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

Dr. J. Stanley’s research is 23-years old but still resonates with me today.

“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

In the book, one particular case study stood out to me. It was about two brothers: Josh, an attorney, and Henry, a high school teacher.

Their parents are millionaires and give each of their children $10,000 in cash each year. They felt that this would reduce the size of their estate and the inheritance tax that their children will have to pay, and allow them to have a good start in life. Despite the difference in income, their adult children receive the same size of cash gift each year.

Dr. Stanley explained that their parents dealt with tough times in their business, which made them who they are today. They always ran a low-cost operation, which they also applied to their household.

Despite their financial success, the parents never owned a luxury vehicle, traveled abroad, or joined a country club. However, they mistakenly felt that their children would receive a key advantage if they interacted with high-status people.

Given their professions, it is obvious that Josh makes more than Henry. Dr. Stanley notes that in the prior year, Henry’s total household income was $71,000 while Josh’s household income was $123,000.

In other words, given that Josh’s household incomes was nearly twice as much as Henry’s, it would be reasonable to infer Josh would be more likely to achieve a seven-figure net worth.

However, because Henry and his wife live below their means, and Josh and his wife live significantly above their income, Henry is actually much more likely to achieve a seven-figure net worth and retire earlier than Josh.

Dr. Stanley reveals that Josh’s total net worth including the equity in his home and law practice is $553,000. But Henry, in spite of his smaller income, has accumulated a net worth of $844,000. The explanation: Henry and his wife are frugal while Josh and his wife are heavy consumers.

It turns out Henry will be able to retire easily and does not depend on the cash gift that he receives each year from his parents, while Josh will have a much harder time planning his retirement — if he can retire at all — and depends heavily on the generosity of his parents.

Dr. Stanley reveals that teachers tend to be frugal while lawyers tend to over-consume. 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 that he can entertain clients and co-workers in.

The takeaway is that depending on your occupation, high-income earners are at a disadvantage due to the culture of their profession. Dr. Stanley was accurate for the most part about lawyers: we are proud to flaunt our income. Just look at the suits we wear and the restaurants we patron.

Work Culture Matters

It’s funny, before I came to work at a legal aid clinic, I worked for the government. It wasn’t private practice but lawyers were expected to wear business casual (which really meant business) and I would go out for lunch with my colleagues every week.

I made more money but I hardly paid down any of my student loans. When I joined the legal aid clinic, which was initially on a part-time basis, my income dropped by more than 40% but I contributed twice what I did previously towards my student loans!

Because the legal aid office is smaller, it’s less hierarchical and bureaucratic and much more casual. Due to the nature of the culture at our clinic, I’m able to adopt a more frugal lifestyle.

For the most part, we wear whatever we want except when we have to be in court or at an administrative adjudicative body. Most of us bring our lunch to work and go out to eat when we’re celebrating a specific occasion.

There are also a few added bonuses that help: our Clinic has a more affordable insurance plan, so less money is deducted from my paycheque. Also, Legal Aid Ontario automatically provides an additional 5% of my income to a retirement plan without requiring that I match the amount.

I’ve been here for almost three years and I make as much as when I worked for the government and save more due to the no-frills culture of the workplace.

Our office is extremely resourceful with its budget, which extends to its employees: We provide high-quality representation to as many poor workers as we can without the frills. We don’t have fancy offices, free snacks in the kitchen, or drive to work in luxury cars.

We do, however, have the fortitude to take on powerful companies who illegally terminate vulnerable workers, emotional intelligence to empower our clients, and the perspective to recognize that we still make more than the average household.

It is our Responsibility Alone to Develop Good Money Habits

When you earn a living wage, it is almost financially irresponsible to not be frugal. After all, if you want to have a family — or even pets! — someday, it won’t just be you depending on you.

Although I am hesitant to believe that every one can achieve the American Dream, I feel that those of us who make a living wage have greater agency to consume less and save more, to the benefit of their long-term financial goals.

In this way, I see frugality and minimalism as going hand-in-hand. Minimalism encourages eliminating all non-essentials, so that you are left with what matters the most.

Frugality is about using your economic resources in an efficient manner; sometimes that may involve buying the cheapest consumer good, other times it may involve buying a more expensive consumer good if it is shown it will last longer and potentially has a high resale value.

Frugal spenders practice some form of the following tactics:

(1) Budgeting

You need a game plan for your money. Each dollar must be assigned to a specific category (rent, groceries, transit) or financial goal (wedding, kitchen renovation, outstanding debt) and you must track where that money actually went over the course of the month. In order to be successful, your household must also get on board, or at the least understand that you will be managing your money within these parameters.

(2) Writing Down Your Long-Term Financial Goals

Those who are able to vividly describe their goals are 1.2 to 1.4 times more likely to achieve them. Just taking out a pen and piece of paper and recording a successful financial future can go a long way. I look at mine almost every day and rewrite new ones every so often as things change.

(3) Target Debt First

Do not concern yourself with what stocks, mutual funds, or ETFs to invest in if you have outstanding debt. If possible, take extreme measures — on a temporary basis — to kick the debt as fast as possible. You need to approach your finances from a place of strength, not a place of economic scarcity. In order to pay off my student loans as quickly as possible, I sold my car, moved into my then-girlfriend’s tiny apartment, and got rid of most of my belongings. I also started a side-hustle, brought my lunch to work every single day, and said no to social invitations that involved dining or drinking out. It wasn’t easy but it was worth it.

(4) Wait Before You Buy

How many of us walk into a store not intending to buy anything and then walk out with something you may have wanted but certainly didn’t need? I used to do this all the time and, unsurprisingly, wound up completely ambivalent about the item one month later. Now, to minimize these occurrences, I stop going into stores that I like to shop at unless I specifically need something, and stock-pile food in my fridge to prevent me from ordering take-out. These two hacks have made me a much more intentional shopper.

(5) Reduce Big-Ticket Expenses

I used to think that life would be unbearable without a car. I had one from when I was eighteen to twenty-six. But, 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.

Going car-free 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. The minor inconvenience of taking public transit, the occasional ride-share, and renting car-shares, has vastly outweighed the burden of car ownership.

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.