In The Millionaire Next Door – a book I read years ago – authors Thomas J. Stanley and William D. Danko summarize their findings after spending 20 years interviewing millionaires. They boil their findings down to seven simple rules, including the bookends ‘always live well below your means’ and ‘choose your occupation wisely.’
The Millionaire Mind
Following the success of The Millionaire Next Door, Stanley followed up with The Millionaire Mind (another book I read in my quest to become more financially savvy). As the description on Amazon notes, “The Millionaire Mind targets a population of millionaires who have accumulated substantial wealth and live in ways that openly demonstrate their affluence. Exploring the ideas, beliefs, and behaviors that enabled these millionaires to build and maintain their fortunes, Dr. Stanley provides a fascinating look at who America’s financial elite are and how they got there.”
The behaviors, according to Stanley, are key. One of the observations is that the less well-to-do should modify their behavior if they hope to attain millionaire status. Perhaps give up habits such as paying for a cup of coffee each day; give up the Starbucks or Dunkin’ Donuts.
A lot of people latched on to the idea that simply giving up one habit, such as a $3.50 cup of coffee a day would set them on the road to being a millionaire. Is it possible to become a millionaire simply by giving up your daily coffee? Put another way, can you become a millionaire by saving $3.50 a day? Could it possibly be that easy?
Time and Compound Interest
Let’s check out the numbers. We’ll assume someone pays $3.50 a day [$1,277.50 annually] for their cup of coffee. Let’s further assume their rate of return is 7% – the rate I use in my own financial planning – they modify their coffee habit at age 25, and plan to retire at age 60, a 35-year period.
Well, that doesn’t quite get us to millionaire status. What if we use 12%, the rate Dave Ramsey often suggests is possible? While it is possible, it is highly, highly unlikely, despite what Dave says. Scratch that, I will go so far as to say you can forget about achieving a 12% average return over 35 years. But just for fun, let’s assume you could.
Still short. Even at the mythical Dave Ramsey rate.
Clearly, you will not become a millionaire simply by giving up one habit, the daily cup of coffee being just one such habit, and saving/investing the money instead. It seems to me the key to becoming a millionaire is not to focus on modifying your behavior in one way. It takes more than that. Savvy individuals understand that they will need to develop a detailed plan and manage their plan over a number of years to reach millionaire status.
What would be the point of becoming a millionaire if you practiced nothing but deprivation for 20 – 35 years anyway? Don’t go crazy with being frugal. The key is to take a holistic view of your spending habits and find areas where you can reduce your spending without giving up all the activities, drinks, or foods that bring you pleasure.
In short, don’t give up your daily coffee from Starbucks if that is something you enjoy. However, take the time to understand how that expense, along with all the other expenses you incur on a daily basis impact your long-term plan. Stay savvy, my friends.