David

Aldridge
Personal Finance
04/20/2015

The Millionaire Next Door e-portfolio assignment

1.) Explain the following four (4) concepts addressed in The Millionaire Next
Door:
Big Hat, No Cattle - This phrase is a way of referencing people who have a perception of
wealth through physical items, but have actually have very little net wealth.
Go to Hell Fund This fund is an accumulated wealth where one can live without working
for ten or more years. This fund is usually provided by liquid assets.
PAW prodigious accumulators of wealth. They are the best at building net worth compared to
others in their income/age category. Typically they have more than four (4) times the wealth as
under accumulator of wealth.
UAW under accumulators of wealth. This category is for the bottom quartile. If you take your
age times your realized pretax annual household income from all sources except inheritance and
then divide by ten, this is what your net worth should be according to this book.

2.) Provide short answers to the following four (4) questions:

How is wasteful defined in the book? a lifestyle marked by lavish spending and hyper-
consumption. A person who is wasteful would not live within a reasonable means or be
frugal. A wasteful lifestyle would be seen that one needs a high status and high consumption
lifestyle.
What is the cornerstone of wealth-building? The book describes the cornerstone of wealth as
being frugal. This concept is repeated throughout the book in many different examples. The
book helps you understand that being frugal doesnt mean going without, you can be frugal and
still have a very handsome lifestyle. For example, do you always have to buy a new car? Or is a
used vehicle what you prefer to buy? Both would more than likely do what you need them to
do, however, one of them will allow you to gain wealth, while the other lets you perceive
wealth.
Most people will never become wealthy in one generation if they are married to people who
are- Most people who are married to someone who are wasteful will not be able to achieve

wealth in one generation according to the book. The reason being is because of the need to
support the wasteful individuals lifestyle. A couple cannot accumulate wealth if one or both are
hyper-consumers. It has to be a philosophy that both believe in.
Upon giving his wife $8 million of stock, from taking his company public, what did his wife
continue doing? The book gives a great example of a wealthy person who continues to show
frugality even though her husband just gave her $8 million worth of stock. She didnt go out and
buy lavish things, she continued to do as she always did and live frugal, even so much as to
continue cutting coupons in order to save money.

3.) In the example of Theodore teddy J. Friend and his parents, answer the
following two (2) questions:
List two reasons why Teddy is considered a UAW The book gives numerous examples as to
why Teddy is considered a UAW, but the one that initially stands out to me is he is an ultimate
consumer, meaning he is possessed by his possessions. He is always concerned about what
other people think about him and his outer appearance. Teddy, like so many others, spent his
money living up to a lifestyle that he thought it should be at. Teddy has two boats, a jet ski, and
six cars even though there are only three drivers in the household. Teddy also lacked frugality,
as just noted. Frugalness doesnt equate to going without per say, it equates to know the
difference between a need and want, and making sure those wants are within reason. Teddy
has a net worth that is less than one-fourth of what his expected wealth of his income/age
category should be.
What was the message Teddys parents sent him about consumer behavior? Teddys parents
were people who earn to spend. When you need to spend more, you need to earn more.
Teddys parents made a modest living; however they spent most of their income on, as the book
put it junk. The problem with this thought process is it creates an artificial bubble that is
unable to sustain over the life.
What was the call change Teddys parents could have made that would put them in the
millionaire category? Teddys parents were both smokers, consuming about 3 packs a day for
46 years. If the couple would have invested the money they spent smoking into shares of the
tobacco company that produced their favorite cigarettes, they would be worth more than $1
million today. This goes to illustrate that a small change compounded of a long period of time
can make a huge difference.

4.) In the example of Mr. W. W. Allan, answer the following two (2) questions:
He never extended credit to people who exhibited the Big Hat, No Cattle philosophy, Why?
Mr. Allan believed that such people would never be able to repay their debt because of their
spending personality. These personalities spend, spend, and spend in anticipation of having
money before they even earn it.

Why did he decline the gift of a Rolls-Royce?- The perceived image of owning one of those and
what others may have thought was one of the reasons he declined the gift. He believed that
owning this type of vehicle, or status artifact would project an image of him which simply
wasnt him. The Rolls-Royce did not represent anything to him that is important in his life. The
car was impractical for things he thought were important such as fishing.

5.) Regarding Economic Outpatient Care (EOC), answer the following four (4)
questions:
Define Economic Outpatient Care (EOC). Economic outpatient care refers to the gifts of
substantial amounts that some parents give their adult children and grandchildren. Usually
these acts of kindness then become expected.
Like the example of James many EOC receivers (inaccurately) view themselves as ___. Many
EOC receivers, like James, view themselves as self-made. About 66% of adult children of EOC
view themselves as part of the I did it on my own club. The members of the club typically live
by the fundamental rule of EOC recipients that it is easier to spend others money than ones
that they self generate. In laymen terms, if you dont have to work for it, then you dont put as
much if any value on that dollar.
As illustrated in the example of Henry & Josh, what is the fundamental rule regarding wealth
building? (Be specific.) The fundamental rule of wealth building is living below your income
level. Regardless of what your income is, if you live below your means, you would see a positive
worth. Henry was a teacher whose salary was minimal compared to Josh. Henry learned to live
below his means. This led to him having extra cash to invest which would lead to a comfortable
retirement. Josh was an attorney whose salary was more than twice that of Henrys, but Josh
lived above his means. This didnt allow Josh to invest which caused his net worth to be
significantly less than Henrys, even though he earned twice as much.
Why did Laura succeed? Laura was able to succeed because of the discipline she developed at
a younger age. After her husband left, she turned to the skills; integrity, courage and discipline
she learned when she was younger and turned them into a positive outcome. Her motivation
drove her to be successful and couple that with the discipline she had, it created the perfect
recipe for success.

6.) Regarding Affirmative Action, Family Style , answer the following two (2)
questions:
Why were sisters Sarah & Alice so different regarding wealth accumulation? The sisters had
different views because of the different way they grew up. Sarah didnt receive the Economic
Outpatient Care of her father like her sister did earlier in life. This caused Sarah to view things
differently and allowed her to become independent. Her sister Alice received the EOC help from

her father in the early stages of life, therefore creating a dependency on it as she progressed
through her years.
What did Kens father tell him often? I am not impressed with what people own, but impressed
with what they achieve.
7.) Now that you have finished reading The Millionaire Next Door, answer the following three
(3) questions in a minimum of three (3) paragraphs.
a. How has your perception of millionaires changed
b. What are the two (2) concepts you found most useful?
c. How will you apply them into your life?

My overall perception of millionaires has not changed. I have always known that there were
the self-made ones, through hard work and dedication to a certain frugal lifestyle, but my
perception is there are very few out there that did it this way. The interesting undertone of the
book is that the millionaire who did it the right way by living below their means typically
blends in with the average neighborhood family.
The book had some very insightful concepts on how to think about money differently.
The first concept I will apply to my life is living below ones means. Now, this doesnt mean that
you have to pinch every penny, but you do have to be involved in where your money is going. Is
that $4.00 Starbucks coffee worth it, or if you take the $4.00 a day; compounded to $20 a week
(5 day work week) over a 52 week year that is $1,040 that could be invested. While $4.00 a day
doesnt seem much, once you compound it over a period of time the amount grows
significantly. Learning to control instant gratification will pay off in dividends in the long run.
The second concept is not getting trapped into the big hat, no cattle mentality. It is so easy to
get caught up into an image of what we want to be instead of what we can or should be.
Society has an over whelming image issue of what people think they need to reflect. In todays
world, people live in the here and now instead of the future, which tends to go hand in hand
with the flashy style, expensive cars and huge house.
I have always been conscious of the compound effect of money. When I was younger I
did get caught into the lifestyle of what I felt I should be instead of what I was. This caused
some significant financial strains earlier in life. I have since learned the difference of needs and
wants, and to correct my image perception into what I want to be instead of what I feel I need
to be. I have established some long term goals and before I make any significant purchase I will
bounce the purchase up against my long term goals and see if it reflects the same value. If it
doesnt, then I do not make the purchase, knowing full well in the long term I will be better off.

Reflective Writing
Reading The Millionaire Next Door was the perfect end to the Personal Finance course. The
book was able to compliment the critical and creatively thinking part of education. The way it
makes you think about your everyday minimal purchases and how even though a small amount of

couple dollars a day can have a snowball effect later in life. It also caused me to internally reflect on
what my long-term goals are. What I do today will have an effect on what I want 20 years from
now. The wealth of a person is not measured in tangible goods but rather in liquid assets. It makes
you realize how important skipping that $4.00 Starbucks coffee is and how one can reduce their
means in order to be long term wealthy.
Being able to communicate is not so much the ability to speak, but it starts with listening and
comprehending coupled with the ability to formulate opinions and put all that into verbal or written
words. The questions required one to effectively listen while reading and comprehend the content
being read. If you were unable to understand the reading and reiterate it to answer the questions
then you fell short of the communicate effectively objective of a general education course.
Personal finance is an art that anyone can be taught. All to often do I come across family
members or friends who dont possess the basic financial knowledge in order to facilitate their life
goals. So much of long-term financial strength depends on the choices a person of my age make.
The course and assignment has made me think of and prioritize my long-term financial goals and lay
the blueprint out now in order to achieve those goals later in life.