It’s a Sunday, so I picked a task that we can do from the comfort of our own homes. I also chose a task that can kill a few hours, since most people will be too busy during the weekday for a task like this one -

Today’s Task: Read one personal finance book.

If you already have a personal finance book at home but you haven’t read it yet, now’s your chance. You can also borrow books from friends or relatives, or buy from a second hand shop. Just make sure that whatever you buy, the information is up to date. Also, as much as possible, buy something local. The ideas in local books will be of more help, especially if they point to local banking and investing information.

Want some free books instead? Check out the following:

• Thriving on Less: Simplifying in a Tough Economy by Leo Babauta. It’s about adjusting your lifestyle to make it more sustainable and allow yourself to live well in a tough economy.
• Money Matters for All Ages, which I reviewed before, is a guidebook on financial planning for the rest of your life.
• Tips for Change from Money Management International. Just a collection of money-saving tips. Although written for a US audience, 98% of the tips are applicable everywhere (FP’s note: I wouldn’t drink tap water though, so know which tips to pick and use).
• Plan Z: How to Survive the 2009 Financial Crisis by Robert Pagliarini. An alternative take on how to deal with the financial crisis. (FP’s note: I don’t think it’s a good idea to avoid paying off credit card debt as early as you can if you have the means to do it, things are not as bad here as compared to the US. But if you’re financially desperate, it’s okay to just pay the minimum each month.)
• Building Wealth: A Beginner’s Guide to Securing Your Financial Future by the Federal Reserve Bank of Dallas. Meant for US readers but most of the ideas are basic enough to be applicable to the Philippines. Just like the title says, it’s for beginners who are just starting to be aware of their financial responsibility.

Remember: don’t stop with just one! Over the next few months, make it a point to read other financial planning and money management books. You’ll find that many writers contradict each other so it’s good to have multiple perspectives on a single issue. But for today, one book should be fine.

I’ve just finished listening to the audio book version of “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko. I’ve heard good things about it, so I thought I’d check it out for myself.

The premise of the book is simple: the authors conducted a survey of self-made millionaires in the US, to see what characteristics they share and how they got to be millionaires.

In the first part, the authors share their discovery of a surprising fact: millionaires often did not look the part. They did not dress like millionaires, they don’t come from wealthy families, and most of them don’t even have an MBA or high levels of tertiary education.

Here’s an excerpt from the book (emphasis mine):

“In time we discovered something odd: many people who live in expensive homes and drive luxury cars do not actually have much wealth…. Many people who have a great deal of wealth do not even live in upscale neighborhoods.”

Then the authors move on to discuss the common characteristics of millionaires and how they acquired their wealth. Not surprisingly, it involves discipline and planning.

Here’s a brief summary of the book’s main points:

What is “wealth”?

“Wealth is not the same as income.”

The authors defined wealth as “Substantial amount of appreciable assets”. This meant a net worth of $1,000,000 or more.

One of the major points discussed in the book is that wealth is not the same as income. This means that just because you have a high-paying job, it doesn’t necessarily follow that you are wealthy. The authors gave several real-life examples of people who earned six figures per year (in US dollars) yet lived their life from paycheck to paycheck. If you added their net worth, it would amount to ZERO. Take their paycheck away, and they can’t survive. According to the book, most people who lived like this would survive only 2 months at most with no income. In contrast to that, wealthy millionaires can live without regular employment.

You don’t have to come from a rich family either. 80% of Ameirca’s millionaires accumulated wealth in one generation, not via inheritance. They are regular people.

But what made them millionaires?

The 7 Factors of Wealth

The authors made a list of 7 common factors found in most of the millionaires they surveyed:

1. They live well below their means. This may sound strange to some people, but millionaires budget well. According to the authors “They became millionaires because they are good at allocating resources. They stay millionaires the same way.”
2. They allocate time, money, and energy efficiently in ways conducive to building wealth. From the book: “Millionaires spend significantly more hours per month planning their finances than high-income non-millionaires.”
3. They believe financial independence is more important than displaying social status. Surveys show that most millionaires don’t spend much on shoes, cars, and clothing – it’s the high-income non-millionaires that do.
4. Their parents did not provide economic outpatient care. This means that millionaires often did not receive financial support from their parents.
   
5. Their adult children are economically self-sufficient. Related to the point above, millionaires did not give financial support to their own children once they reached adulthood. In fact, the research shows that the more money you give your adult offspring, the more they will depend on credit, and the less wealth they’ll accumulate.
6. They are proficient in targeting market opportunities. Most millionaires are good at selling products and services to those who are also wealthy.
   
7. They chose the right occupation. Most of the surveyed millionaires are self-employed or run their own businesses.

What I think of the book:

If you get this book, remember that it’s an analysis of survey results. It’s not a step-by-step how-to guide on accumulating wealth. Don’t expect specific tips on where to invest and how to cut back on your spending.

While the data was eye-opening, I had a few complaints:

• Paulit-ulit. Some of the information is redundant.
• The book doesn’t take into account the value of time. For example, if there’s a promo, I’m not going to fill out a form for an hour if it would give me only $1 free. My time is worth more than that. If you’re absolutely broke, that’s probably fine.
• “Luck” is ignored. While I don’t believe in “fate” generally, I believe that there is an element of randomness involved regarding what opportunities you have. For example, if you’re unlucky enough to have parents who aren’t financially responsible, you’re bound to pay for their debts, retirement, and living expenses (esp. in Filipino culture). This is much harder if you are starting your own family.
• The research methodology was a little off. The millionaires were self-selected rather than, say, chosen from an existing list.

What I do like is that it focuses on frugality, investing, discipline, and planning. I believe that these things are a solid formula for wealth, and it’s good to see it backed up with data. It’s a good way to crush the get-rich-quick mentality.

Should Filipinos get this book?

Since 95% of the book is a presentation of data, and only around 5% are ideas and lessons you can act on, I wouldn’t recommend the average Filipino to buy it – especially since the research was conducted in the US. If the same survey was done in the Philippines, the results may be different. That book, I might recommend.

As for the things you might learn, the valuable ideas from this book can already be found on this review, along with other existing reviews of the book. It doesn’t have many solid “tips” or concrete steps you can take to improve your finances. As long as you’re aware of the 7 factors mentioned above, and you act on them, you’re good to go.