Three Lessons from The Millionaire Next Door

The Millionaire Next Door is my favorite personal finance book because of three life-changing lessons it imparts, all supported by mountains of research data gathered and analyzed by two professors, Thomas Stanley and William Danko.  These lessons provided me with a financial enlightenment when I was first learning the basics of personal finance, and I suspect many of you will find at least one of them encouraging, challenging, or both.  These lessons taught me to have a new attitude regarding personal finance, and I hope they do the same for you or your loved ones.

Lesson 1:  The majority of millionaires differ radically from what the media and marketers have you believe.

I grew up on a steady diet of TV and, as you know, advertisers and marketers feed you a stream of images and depicting what the rich are supposed to look like.  Of course, their message equates buying their products and increasing consumption with living like a millionaire.  The Millionaire Next Door shatters the notion that the average millionaire consumes the latest and greatest.

In reality, the average millionaire lives a nondescript life and lives in an average neighborhood. This is logical, as over-consuming would lead one to have less money to save an invest.  Stanley and Danko acknowledge that deca-millionaires, the extremely rich, can afford to consume and live up to the images portrayed by advertisers, but this segment of the population is extremely small.  You are more likely to find the ex-millionaire who has spent their fortune away than you are to find a deca-millionaire who can afford to live an extravagant lifestyle.

Lesson 2:  You will not acquire financial independence as long as your sole source of income involves trading time for money.

Many Americans grow up with the idea that working an 8-to-5 is the only way to pay for life. This mentality is one I grew up with and fails to consider what happens if injury, chronic illness, or another circumstance interrupts your employment.  More importantly, this mentality forgoes any consideration of financial independence, as it assumes one must be an employee their entire life in order to sustain a lifestyle.

You will never acquire financial independence without acquiring assets that appreciate without realized income.

-The Millionaire Next Door

Having assets (savings, investments, businesses, etc.) work for you allows you to achieve financial independence as these assets working for you reduce or remove your dependence on realized income (income you earn via employment).  The more assets you have working for you, the more likely you are to achieve financial independence more quickly.  Think of Dave Ramsey’s debt snowball here, but instead of debt, consider an “asset snowball.”

Lesson 3:  The American dream is alive and well.

We’ve all heard in the media many times that it’s impossible for the little man to get ahead, with stagnant wages, a tepid economy, and any number of other reasons.  The Millionaire Next Door provides all Americans with hope:  The vast majority of millionaires are first generation millionaires, having built their fortunes without the benefit of an inheritance.  That’s right, most people who become millionaires are not trust fund babies and do not have a leg up on the rest of us.  The majority of them live below their means, save, and then invest their way to wealth. The American dream is indeed alive!

Psychology and Fear in Personal Finance

Be fearful when others are greedy.  Be greedy when others are fearful.

-Warren Buffet

Warren Buffet is one of the most successful investors of recent times and provided this great quote in 2008 during the height of the subprime mortgage crisis.  During the 2007-2009 bear market, the S&P 500 lost over 50% of its value and many people close to retirement had to delay their exit from the 9 to 5.  In hindsight, as we sit in the middle of a bull market in 2016, Buffet’s quote is great advice, but how are you supposed to separate yourself from emotion when your nest egg loses over 50% of its value?

S&P 500 2007 - 2009 Bear Market

S&P 500 2007 – 2009 Bear Market (courtesy of Yahoo Finance)

There is no easy answer here, as personal finance is indeed personal, but you can certainly make good, informed decisions in the middle of emotionally charged circumstances.  Buffet was right about the subprime mortgage crisis and the need to buy while prices were low (i.e., while the market had lost lots of its value).  He likely looked at the history of the market and understood that it would bounce back.  As of September 16, 2016, the S&P 500 sat at 2,139.16 versus its lowest value during the subprime mortgage crisis of 676.53 on March 9, 2009.  As you can see, the market has more than returned.

S&P 500 - 2007-September 16, 2016

S&P 500 – 2007-September 16, 2016 (courtesy of Yahoo Finance)

How do you disarm fear and anxiety in personal finance?  Educate yourself.

Peace I leave with you; my peace I give to you. Not as the world gives do I give it to you. Do not let your hearts be troubled or afraid.

John 14:27

How should you manage fear and anxiety when making financial decisions?  Start with education, then don’t stop educating yourself.  Read personal finance books (I highly recommend The Millionaire Next Door), visit personal finance blogs (Afford Anything is my current favorite), and listen to personal finance podcasts (Marketplace is great for keeping up with current financial events; Afford Anything has a great podcast, too).  I’ve found that I pull pieces of information from each of these sources and, as a result, have molded a personal philosophy.

The key lesson here is that education will help you see that American equity markets have more than recovered from the multitude of previous crashes and bear markets.  Buffet understood this and saw that equities were simply on sale.

How else do you disarm fear and anxiety?  Understand risk and reward.

I recently listened to a personal finance podcast where I heard an interesting anecdote involving fear.  A caller indicated they hadn’t invested in the stock market for retirement due to their fear of losing money.  While the caller certainly is correct that avoiding the stock market and investing in something safer, like CDs or cash, will help you avoid risk and the large losses that can accompany risk, he is also missing the other half of the equation:  In finance risk is necessary for growth.

While the caller will seemingly preserve capital by avoiding the volatility of the stock market, their capital will erode over time due to the effects of inflation.  The eroding power of inflation will decrease buying power if not offset by gains.  One option for generating more gains than cash but experiencing less volatility than the stock market is the bond market.  The bond market, though, experiences a good amount of volatility, too.

While someone can certainly go to sleep peacefully knowing they will avoid the volatility of the stock market and keep their money safe (at least until inflation eats away at it), it would be rash to do so without being aware of the rewards that accompany carrying risk.  Over the past 30 years (specifically from January 1, 1985 through December 31, 2015), the compound annual growth rate of the S&P 500 was 8.2% with dividends reinvested and adjusted for inflation.

S&P 500 - CAGR for past 30 Years

S&P 500 – CAGR for past 30 Years (courtesy of

As you can see, $1 invested in an S&P 500 index fund on January 1, 1985 would have returned over 1,100% in 30 years.  While I can see how avoiding significant losses would allow someone to sleep peacefully, avoiding a significant amount of the S&P’s gains during this time period would cause me to lose sleep at night.  My advice to the caller:  Educate yourself about risk and reward, then understand how accepting additional risk could result in your nest egg multiplying in size.

Investment+Savings Challenge

One of my personal financial goals is to become financially independent.  For those unfamiliar with the term, I define financial independence as follows:  A state in which financial assets generate sufficient income to pay for a chosen lifestyle.  In layman’s terms:  More assets = good, combined with fewer expenses = better.

Financial Independence = Passive Income Generated by Assets > Expenses

I am seeking financial independence so that I will have the freedom to walk away from my current or future job should I need or want to in the future.  One example of when I would potentially want to walk away from my job:  My spouse and I have a baby and we decide that my staying home with the child is our preferred option for care taking.  While I absolutely love my job and my career, financial independence allows for many options in the future that being tied to a 9 to 5 does not.

One key step in achieving financial independence is increasing investment and savings rates. Not only does this increase the amount of assets you have working for you by generating passive income, but you decrease your expenses, thereby accelerating the journey to financial independence.

I’m going to start tracking my investment and savings rate on this site, starting with August 2016.  My investment+savings rate is based on my *gross* income.  Also, I’m including in gross income my employer’s 401(k) contribution, as they give me a portion of my salary each month.  This isn’t a match, but a contribution to my 401(k), so I view it as income and include it in my gross income so that my savings+investment rate isn’t disproportionately inflated by this contribution.

August 2016:  40.29%




Considerations for Investing as a Catholic, Part 2

In my previous post regarding things Catholics should consider when investing, I spoke about one mutual fund family (Ave Maria Mutual Funds) as an example of a fund family that offers investments that abide by United States Council of Catholic Bishops (USCCB) guidelines.  There are certainly other fund families that abide by USCCB guidelines and I wanted to mention some of them here.

Note:  I do not currently have money invested in Ave Maria funds nor in any of the other fund families I am about to mention.  Yes, you’re right:  As a good Catholic, I should strongly consider moving my money to somewhere other than the Vanguard funds where my IRA money currently sits.  I am searching for a good Catholic mutual fund with low fees, so if you know of any, let me know!

Luther King Capital Management (LKCM) has the LKCM Aquinas Catholic Equity Fund (AQEIX) that abides by USCCB investment guidelines.  The fund, though, has consistently under performed its category average.  Its expense ratio of 1.50% makes it a very expensive fund to hold.

Epiphany Funds has three funds to choose from, all of which have high total expenses.  These funds are very small and this is likely the reason for the high expenses.  The Epiphany Fund family

Index Fund Advisors provides a list of Catholic index funds on its web site.  I do not see ticker symbols for these, so I am not able to judge their performance very well, although they appear to perform relatively well.  The expenses for investing with IFA appear to be significant (0.90% annually for accounts with less than $500,000, plus quarterly fees), so be aware.  I like the variety of target date funds IFA provides, as this makes it easier for investors of any age to find an index fund suitable for their stage of life and risk tolerance.

As I mentioned in Part 1, high expenses are the norm for Catholic mutual funds and are the price we pay, at least for now, to abide by USCCB guidelines. Until these Catholic funds gain more assets under management, these high expenses will likely continue.  In the meantime, if you choose to invest in any of these funds, give yourself a pat on the back.

USCCB Socially Responsible Investment Guidelines:

Considerations for Investing as a Catholic

In a previous post I recommended investing in index funds in order to minimize expenses and better increase your nest egg.  Unfortunately, though, many of the companies contained within a standard index fund conduct activities that are in opposition to Catholic teaching.  For example, the owner of Rick’s Cabaret strip clubs, RCI Hospitality Holdings (RICK stock ticker), is held by, among others, Vanguard Total Stock Market Index Fund (VTSMX and VTSAX).  When you purchase shares in VTSMX or VTSAX, you purchase fractions of shares in the owner of Rick’s Cabaret.  So what is a Catholic to do?

Educate yourself regarding Catholic investing guidelines and make informed decisions.  The United States Council of Catholic Bishops (USCCB) released “Socially Responsible Investment Guidelines” in order to provide guidance on this topic:


In summary, we have a moral responsibility to avoid investing in organizations that operate in opposition to Catholic teaching.

But, how is a person supposed to navigate through the hundreds or thousands of funds an index fund, much less multiple index funds, invest in?  Thankfully, Catholic mutual funds exist and do this work for us.  Ave Maria Mutual Funds is an example of one of these companies and Ave Maria has two funds, the Ave Maria Rising Dividend Fund (AVEDX) and the Ave Maria Growth Fund (AVEGX), that are rated well by Morningstar.  The 0.92% expense ratio for AVEDX and the 1.17% expense ratio for AVEGX are very high, though, in comparison to Vanguard’s fund lines.  Working against Ave Maria in this case are the active management they have to perform for both funds, as fund managers must weed out non-Catholic organizations, and the sheer size of Vanguard funds, as Vanguard can drive their expense ratios lower (VTSAX has an extremely low expense ratio of 0.05%!!!) due to VTSAX’s $141 billion in holdings versus AVEDX’s $789 million in holdings.

Catholic investors can look at the 0.85% difference in expense ratios between VTSAX and AVEDX and know that the extra money they are paying is helping to build the kingdom.  That being said, I really wish Ave Maria would consider lowering their expense ratios, as the extra 0.85% in expense makes a huge difference over time.

If you were to invest $10,000 into VTSAX with no future investments, a 7% rate of return, and the 0.05% expense ratio, in 30 years you would have $74,989.  (Calculations done on

Investing in VTSAX


If you were to invest the same $10,000 in AVEDX with no future investments, a 7% rate of return, and the 0.92% expense ratio, in 30 years you would have $57,689.  That’s a difference of $17,300 when your investment compounds over 30 years.  That extra 0.85% in expenses wasn’t so small after all.

Investing in AVEDX


Unfortunately, until Ave Maria Mutual Funds has more money under management, it will likely not be able to leverage economies of scale in order to reduce expenses.  We meet our initial goal, though, of putting our money into investments that comply with Catholic social teaching, and this is certainly worth some extra expense.

Why You Should Use Index Funds in Your Retirement Accounts

When I first started learning about investing and retirement accounts, I struggled to determine where I should invest my money.  Thankfully, several great personal finance web sites (including Motley Fool and Bogleheads) agreed that investing in index funds led to the most benefit for most people.  Index funds are mutual funds that track what is called a market index, like the Standard and Poor’s 500, and maintain small slices of companies in proportion to the companies’ share of the index.  For example, if Apple currently makes up 2% of the S&P 500, an S&P 500 index fund would place 2% of its holdings in Apple.

Why is indexing preferred over investing in actively managed funds, where fund managers buy and sell stocks on a frequent basis?  The frequent buying and selling of stocks generates commissions for the fund managers and their companies (this is your money going to pay the fund managers).  Additionally, there are often fees associated with the initial purchase of actively managed funds.  At the end of the day, actively managed funds must increase in value not only to match the gains of index funds, but also to cover actively managed funds’ much higher expenses.

Study after study indicates that index funds outperform actively managed funds:

I recommend Vanguard Funds ( for index funds, as Vanguard’s funds have the lowest expense ratios.  One fund that is highly recommended by many proponents of indexing is Vanguard’s Total Stock Market Index Fund (VTSAX), which has an extremely low expense ratio of 0.05%.  In comparison, many actively managed funds have expense ratios of over 1.00%.  While this extra percentage point may not seem like a lot, when compounded over time, this extra 1.00% may result in you paying fund managers tens of thousands, if not hundreds of thousands, of dollars that could have been used to grow your retirement nest egg.


Great Personal Finance Podcasts

One of my favorite things to do on long drives is listen to personal finance podcasts.  There are a handful that I have found (so far) to be better than the rest:

My favorite podcast is Afford Anything with host Paula Pant, as she combines an entertaining delivery with great guest speakers.  Paula encourages listeners to both increase their incomes while decreasing their expenses (increasing the “gap”).  Her focus on increasing income differentiates her from many, many other personal finance bloggers who put a great focus on limiting expenses and frugality.  I certainly think both are important, but Paula’s focus on making the gap bigger blows past the flawed binary view on many blogs that we should focus on either increasing income or reducing expenses, but not both.  Paula provides a ton of insight, too, into real estate investing.  I definitely, definitely recommend the Afford Anything podcast.

The Mad Fientist podcast focuses on reaching financial independence.  The Mad Fientist provides some original (to me) ideas:  How to use a health savings account (HSA) as a “super IRA” account; how to minimize taxes when investing in retirement accounts.

The Dave Ramsey Show podcast is targeted more toward people trying to get their financial house in order, but it is still very motivational.  Dave Ramsey releases three hours of the show every weekday, so there’s plenty to listen to.  My favorite segments are Dave’s millionaire theme hours, where millionaires are interviewed and insights are provided into their spending, saving, and investing habits.

Financial Peace With the Prince of Peace

My favorite mantra delivered by Dave Ramsey is the one that he uses to end his radio show:

The only way to true financial peace is to walk daily with the Prince of Peace.

Our lives should be focused on primarily serving our Lord, our comfort and our King.  Today’s morning prayer from the Liturgy of the Hours speaks of the peace the Lord provides:

Alone with none but thee, my God,
I journey on my way.
What need I fear, when thou art near,
O King of night and day?
More safe am I within thy hand,
Than if a host did round me stand.

My destined time is fixed by thee,
And death doth know his hour.
Did warriors strong around me throng,
They could not stay his power;
No walls of stone can man defend
When thou thy messenger dost send.

My life I yield to thy decree,
And bow to thy control
In peaceful calm, for from thine arm
No power can wrest my soul.
Could earthly omens e’er appal
A man that heeds the heavenly call!

The child of God can fear no ill,
His chosen dread no foe;
We leave our fate with thee, and wait
Thy bidding when to go.
‘Tis not from chance our comfort springs,
Thou art our trust, O King of kings.

As we seek to improve our financial lives, let us always remember to first find peace in the Prince of Peace!

Measuring Progress – Tracking Net Worth

As we budget, save, grow our income, and practice self-control in spending, it’s important to have a method for tracking progress.  After all, if we are indeed working to improve our financial lives, shouldn’t we have a way to measure our improvement (or regression)?

I have a coworker who has turned into a terrific friend and we’ll often talk personal finance in our downtime.  He shared with me his primary method for tracking progress in his financial life:  Tracking net worth.  This was definitely a “light bulb” moment and something I started doing (in November 2012) after we had the discussion.

In summary, you list your assets, list your liabilities, and take the difference, which gives you your net worth.  I calculate (actually Microsoft Excel calculates) my net worth every month and this lets me see how I’m doing financially.  Increasing the value of my assets or decreasing debts will send my net worth in the right direction.  Alternatively, keeping monthly tabs on my net worth lets me see where I might be slipping and hurting my net worth, giving me the chance to correct bad habits.

The following is the Excel spreadsheet I use to track my net worth:

Net Worth Spreadsheet

Net Worth Spreadsheet

If you would like to download this spreadsheet, click here.  The spreadsheet includes some simple formulas, including what percentage each asset comprises of each asset category.  Columns F, G, and H detail my net worth history and columns J through P detail what comprises the net worth value.

Categorizing your assets and liabilities can turn into an exercise, as you’ll need to consider whether certain items are assets, liabilities, or both.  For example, you could list your home’s equity as an asset, but you’ll also want to list your mortgage as a liability due to it being a debt owed to the bank.

As you keep track of your net worth, I think you’ll find a sense of accomplishment if you’re growing your net worth.  This will provide added motivation to steer your financial ship properly.  If you’re going in the wrong direction, use this as a tool to help identify what’s driving your loss and what you can do to fix it.  Good luck!

The Debt Snowball

One of my favorite concepts from Dave Ramsey’s Financial Peace University (FPU) is the debt snowball.  The debt snowball is the second of Dave’s baby steps to financial peace and is a technique for paying off debt that pays off the smallest debt first, the next smallest debt next, and so forth.

The debt snowball starts with you listing all of your debts.  You then pay the minimum on all your debts except for the smallest debt.  With the smallest debt, you pour all of your excess cash to paying it off.  An example:  If you have a $40,000 student loan, a $2,500 credit card bill, and a $15,000 outstanding balance on a new car, the debt snowball technique has you pay the $2,500 bill first, the $15,000 bill second, and the $40,000 last.  While you’re paying the $2,500 credit card bill, you continue making minimum payments on the two other debts.  The end result is that you pay off the smallest debt quickly.

You may have noticed that I made no mention of considering interest rates when determining which debt to pay first.  From a mathematical perspective, it certainly makes more sense to pay off debt with the highest interest first.  Dave Ramsey teaches, though, that if personal finance was strictly a mathematical issue, hardly anyone would be in debt.  On the other hand, Dave recognizes that personal finance has a large behavioral and psychological component to it.  By paying off the smallest debt first, you receive a psychological victory that rewards your discipline.  Having achieved this small victory, you’re then more likely to stick to your debt reduction plan.  You then focus on the second debt and gaining another psychological victory.