Several people have asked for personal finance book recommendations lately, so I’ll to start with the book that got me started thinking about spending, saving, and investing.
Throughout high school, I worked at various jobs and spent whatever I earned. If I earned more, I spent more. If I worked less, I spent less. I don’t recall consciously deciding to adjust my spending up and down; I just spent whatever was in my pocket (or bank account).
Reading The Millionaire Next Door changed that. The authors (Thomas J. Stanley and William D. Danko) interviewed hundreds of millionaires and shared their findings in the book. The overarching theme was to live within one’s means and the book criticized mindless consumption or spending to “keep up with the Joneses.” The book didn’t just advocate frugality though, as it did encourage readers to spend money on quality goods and services outside one’s area of expertise (ie. buy a good pair of shoes that will last or pay a professional to fix your plumbing). On the income side, the book illustrated the benefits of owning a business and spending time learning about and managing investments. The book is light on actual advice, but I believe it provides a great foundation for understanding personal finance.
While the book made an implicit assumption that foregone spending should be saved and invested, the larger takeaway for me was that approaching spending thoughtfully provides flexibility to do what you want (whether that’s to save for future consumption, having money to buy memorable experiences, save for investing, better provide for one’s family, or give and donate). I’m not sure there’s inherent value in becoming a millionaire, but there is value in spending more intentionally.
The book is not without it’s critics. A primary criticism is that the authors’ study of millionaires suffers from survivorship bias. In other words, many people work hard, start businesses, live within their means, and so on, but not all of them become millionaires. But the authors only interview the millionaires who may misattribute their wealth to the aforementioned factors, while ignoring other common factors like the region or era in which they lived or simple luck.
It’s been about 20 years since I first read the book and 15 years since I began working in financial services. Although the critics have valid points about survivorship bias and perhaps the book’s lessons will not guarantee financial success, it is very difficult to achieve financial success without the book’s lessons. Thus, even though it is not an educational or “how-to” book, I believe The Millionaire Next Door is a great introductory read for those interested in learning more about personal finance.