The Millionaire Next Door on Misconceptions of Wealth

The Millionaire Next Door on Misconceptions of Wealth

As a society, and perhaps most of the world, we have deep-rooted misconceptions of what it truly means to be wealthy.

We think wealthy people go on spending sprees for stuff like this:


They just buy them in bulk, or so I hear.

Or they can afford to do stuff like this:


I just cried a little on the inside. Instead of burning those bills, give them to me ‘kay?

People with a 6+ figure income are wealthy. That’s how you get the money to burn in the first place, right?

Sure, those types of people above have a lot of stuff and a lot of money to burn, but that doesn’t mean that are set for life. If they truly knew how to control the amount of money flowing into their reserves, they should be able to retire right at that moment and maintain the same lifestyle of heavy consumption indefinitely.

Another way Dr. Stanley and Dr. Danko, the authors of The Millionaire Next Door, define wealth is by net worth.

Net worth: value of your assets (e.g. investments, cash in your checking account, any houses you know you lucky college student)-value of your liabilities (e.g. that pesky student loan debt)

Dr. Stanley and Dr. Danko define two groups of people, asides from the average accumulator of wealth, into these groups:

PAWs: prodigious accumulator of wealth—they get the whole personal finance thing

UAWs: under accumulator of wealth—they need some training (or perhaps in college)


So, how do PAWs get to where they are now?


  • Save most of their money

Sometimes even up to 70% of their income

  • Or just get a job that makes boatloads of money and save some of it

If you’re making $1,000,000 a year and just save 15% of it, you are saving $150,000 a year. While you might not be able to maintain the same lifestyle that requires you to spend the rest of your money after taxes, you’ll probably still be comfy compared to everyone else.

  • Invest in something

Dr. Stanley and Dr. Danko make a great point that you should invest in stuff you know about. Great at fixing up houses? Planning on going into the pharmaceutical business and understand medical studies? Then you can invest in those fields (e.g. housing, pharma stock).

Proceed with caution though and don’t get too full of yourself though. I’m sure a lot of people who were the best at fixing up houses got screwed over by the Recession. Be sure to understand the risk you take when undertaking an investment, even with your special knowledge.

As a college student, it can be difficult to plunk a lot of money down in a huge investment like a house. A great way around this obstacle is to start a side hustle. You’ll learn a lot of new skills and gain a lot of experience.

  • Don’t rely on others (especially parents) to prop them up

I think this is a super important point for college students. Even if you are receiving assistance from your parents to go to college, don’t go on a spending spree with money that is not actually yours.

I’d love to eat out once every week to escape cafeteria food, but that doesn’t mean I need to spend my parents’ money to do so. Since the money I make from my job is limited (and I value investing earlier more than eating out every week), I have limitations on my spending.

I’d love to eat sushi every day <3

I’d love to eat sushi every day <3


How do you know where you stand?


Dr. Stanley and Dr. Danko provide this simple formula to gauge how much your net worth should be:

“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be” (page 13)

The formula above determines what the average amount of net worth you should have currently. Being significantly above their prescribed net worth makes you a PAW and below makes you a UAW.

If I apply this formula to my situation, I make $2,000 in an academic year because of work-study (pretax annual household income)*19 (age)/10=$3,800

My current net-worth: around $1,500 (current value of my investments+cash-student loans)

Of course, as a college student, I am certainly not in the ideal situation. My net worth has to increase by 60%.

I’m working on side hustles to improve that number and getting good grades/extracurriculars to earn more in the future. Even if I am currently below the ideal net worth, college is a perfect time to work on my PAW habits so that the increase in income does not correspondingly increase spending.


I highly recommend The Millionaire Next Door. You can get it on Amazon here* or, better yet, make use of your local library like I did. It’s a great way to orient your perspective on what it actually means to be wealthy money-wise. And what better time to learn this than while we’re still young?

*Not an affiliate link

Walkthrough: Why You Should Invest Excel Sheet

Walkthrough: Why You Should Invest Excel Sheet

I made this Excel sheet for my post What is Financial Independence? to show why it is extremely important to invest. It was a lot of fun to put together and I would love for this to be useful for others. To learn how to use the Excel sheet and the math behind it, here’s a short walkthrough on its functions:


Checking Account, Savings Account, Historic Stock Market Returns


These are just examples of the different places you can put your money. If you change first row with the investment names the corresponding row with the different time horizon will change as well. As a general rule of thumb for this sheet, if you change something in the top time horizon section, the bottom will change as well.


Interest Rate


The first interest rate row can be changed to any percentage and the second interest rate row will change correspondingly. These percentages reflect what you can earn by putting your any away in different types of investments.


Some Things to Take Note of:


I assumed that the investment was undergoing compound interest annually.

Compound Interest: this is interest calculated based on the starting amount and any subsequent interest added to the starting amount as time goes on.

For example, if you have $1,000 to start off, your investment will gain $10 more dollars at 1% interest at the end of one year. At the end of the next year, your investment will gain $10.10 more because the calculation is based on the $1010 from last year, not just on the initial $1000. You end up with $1020.10 at the end of two years.

Einstein is rumored to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” The “pays it” part sounds a lot like student loans.

For the people who like math out there: the formula I used was (starting amount)*(1+investment return)^time horizon.


Starting Amount


You can change the top starting amount and the bottom one will change to be the same. The purpose of this excel sheet is to compare how much more you will make based on the length of investing X amount of money.

I also made an excel sheet that is a bit more complex and shows the results of investing different dollar amounts. I’ll update this post with a link to that Excel sheet when I have it finalized.


Time Horizon


Either the top or bottom values can be changed to different time amounts (in years).


Percent/Amount Increase


The percent and amount increase are automatically calculated. People are always looking for the best returns on their investment. By investing in the stock market for just four more years, you can make 31.08% more.




It is super important to note that these are expected returns. You might not make $310.80 by investing in the broad stock market in just four years. It’s also possible you will lose money. The historic stock market return is over the long-run, not just a mere four years. Proceed with caution by educating yourself in personal finance and making your own decisions wisely.


Thanks for using this Excel sheet! Hopefully it helps you visualize the impact investing earlier has in the long run.

What is Financial Independence?

What is Financial Independence?

To start, financial independence (FI, for short) does not just mean you get a stage in your life where you don’t have to mooch off your parents because you make enough money.

FI is any person’s access to living—both young and old alike—without worrying about money. The common FI gauge is a hypothetical situation:

If you were fired/quit your job today, would you be able to live in retirement with a similar lifestyle indefinitely?

If the answer is yes, then you have reached financial independence—independence from your job, from constrains on your time, from worrying about your financial situation, from living paycheck to paycheck.

But geesh, that sounds like you need a lot of money, especially when having a couple thousand dollars even sounds like a lot of money.

However, FI is achievable and many people have reached this stage in their life by following this simple (and insanely difficult principle when it comes to finances): live below your means and invest the difference. Instead of providing a how-to-guide for FI in this post, I will break down what those eight key works mean for to achieving FI, particularly for my fellow college student.


Live Below Your Means


Or in other words, do not spend more money than you make. It’s always a good rule of thumb to live by but there are some things that seem to require living beyond our means.

We all have heard the stories. Students graduate with an average of $35,000 in student loans alone, not to mention the poor souls lost to credit card debt. We spend thousands of dollars on tuition, yet work for pocket money to burn. These four years are an odd time financially, and certainly an unhealthy way to start off adulthood. Full-ride scholarships are great but sometimes (*ahem* most of the time) you end up having to take a small fortune out to go to school.*

With juggling so much debt and studies and life, how in the world do we live below our already small means? The approach is two-faceted:


Live Below


You have to save like crazy as a college student, which usually translates to not buying stuff (see this SNL video for inspiration). This means turning down a meal off-campus in favor of using up all your meal swipes/points/whatever your college calls them. This means getting a used clunker instead of a chic insert-sexy-sounding-name car. This means forgoing that onesie you were going to get to make everyone laugh when you are acting as a drunken fool (trust me, the drunk part is plenty funny on its own). It means cutting out any unnecessary spending and asking yourself the tough questions: Do I actually need this or do I just want it? Does this add value to my life (this is where the onesie die-hards will probably disagree with me)? What am I compromising in my life to get this item? If I really need this, is there a way I can get this cheaper? These are tough questions, but no one said that achieving your dreams and being financially secure was easy.

My friend’s version of “eating out:” the ultimate improv dorm kitchen.

My friend’s version of “eating out:” the ultimate improv dorm kitchen.


Your Means


More often than not, our means are part-time jobs. On-campus jobs (work-study or not) have been the best for my situation, since travel time is minimal (it’s a twenty minute walk to downtown from my dorm whereas my on-campus jobs are only seven minutes away) and the work is chill. For one of my jobs, I can take one hour lunch breaks, do my homework, and have amazing, long conversations with everyone who walks into the office (a.k.a. I have the best boss ever) while getting paid for work-study. The other one is a lot more demanding. I call people and ask them to donate to the college. Not the most fun job, but has better pay and I learn how to successfully make cold-call sales.

Part-time jobs alone do not cover tuition, room and board though. So how in the world do we pay for college?

We all know the drill: Scholarships! Grants! Loans! Work-Study! Parents! Jobs! ROTC! College is a huge expense and the cost of attending college has been rising faster than inflation.

Debt and tuition are higher than those caps.

Debt and tuition are higher than those caps.

Debt woes aside, our method for affording college can also be considered as part of our means since without that $100 scholarship or loan or grandma’s gift, we would not be able to attend school.

Other than traditional part-time jobs and sources for paying for college, it’s also important to think outside the proverbial box. Side hustles are the most popular unconventional choice. Make an app. Design a new product and market it. Write a book. It doesn’t matter what your side-hustle is (so long as it’s legal) but hustle, hustle, hustle in your free, non-studying time to get it out there. This is also a lot more fulfilling than working a shift in the office twiddling your thumbs or dealing with annoyed alumni.


Invest the Difference


This is by far the most hotly debated topic in FI. As a college student, I struggle with just the first part of the equation (spending and making) but the investing part is just as important. Right now, I make -$2000 a year going to school, and that’s a lot more than a lot of other college students. As a broke college student, it is important to understand why we should all start doing investing this very moment.

To get a better idea, take a look at this chart:**


The numbers really say it all. You can have $407.39 more down the line if you start investing in the broad stock market now (assuming a conservative 7% in the long-run, which is less than the historic market return of 8%).

Still not convinced? Check out the graph below mapping the different ending values over the years for $1000 in the stock market:


$1,000 grows +$4,000 more by invest for just four more years. The only difference here is time.


Of course, you also have to pay back your debt—both student loans and credit card. This can also be considered investing. You have to pay the loan off, so why not pay it off earlier and save yourself additional interest?

Whether you should invest and just pay minimum payments on your student loans or just pay them off as fast as humanly possible is rather complex. You’ll have to make a judgment according to your specific case.


No matter the income/budgeting/investment method used for gaining FI, the basic principle remains the same:


Live below your means and invest the difference.

It’s difficult, but crucial, and the time to start asking yourself those hard questions is right this second.


*To be perfectly transparent from the get-go, I have a $4,000 loan and $2,000 in work-study while my parents pay ~$6,000.

**The numbers derived in this chart come from my own calculations. I built a model for comparing interest rates and time horizons in Excel. You can download it here: xyzeconomics_investasap. I encourage you to play around with the numbers.

Journey Start

Journey Start

Adulthood is mysterious and strange and all so damn expensive. College for us newly legal adults is an especially tricky financial time. While learning really cool, sometimes obscure theories and facts, developing critical thinking skills, and stressing over a 50 page thesis, we also have to learn how to manage money.

Within the common concerns of finding a job, paying off loans, whether to eat out, and finding cheap textbooks lies perfect opportunities to develop money habits for the future.

So if you have ever struggled with money in college, XYZeconomics is the best place to find answers. As a current college student who just finished freshman year, I have learned very valuable lessons on how to enjoy your college career without killing your bank account. Join me in my journey towards financial independence. Let’s figure out how to adult together.