The Millionaire Next Door - Part 2

Interested in reading this with me? Check it out here:
The Millionaire Next Door - https://amzn.to/2K1z0jt

One of the major concepts discussed in this second reading session was the idea of taxes as a facet of overall wealth. The short version is, if you have no wealth (savings, investments, etc) then you are effectively paying 28-45% of your net worth as income taxes. However, if you have a fair bit in savings and investments, that number should be much lower, as you are leveraging the much lower rates related to capital gains vs income or short term gains tax. The author recommends that a wealthy person should be maintaining 6% of their wealth as income tax.

Example: if you are paying 45% on a $200,000 income ($90,000) you worth should be around $1,440,000. This would mean you are paying 6% of your total wealth as income tax.

You get a tax rate this low by heavily leveraging tax advantaged accounts. The easiest example is a 401k. As of 2018, a single filer is allowed to contribute $18,500 per year pre-tax. This lowers your tax basis considerably. There are other tax advantaged accounts (IRAs, Health Savings, etc) and you should leverage these as well where it makes sense.

He also details an account of the average American millionaire and their tax situation. Basically, they shelter as much of their funds as they are able, and in order to avoid the estate being heavily taxed on death, they set up College savings plans for their kids and grandkids, donate to religious organizations, colleges or other charities, and leverage the gift exemption for all their heirs. The situation they refer to, a multimillionaire went from a worth of over 10 million to just 200,000 right before their death.

The next key concept discussed is the idea of hyper consumerism. He lays out the living situation of 2 different doctors, who both are making similar money ($700,000 per year +) but live very different life-styles. One doctor is very concerned about his job because he and his family have become quite comfortable and used to making that kind of money. If he were to lose it, they would not have the ability to quickly replace it. They only have a few hundred grand in savings, which due to the size of their leveraged credit (mortgages, auto loans, credit cards, etc) would be quickly spent. This person is forced to realize all their income to maintain this lifestyle.

The other doctor on the other hand is much more frugal. They are far less leveraged on credit with loans and mortgage paid off, and he drives a used car. However, his network is something like 16x that of the other doctor. This doctor has much less stress related to his job, if something were to happen, they could survive comfortably on the savings.

The last point I found surprising during this session is that there is actually a negative correlation between wealth and education. Just take a second to think about that, a NEGATIVE correlation between wealth and education. Meaning the more educated you are the less likely you are to be traditionally wealthy. This book was also written re released in 2010, I can only imagine that there is an even stronger correlation now with student loan debt hitting all time highs, and inflation being what it is. I personally wonder if this is related to educated people not being concerned about money due to higher incomes, not having the ability to save due to poor habits or additional costs, or perhaps because blue collar workers are becoming more scarce and being able to charge more?

I will say, this is still quite an easy read. Some concepts are getting a bit repetitive, but that is due to the nature of the beast. We are discussing individuals and their budgets, so of course it requires restatement.

References:
https://studentloanhero.com/student-loan-debt-statistics/

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