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Think back 30 years ago, do you think the socioeconomics of the world has stayed the same? No. It’s harder than ever to become a “real” millionaire today through frugality if you are part of the middle class.
I can still use being young as an excuse, right? That’s one of the perks of having an online blog journal. You can reflect upon personal growth indefinitely.
For most millennials, recent events have made me realize that I need to re-evaluate some of the facts besides riding on my optimism.
Would frugal millennials today actually become ‘The Millionaire Next Door’? Here are ALL the reasons why it’s becoming more elusive to become a millionaire for most millennials out there.
The Impact of ‘The Millionaire Next Door’
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When I was first trying to educate myself about money, I picked up the Millionaire Next Door by Thomas J. Stanley. It came universally recommended as one of the pillars of personal finance. It was eye-opening to read a book that was so contextually different from the usual fiction I read. Why did the school board make us read Steinbeck in 9th grade when I could have absorbed 30 times more useful, practical knowledge from Stanley?
The Millionaire Next Door examines the lives of unlikely, unseemingly millionaires. It went into the habit, career, and family relationships these millionaires had. The pillars of argument were based on Stanley’s data sample and the importance of how frugality intermingled and aided their financial lives.
Overall, the message is solid. That’s why it’s a classic.
But there are parts of the book where I thought the information was extremely outdated.
The millionaires wore inexpensive suits and drive American-made cars?
Some parts of it sounded like something you could get away with saying in the 80s. There’s discussion of why doctors ended up marrying second-grade teachers and things that aren’t really related to personal finance.
Nevertheless, I’ve always held that book and its content close to my heart. The Millionaire Next Door sold that this practice of wealth is more common than you would think. For those people who exercised restraint, practiced frugality and invested their money was on a sure path to success.
The Millionaire Next Door is a noble human notion. For those who have wealth but reject the power and temptation that comes with money is an admirable trait all too underappreciated. Purposeful frugality and stealth wealth remind me a lot of a superhero in the comic books. Something along the lines of like Clark Kent. They have a lot of power but they manage to hide it all the while being good.
It’s one of the most admirable things I find in a person. Some girls really like Justin Timberlake, but I’m really into the guy next door works who worked a quiet life, went to jury duty, paid his taxes, was good to his children and done so all within an appropriate budget. Hey, now that’s sexy! *cough, my hubby, cough*
Why ‘The Millionaire Next Door’ is a Myth
If the principles are sound then there’s an exponential chance one would be able to become a millionaire with the cooperation of time. If you work hard and be a good citizen, you can have it all. They call that the American Dream. yeah?
But does it really work that way today?
I was born in 1991, which wasn’t that long ago. I can’t vouch for the history or trends of “the millionaire next door” types. Parts of me remains optimistic about building wealth but that might be contributed by limited experience. A growing part of me resents my former optimism, here is why:
1) Survivorship bias
Stanley addressed survivorship bias briefly in his book. He gathered a very bias sample of people who were already millionaires so the data set was extremely susceptible to survivorship bias.
Take, for example, in 2015, a janitor by the name of Ronald Read made headlines after his death when it was uncovered that he had accumulated 8 million dollars in stocks. No one saw that one coming! Mr. Read lived a low profile life, worked a low profile job as a janitor and never exhibited any signs of wealth to his community or family.1
The fact that Read made headlines shows he was an extreme outlier and downright lucky to have made the stock bets he did at the time that he did so.
In addition, Read’s family house cost him $16,000 in the 60s. Adjusted to 2017, that house would be equivalent to a little over $131,000. That essentially rules out home ownership in both coasts of United States. You would need to remain in American heartlands, find a stable job there for 65 years, and purchase a family house that would cost around $130K – a rarity these days.2
2) Low millennial salaries
Read’s investment strategy could be duped by millennials who can save and invest $300 a month for 65 years and let it ride the market without touching it.
Sound too good to be true?
Because it is.
Adjusting $300 in Read’s era of free love (the 1960s) to present dollars you would need to save and invest, for the same buying power in 2017, $2,463.59 a month.3
Getting smacked in the Great Recession paired along with student loan debt has made the millennial median salary very, very low. What possibility is there for average wage millennial worker whose national annual salary is under $34,000 to chuck away almost $2,500 a month for 65 years?4
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3) Stunted wage growth
In the current arena, things are still not looking up for millennials. Millennials, if even fully employed, are usually holding positions in entry level jobs that pay lower wages.5 Unfortunately wage growth in the lower pay sectors have not seen any increase the likes of the white collar workers.
For most U.S. workers, real wages — that is, after inflation is taken into account — have been flat or even falling for decades, regardless of whether the economy has been adding or subtracting jobs.6
The chart above indicates that average millennial (25-35) wage stay stagnant over time compare to the 1% earning millennials.7
Lower wages is only the tip of the iceberg – what about the looming possibility of automation and increasing competition for human work? I’m not against automation but guys, the first round of this generation is going to hurt a lot of people until things are sorted out.
4) Increase in jobs instability
The big hallmark of ‘The Millionaire Next Door’ is consistency and patience. Job instability goes against that hallmark because timings and downturns are critical to dealing with building wealth. Job instability has always been higher for lower wage earners.8.
Millennials love job hopping, I did a bunch myself as well in seek of self-discovery. After my student loans were paid back, a stable paycheck was no longer my main concern at the time. That was one of the nice perks of living with mommy. For minimum wage workers, there are limited choices moving up. I didn’t have trouble being hired, my issue was the pay and promotion/career development of what are essentially jobs/gigs, not careers.
One of the marking characteristics of entry-level jobs for millennials is knowing how easy you are to replace.
After opening my eyes and feeling a bit disillusioned, I’ve dropped down from my previous status where I vouched that it was doable for any millennial. It’s doable for some with jobs in the field of computer science, biomedical and finance etc.
What gains have been made, have gone to the upper-income brackets. Since 2000, usual weekly wages have fallen 3.7% (in real terms) among workers in the lowest tenth of the earnings distribution, and 3% among the lowest quarter. But among people near the top of the distribution, real wages have risen 9.7%.9
For even Ronald Read, it would be unlikely that he could afford more than rent and necessities today – much less support his 2 stepchildren, buy a house and leave a legacy of $8 million dollars.
5) Millennials are starting out behind
It shouldn’t be a surprise that millennials are entering the workforce with a negative net worth than all the generations before them. I recall leaving university with my student debt load and hearing the rumblings of a student loan bubble. It made me anxious and a little angry. Millennials require more degrees and more years of experience for the same job that their dads got right out of college. I don’t think my education warranted that price tag. I could have learned more than 70% of my education on the web and all I needed for that was Wifi and a virtual teacher. I wouldn’t need dorms or swimming pools.
$1 in your 20s is much more valuable than $1 in your 50s.
If you know the power of compounding then you know that starting out negative has massive ramifications. If I had not come out with -$20,000 in student loans and invested that $20,000 until I was old and gray, imagine much more money I could have?
6) Forecast of lower GDP growth and market returns
In 2016, our economy grew by 1.6% using the gross domestic product (GDP) as a measure. This is significantly lower than the historical average back from the post-war period where GDP growth was hovering around 3%. Some primary reasons for the explosion of growth back then were due to production in stimulus and war-related efforts as well as women beginning to join the workforce. Jack Bogle, the founder of Vanguard, made headlines after reflecting his conclusion for the gloomier outlook of returns expected for the next coming decades.10
1) The number of millionaires has increased dramatically during the last decade.
Oh but that darn hidden snake called inflation! Jared and I were shouting random things at Google’s audio function and it spat back that a 1920s millionaire today wouldn’t have just $1 million dollars – they would need to have $10 million dollars!
I love my husband and his stupid face going “oh, so it’s like we have $100,000 instead.”
Yeah, got that, thanks honey
That’s what so tricky about stat and human research. Where is there a data that tracks the “millionaire next door” type? There’s no benchmark for that. “The millionaire next door” doesn’t have a comprehensive definition, especially in a country that can’t even seem to agree on the definition of middle class!
2) What about the 6 figure inheritance for millennials?
Rumored…6 figure inheritance!11 Higher life expectancy and higher health care cost could easily run over any inheritance that could prove to be a lifesaver.
Widening wealth gap everyone!12 It works great if parents were well to do but most lower wage-earning millennials are stuck
3) Do millennials even care about being a millionaire?
Such lies, who doesn’t want to be a millionaire?! Money sense matures as you grow. A lot of millennials may not place emphasis right now but will once the natural path of life (family, children, health, career) procures and stability begins to play a bigger role in life.
Bleak as a leak in the boat on the River Styx, am I right? But oh, please, don’t throw your hands up and give up. FRUGALITY can be powerful. Time is the biggest HERO fighting on Millennial’s side. Compound interest is powerful.
No one could fathom the future, not even with all the data and research from the past. Try to save and bet smart on your future, that’s better than surefire financial drowning.
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