Math Isn’t Subjective (And That’s a Good Thing)
In our hyper-consumption culture today there are a lot of people looking for excuses as to why they are NOT financially independent. These excuses allow the majority of our society that is financially dependent on a job (i.e., trapped in work) to avoid feeling guilty for gluttonous consumption and financial irresponsibility. It is a lot easier to conclude that you are a victim of your circumstances instead of taking responsibility for your financial mistakes. Data published 20 years ago in a book written by Dr. Thomas Stanley titled The Millionaire Next Door, however, provided objective empirical evidence supporting the conclusion that you don’t have to have a huge income or inherit a fortune in order to accumulate wealth in America—and inadvertently eviscerated most Americans’ excuses for their financial dependence. The book and supporting data accumulated over decades of research regarding the affluent in America showed that driving expensive luxury cars and living in upscale houses does not prove that you are wealthy—in fact, it often proves that you aren’t (and maybe never will be). What Dr. Stanley’s research proved instead was that you simply needed to work hard, spend less than you earn, and wisely invest the rest in order to gradually accumulate significant wealth over a lifetime.
The book was a New York Times bestseller at the time of its publication in 1996 and thereafter, and even today continues to be a top seller in Amazon’s Wealth Management category. Notwithstanding this wild success, the thesis of the book drew vicious criticism in 1996 that continues today—criticism by people, I suspect, that view the book’s thesis and conclusion as an indictment of their lifestyle. Today some have sought to discredit this research and its shockingly simple yet effective conclusions based on environmental factors that are beyond the individual’s control: healthcare is too expensive! College is too expensive! Housing is too expensive! We can’t save anything! But while some of these underlying macro-economic trends have undoubtedly moved in an unfavorable direction for the individual consumer, these conditions do not change the math of the basic wealth equation (no matter how much we may want them to). Individuals not interested in making excuses and in achieving financial independence have found ways to navigate through these challenges in ways that don’t sink their financial ship. They treat college costs, housing costs, and healthcare expenses as just another financial challenge to be responsibly managed and overcome. So, just by way of example, if your dream job is to be a freelance writer earning $35k/year, you might decide NOT to go to Columbia University and finance three degrees with student loans thereby racking up hundreds of thousands of dollars of debt. Getting that decision right does not require you to be an economist or an incredibly savvy personal finance maven; you only need to have a little bit of common sense and just a dab of personal responsibility.
At the end of the day, no rational thinker can argue with the arithmetically unavoidable conclusion: if you work hard, earn a good income, spend less than you earn, and wisely invest the delta, you will accumulate financial resources over time. That math works. Without fail. Every time. Rather than making excuses to justify financial irresponsibility and profligate consumption habits, own your personal financial history and be purposeful in your earning and spending behaviors in the future. That decision will set you down the path of financial freedom and maybe prevent you from becoming trapped in work.
Footnote: Here’s another piece attacking the thesis of The Millionaire Next Door on the basis of … well … I can’t quite tell what the argument is. Let me know if you can decipher it.
Man, great post here – right on!
I especially dig the title. Math like this really isn’t subjective. There’s just no other way to build wealth.
For kicks, though, here’s a subjective math thing: Are 1 and 0.999… equal? Proof they are: Take both values and divide by 3. You end up with 0.333… and 0.333… It’s one of those infinity things that kinda bends your mind.
Thanks for the good read.
Thanks for the visit FL and the comment! As for the brain-teaser, that sounds like a question at the end of a chapter in a college math (or finance?) textbook … you have more experience there so I’m not touching it. (Are we crossing over into asymptotes?)
And sorry for the delayed approve … I may need to spend a little less time on your site and more on my own!
I agree with this post. Math doesn’t lie. If you spend more than you earn, you will have a deficit of money. If you earn more than you spend, you’ll have a surplus, and that surplus will grow if that money earns money that earns money etc. It is crazy that so many people choose to ignore this, or play victim in the financial situation.
Thanks PB! It is truly amazing how many (presumably) highly intelligent and highly educated people oppose this very basic and objective concept.
Good post. Objectivity is good for math, lest the whole universe collapse into itself.
That LA Times piece you referenced seems to be making the argument that it’s easier to get rich if you already have some money (like in the example of starting a small business, or the janitor not being able to save $300/month). Those things are true, of course. The questionable conclusion that the writer and others reach, though, is “…so why even bother trying?” The system is certainly not always fair, but that’s no reason to give yourself excuses not to work toward financial security.
Thanks for the visit Matt! And thanks for the thoughts on the LA Times article. My problem with the argument in that piece is that the author sets up false premises and then proceeds to knock them down in support of his “don’t even bother” conclusion. I don’t believe that the TMND data indicated that a large proportion of the successful group started out with significant “family resources” as argued here. And then for the janitor story, the writer looked to an analysis on an economics blog that concluded “oh, no janitor on earth would have been able to afford saving $300 a month.” That analysis reminds me of the old economist joke that goes something like “If you see a dollar lying on the sidewalk, don’t bother bending over to pick it up because if it were really there, someone would have taken it already.” The problem with the “no janitor could do that” argument is, well, he DID do it. I’ll take historical fact over economic theory every single time! So when the LA Times author says that “it’s hard to know what life lessons one should draw from [the janitor’s] experience,” I say how ‘bout this: Work hard and don’t spend all your earnings on consuming stuff so you can have some to invest and grow and become financially successful.
But there is also no denying the other truths that you point out: it is easier if you start with something as opposed to nothing, and some will have systemic advantages that others will not. That’s why I think stories like the janitor’s are so important—he’s one that started with nothing and faced systemic disadvantages … and he still got there.
Great comment here. And you’re right on target with the “theory-induced blindness” criticism – it’s rampant in economics and elsewhere. Facts can be pretty inconvenient to some theories, and as much as it may pain us, sometimes we actually have to pay attention to all those messy facts. Right on.
Thanks FL. I like the label of “theory-induced blindness.”
It’s Danny Kahneman’s phrase. I stole it. Shhh…
I won’t tell anybody.
Thanks Steve!