoing monetary experiment is likely to widen these fluctuations. Will we face a repeat of the 1930s or the 1970s? Essentially, will we confront inflation or deflation? This question is pivotal.
From the lessons of the 1930s, we learn the importance of remaining debt-free, keeping substantial cash reserves outside the banking system, and stockpiling essentials like rice and canned goods.
Conversely, the 1970s taught us that borrowing large sums could be beneficial. Over time, the real burden of debt diminishes, while asset prices increase significantly. For instance, a median home in 1960 cost $11,900, while by 1990 it rose to $79,100. During a 30-year loan term, monthly payments on a home purchased in 1960 became negligible. However, the cost of living surged; what $1 could buy in 1960 now took $4.42 by 1990. Home values escalated at nearly double the rate of the dollar’s devaluation.
Ultimately, effective underconsumption relies on a backdrop of stable currency or mild deflation. Even with moderate inflation over the past seven decades, underconsumption has proven to be a viable strategy.
Given the alarming levels of monetary debasement witnessed in recent years, it’s likely that inflation will resurface—and possibly exceed the peaks of the 1970s. However, this is not a time to accumulate excessive debt or to engage in margin trading.
Instead, it appears that stocks and real estate may face another downturn in the coming years. It’s possible that we may experience elements of the 1930s while transitioning toward the 1970s. In this context, minimizing debt and maintaining liquid assets could be a prudent strategy. Only time will reveal the outcome.
Sincerely,
MN Gordon
for Economic Prism
