A lady at work was teasing me the other day because I didn't want to spend eight dollars on a group lunch. She was telling a coworker that I'm "loaded" but can't bring myself to spend any money, ever. This of course is not true, but she is one of the most unfrugal persons I know - frivolous and also generous, but not frugal. Anyway, I am not loaded despite her impression (i'ts not from my frayed shirt sleeves and my scuffed old Rockports), but I hope to be loaded someday by following these simple guidelines to becoming the unassuming rich neighbor someday.
1. Spend less than you make.
This is simple math, doesn't require a college degree so even 4th graders should be able to figure out they can't buy that new $30 video game if they only got $20 in birthday money. Apply this principle throughout your life and money will amass almost by itself. This is non a negotiable factor, in fact if this is the only thing you do, you will do okay. The millionaire next door will decline those invitations to go on an expensive dinner party and suggest instead that everyone have a BBQ at their place or the local park.
2. Maintain what you have - repair rather than replace.
I have a favorite pair of khaki shorts that has patches all over and the material is so fragile and thin with strangling threads on the seams. They are over fifteen years old and get worn about 200 days a year. They are top quality materials and they just last forever. The older an item is generally the better quality it was when it was manufactured. Stuff made in the 1980s is rock solid. Our best appliances were made in the 80's and its a shame to pass them on. New stuff is cheap and uses cheap components that do not last, its built into the design so you have to replace the item. The millionaire next door likely wears tattered but clean clothing, that may be a little out of style but they don't really care what you think. They're comfortable and practical.
3. Drive your cars until they aren't reliable.
Cars over ten years old are cheap to own. If you get a good quality vehicle (i.e., not Chevrolet) it should last a couple decades with minimal maintenance - brakes, tires, oil changes. We just replaced the brakes on our 15 year old Ford truck for the first time. This truck still has another fifteen years in it. Older vehicles are cheaper to insure and own. The unassuming millionaire next door likely has a couple of old, well maintained vehicles in their driveway or garage.
4. Spend less than 2.5x of your annual salary on a house.
This is where a lot of people have screwed up their chances of ever becoming millionaires on an ordinary middle class income. These days you can't plan on your income increasing throughout your career. When you buy a house you need to just use your income NOW. If you make $40K per year, you should only be looking at houses that cost less than $100K. If you spend more, you will be house poor and all the extra income you should be investing and saving will be used up in housing expenses. Don't concern yourself with the amount bankers will tell you you're approved for, they don't have to live with that expense for the next 15-30 years. The millionaire next door likely has a modest, ordinary home that brings no illusions of grandeur that you might think a millionaire would display.
5. Don't move.
This goes along with the point above, get an affordable home and don't move. Ever - if you can help it. Struggle through those years with the kids growing up and having to share rooms, and in the end you will not have to downsize when the kids all move out (and they will move out...). If you make a good decision on your home purchase, in a friendly, safe location near lots of job opportunities you can stay there your whole life. Moving is expensive and a waste of money paid to all the providers who make it happen. And of course, if you move you need new drapes and furniture. So, a few thousand dollars for a move turns into several times that by the time you are settled in. The millionaire next door likely has lived in their same home for twenty or thirty years and has no plans to move.
6. Invest regularly and don't touch it.
Every small amount adds up. A regular weekly contribution to stocks, IRA's or company 401Ks will slowly amass to a considerable amount over time. People who make this part of their budget early in life may simply be millionaires with some lucky investments in time tested stocks growing over the years. Sure there will be some mistakes and some losses but over time the stock market is a solid investment vehicle. The millionaire next door is the guy who made a middle class income all his life, who lived below their means but invested regularly and didn't cash it in during an emergency - probably since he had an emergency fund too.
7. Don't divorce.
This goes without saying that the millionaire next door is content in their life enjoying simple pleasures like sitting outside on a beautiful day, the warmth of a fire on a cool night, and the conversation of friends and family, and the companionship of their spouse. All these things are free. Sure money can make things easier, but it is the emotional support and love of a healthy relationship that can ensure that a partnership is permanent. A divorce is a senseless way to waste lots of assets and money. If you're not committed for marriage then don't do it because a divorce is one of the worst things that you could do to screw up your chances of financial success. Having kids as part of that divorce makes it even worse. The millionaire next door has likely been happily married for several decades.
8. If you have kids teach them your frugal ways so they are self sufficient adults.
One of the greatest gifts a parent can bestow on a child is financial savvyness. Starting at a young age children can learn the value of saving, coupons, deals, and investing. As they grow they can see how frugal ways increase the life of items so they don't need replacing, and that taking care of something is important to longevity. Then as they near adulthood and make independent spending decisions they learn the consequences of poor decisions and also how smart their parents really are. Your children will learn to manage money the way you manage money. The millionaire next door does not have any adult children he is providing for, they are self sufficient.
9. Choose quality over quantity.
One important factor that comes into every purchase decision is quality. The better quality item will cost more than the poorer quality item. But it should have a better performance, longer life, less maintenance and ease of use. We cut a lot of fire wood for fires and over the years we have owned a half dozen chain saws. We always got the cheap ones at Home Depot and they only ever lasted a year or two before performance issues became the problem. Our last one we bought was a Stihl and we've had it many years now and it operates like brand new every time we use it. It was three times the cost of a cheaper one, but it is a pleasure to use. We also do a lot of kitchen preparation of salads and meals. A constant dissatisfier is crappy, dull knives. I finally bought a $400 chefs knife for DH and it has transformed meal prep. Now he is always looking for something he can cut up. It is a joy to use. I wish we would have had it years ago. The millionaire next door will have top quality tools, electronics or functional items even though they are expensive. The millionaire next door does not tolerate cheap shit that doesn't work as designed.
10. Ignore the Jones' and all their new stuff.
Be tough and don't give into peer pressure to buy new stuff when the stuff you have functions as designed. So what if its not all shiny and full of bells and whistles, if yours still functions it is all you need. Once you advance to fancy stuff, it's really hard to go back to frugal. But then again, because you are frugal you can enjoy the occasional splurge in a high quality item that seems to be frivolous. But the trick is that not all you have is frivolous, only a couple things.
So there is my recipe for success to becoming the millionaire next door. Do you have anything to add?