Big Hat, No Cattle: Money Lessons From The Millionaire Next Door

“My business does not look pretty. I don’t play the part… don’t act it. … When my British partners first met me, they thought I was one of our truck drivers. … They looked all over my office, looked at everyone but me. Then the senior guy of the group said, “Oh, we forgot we were in Texas!” I don’t own big hats, but I have a lot of cattle.” 
— one respondent surveyed in The Millionaire Next Door

In spite of its shortcomings, I consider The Millionaire Next Door by Thomas J. Stanley the book that had the greatest influence on my approach to money.

As a lawyer, Dr. Stanley shattered my preconceived notions that lawyers were wealthy. In fact, Dr. Stanley took pains to explain that lawyers and physicians are notorious for being poor accumulators of wealth (or what he calls “PAWS”).


A Case Study of Two Brothers

There’s one case study in the Millionaire Next Door that stood out to me. It was about two brothers: Josh, an attorney, and Henry, a high school teacher.

According to Dr. Stanley, Josh and Henry’s parents are millionaires and give an annual cash gift of $10,000 to each of their adult children. The parents feel that this would help their children have a head start in life.

Despite their financial success, Dr. Stanley writes, the parents never owned a luxury vehicle, traveled abroad, or joined a country club. Instead, they ran a low-cost business and incorporated this frugality at home too. However, they mistakenly felt that their children would be better off if they were not like their parents; that if their children interacted with high-status people they would have a socio-economic advantage.

But who ended up having a higher net worth out of the two brothers? After all, Henry was a high school teacher who had a household income of $71,000 while Josh was an attorney who had a household income of $123,000 — almost twice as much as Henry.

It turns out that despite the difference in income, Henry has a significantly higher net worth than Josh simply because Henry and his wife below their means, while Josh and his wife are high consumers.

Dr. Stanley reveals that Josh’s total net worth, at the time of writing the book, is only $553,000 while Henry’s net worth is $844,000.

It turns out that Henry does not depend on the cash gift from his parents and plans to retire with ease, while Josh depends heavily on his parents’ generosity and will have difficulty retiring.

In analyzing the various occupations, Dr. Stanley points out that teachers tend to be frugal while lawyers generally overconsume. Henry is not pressured to drive a luxury car or live in a prestigious neighborhood; Josh, on the other hand, has to get new business for his firm, which requires him to drive a luxury car, wear expensive suits, and live in an upscale home where he has to entertain clients and co-workers.

The takeaway is that depending on your occupation, high-income earners are often at a disadvantage due to the culture of their profession. This is a good reality check for those who are in ‘professional’ jobs. Pretending your important is expensive.


Convenience is Expensive

The other day, I asked my fiancé, who is a nurse, why she’s so good at saving money. “I have it easy,” she replied, “I don’t have the opportunity to spend money while I’m at work. The hospital is in the middle of nowhere, everyone brings their lunch to work, and I work twelve-hour shifts. When I’m not working, I’m either sleeping or getting ready for work.”

She’s right. In contrast, I usually work eight or nine-hour days in the downtown core. I work two blocks away from one of the most popular malls in Toronto and I am steps away from an abundance of coffee shops and restaurants that I can easily grab lunch at. If I’m too busy to buy anything while I’m at work, the stores are still open when I leave for the day.

Sometimes the key to frugality is simply lack of options.


It is our Responsibility Alone to Develop Good Money Habits

When you make a decent living — I’m talking well above the poverty line — it almost seems irresponsible not to be ‘frugal’ in the broadest sense. After all, if you want to have a family — or even pets! — someday, it won’t just be you depending on you.

I don’t believe that every one can achieve the American Dream, but I feel strongly that those of us who make a living wage have much greater agency to save more and consume more ethically, to the benefit of their long-term financial goals.

In this way, I see frugality and minimalism as different sides of the same coin. Minimalism encourages us to eliminate non-essentials so that you’re left with what matters the most. Frugality is about using your economic resources as efficiently as possible: sometimes that might mean buying the cheapest option, other times it may mean spending on the most expensive option if that means it’ll last twice as long.

There’s no one-size-fits-all when it comes to how we spend our money but we can set aside time to think about how we’d like to spend our money. This is why I like budgeting: I can create buckets and then distribute my money across them depending on how much I care about each of them.

This is what led to me selling my car when I was in debt. Being stuck in student loans for longer than necessary simply because I wanted to continue paying to own a car seemed ludicrous to me. Now, three years later, I couldn’t care less about owning a car; in fact, I’m relieved that I no longer have to pay for gas, car insurance, a monthly parking spot, and the seasonal expenses of putting on snow tires, replacing windshield wipers, and getting oil and filter changes.

Living without a car has saved me time, money, and headspace. As a result, those extra savings go right into investments, short-term savings, and whatever else I want to spend money on. I also like to think I’m doing my part to help the environment.

The minor inconvenience of taking public transit or renting a car via carshare apps has vastly outweighed the economic and environmental cost of car ownership.

So what matters most to you? Is it driving a car, showing off your personality through your clothes and accessories or putting some money aside for your dream wedding?

Just thinking about how you want to spend your money encourages you to meditate on your long-term financial goals. When you get a chance, write them own. Apparently, you’re 1.2 to 1.4 times more likely to achieve them when they’re on paper.


Take Most Things…But Not Everything

The Millionaire Next Door provides hope. It encourages readers not to be dismayed if they can’t access high-income jobs. It is still possible to secure a comfortable retirement so long as you live below your means, what he calls “great defense.”

Frugal spenders tend to hold jobs that Dr. Stanley calls, “dull-normal”: teachers, mechanics, firemen, and owners of small businesses.

Now, there’s no shortage of criticism about Dr. Stanley’s research, the most obvious that it was a product of survivor bias: he only interviewed “winners” and not middle-income earners who failed or invested in the wrong things.

The Millionaire Next Door was also written during a period of time where returns on assets were huge — before the dot com crash. Also, the current economic climate is much different than when the book was published: this year, income inequality in the States has reached pre-Great Depression levels.

But, strip away the figures, and you get a compelling message: create an artificial environment of economic scarcity. Spend less than you make. Avoid a high-consumption lifestyle. Buy what will serve your needs, not what might impress others.

At its essence, money management is a series of trade-offs. Bringing your lunch to work may mean treating your spouse to a few nice dinners each month. Forgoing a phone upgrade each year may mean a family vacation at the end of the year.

That you can afford everything you want, when you want, is a total facade. Instead, look inwards — deep inwards — and determine, absent external noise, of how you really want to live out your days. Then, take a pen and piece of paper and start planning how you can allocate your resources to get you there.


Simple Recommendations

As I mentioned, I used to write a personal finance blog. Though I’ve gradually transitioned to writing about simple living and now progressive minimalism, money management will always be incredibly important to me. No matter what stage of your life — whether you just graduated from college or planning to expand your family — you’re always going to have financial goals. Here are the books who have helped me think twice about pulling out my wallet:

Worry-Free Money by Shannon Lee Simmons

This was the first book I read that advocated not making a budget. Instead, Simmons suggests, pay yourself first and happily spend the rest. If you immediately transfer your savings, make your debt payment, etc., does it really matter how much you spend on coffee or take-out? The rest is yours to use however you like.

Her contrarian take is that this facilitates a healthy relationship with your money rather than approaching it from a scarcity mindset. I tried her approach for awhile and, honestly, it helped me a lot. I learned that money is not something you have to hoard but can also spend guilt-free.

Your Money or Your Life by Vicki Robin

Admittedly, I’m only half-way into this book but it’s already made it into my top three. Vicki not only teaches readers how to better manage our finances but asks us to rethink how money impacts our relationship with others. “Along with racism and sexism, our society has a form of caste system based on what you do for money,” she writes, “We call that jobism, and it pervades our interactions with one another on the job, in social settings and even at home. Why else would we consider housewives second-class citizens? Or teachers lower status than doctors even though their desk-side manner with struggling students is far better than many doctors’ bedside manner with the ill and dying?”

Never Too Late by Gail Vaz-Oxlade

Vaz-Oxlade is the original Canadian personal finance expert. To this day, my fiancé and I watch reruns of her old cable shows where she helps people struggling with their mountains of debt. She’s tough but loveable. She insists that you need to get your shit together but that doesn't mean depraving yourself in the present for the sake of a fairytale future. I consider this the best introductory book to money management.

Lastly, if you want to ask me a question about how I budget, invest, or spend as consciously as possible, feel free to drop me a line at hello@jennifertaylorchan.com. I’ll be answering your questions in a forthcoming newsletter.

See you next Tuesday.