Means to an end - or - Rich Dad Poor Dad vs. The Millionaire Next Door
posted by CS | 11:11 AM 
I've labored with the following question for quite some time:
The state of wealthy is achievable a number of ways, but it helps to first consider two primary methods. The two I propose are quite possibly complementary, though in practice for most, more likely to be motivationally opposed. For the simplicity of the argument, no mention of investment quality is made.
The first such way is to live below one's means significantly - spending very little and saving very much. Everyone's heard of the simple schoolteacher who, on a modest income, retires early with many hundreds of thousands of $$. She arrived at wealth through extreme frugality. She lives as if poor and typically spends her retirement similarly.
The second such extreme example is the fortunate fellow who makes so much, he can't spend it all. He needn't be frugal, because his income is so stratospheric as to cover his expenses in abundance. This case, as I've seen over time, is very rare. Given time, almost any non-frugal person's expenses will rise to exceed his means.
So frugality, on some level, is operative.
Which brings me back to the question: where should the less-than-wealthy devote the majority of their time and resources - trimming expenses (frugality) or increasing income (entrepreneurship)?
On the subjects of frugality and entrepreneurship, I've read many books, but two of them stand best perhaps in arguing for where one's emphasis (time) should reside. Representative of the notion that the way to wealth is to live well below one's means is The Millionaire Next Door (TMND). I read this (a few times) ca. 1997. It resonated well, as I was a single man with few expenses, a homeowner, with no debt apart from a mortgage, and an employee of a small business in which the owner was typical of the subject of the book: frugal and entrepreneurial.
The book best representing the second philosophy is one I read ca. 2003 - Rich Dad, Poor Dad (RDPD). In fact, the authors even address the difference in philosophy, as I recall, making mention of TMND. I remember it as something of an aside, in the vein of "living below your means is a must, but expenses can only be lowered to a point before affecting quality of life." The book's subject, thus, is concerned with raising one's means.
So which is right? Or is it a matter of personality, as in for one man it may be frugality, while for another, entrepreneurship? I will say that in rereading both, I find truth in each. Something about TMND sits with me better over the long term, than does RDPD. While I admit this may be my personality at work, I think it's rather that I appreciate a solid argument without a lot of hype. In other words, the premise of TMND to me is a more logical and thus replicable model. RDPD, while excellent at confronting the "Poor Dad" mentality in some readers, is lacking the message that time, consistency, and persistence are what can pay off for all, regardless of how one's entrepreneurship succeeds.
This brings up something of a third way in this debate. Former Libertarian Presidential candidate and financial guru, Harry Browne advocated for a dual portfolio strategy in handling one's finances. He suggested creating something he termed a "Permanent Portfolio", consisting of a diversified array of high quality instruments, in which the bulk of one's money should reside. Once that was well underway, he further suggested creating another portfolio, which could be thought of as "play". I like to think of that as the entrepreneurial portfolio. It is what you could lose completely, yet not affect your long-term plans.
This thinking somewhat muddies the discussion, as it doesn't purely address frugality v. entrepreneurship, but then the two are not mutually exclusive (as in the case of my former boss mentioned above). My thinking is that one can be generally frugal and spend time in this regard, funneling assets into the main portfolio, which spending a smaller amount of time being less frugal and taking risks in the play portfolio. What I mean by "portfolio" is perhaps a broader term, such as "time and money repository".
This is a work-in-progress. To be continued.
For one to become (and more importantly, remain) financially wealthy, where should more energy be devoted: living below one's means or raising those means?I define wealth in terms of time; that is, wealthy is a state in which I could, without employment-linked income, meet all my obligations (expenses & debts) - indefinitely.
The state of wealthy is achievable a number of ways, but it helps to first consider two primary methods. The two I propose are quite possibly complementary, though in practice for most, more likely to be motivationally opposed. For the simplicity of the argument, no mention of investment quality is made.
The first such way is to live below one's means significantly - spending very little and saving very much. Everyone's heard of the simple schoolteacher who, on a modest income, retires early with many hundreds of thousands of $$. She arrived at wealth through extreme frugality. She lives as if poor and typically spends her retirement similarly.
The second such extreme example is the fortunate fellow who makes so much, he can't spend it all. He needn't be frugal, because his income is so stratospheric as to cover his expenses in abundance. This case, as I've seen over time, is very rare. Given time, almost any non-frugal person's expenses will rise to exceed his means.
So frugality, on some level, is operative.
Which brings me back to the question: where should the less-than-wealthy devote the majority of their time and resources - trimming expenses (frugality) or increasing income (entrepreneurship)?
On the subjects of frugality and entrepreneurship, I've read many books, but two of them stand best perhaps in arguing for where one's emphasis (time) should reside. Representative of the notion that the way to wealth is to live well below one's means is The Millionaire Next Door (TMND). I read this (a few times) ca. 1997. It resonated well, as I was a single man with few expenses, a homeowner, with no debt apart from a mortgage, and an employee of a small business in which the owner was typical of the subject of the book: frugal and entrepreneurial.
The book best representing the second philosophy is one I read ca. 2003 - Rich Dad, Poor Dad (RDPD). In fact, the authors even address the difference in philosophy, as I recall, making mention of TMND. I remember it as something of an aside, in the vein of "living below your means is a must, but expenses can only be lowered to a point before affecting quality of life." The book's subject, thus, is concerned with raising one's means.
So which is right? Or is it a matter of personality, as in for one man it may be frugality, while for another, entrepreneurship? I will say that in rereading both, I find truth in each. Something about TMND sits with me better over the long term, than does RDPD. While I admit this may be my personality at work, I think it's rather that I appreciate a solid argument without a lot of hype. In other words, the premise of TMND to me is a more logical and thus replicable model. RDPD, while excellent at confronting the "Poor Dad" mentality in some readers, is lacking the message that time, consistency, and persistence are what can pay off for all, regardless of how one's entrepreneurship succeeds.
This brings up something of a third way in this debate. Former Libertarian Presidential candidate and financial guru, Harry Browne advocated for a dual portfolio strategy in handling one's finances. He suggested creating something he termed a "Permanent Portfolio", consisting of a diversified array of high quality instruments, in which the bulk of one's money should reside. Once that was well underway, he further suggested creating another portfolio, which could be thought of as "play". I like to think of that as the entrepreneurial portfolio. It is what you could lose completely, yet not affect your long-term plans.
This thinking somewhat muddies the discussion, as it doesn't purely address frugality v. entrepreneurship, but then the two are not mutually exclusive (as in the case of my former boss mentioned above). My thinking is that one can be generally frugal and spend time in this regard, funneling assets into the main portfolio, which spending a smaller amount of time being less frugal and taking risks in the play portfolio. What I mean by "portfolio" is perhaps a broader term, such as "time and money repository".
This is a work-in-progress. To be continued.
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