Steven Bendtsen

S00404648
FIN-1050-F14-Howell

The Millionaire Next Door

1. Explain the following four (4) concepts addressed in The Millionaire Next Door:
Big Hat, No Cattle
Big Hat, No Cattle means that often those who are showy with their money dont have much of it.
They are more concerned with spending than earing. They are conspicuously displaying what they do
have to try to prove their worth. However, this consumption reduces or eliminates their ability to save,
so they end up with very little net worth.
Go To Hell Fund
A Go To Hell Fund is an accumulation of wealth large enough to continue ones standard of living for
years without working.
PAW
A PAW is a Prodigious Accumulator of Wealth. They are frugal and live below their means. While they
usually make at least an average income, it is their defense or saving habits that cause them to
accumulate wealth. They feel inclined to achieve, to create wealth and to become financially
independent. PAWs are defined as those in the top quartile of net worth for their Age/Income
demographic.
UAW
A UAW is an Under Accumulator of Wealth. They spend what they make and are conspicuous
consumers. They are addicted to lifestyles of high consumption and attach their self-worth to their
ability to accumulate status artifacts and live lavish lifestyles for others to see. They spend, more or
less, everything they earn, even if they have an extremely high income. UAWs are defined as those in
the bottom quartile of new worth for their Age/Income demographic.

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

How is Wasteful defined in the book?
Wasteful is defined by the book as A lifestyle marked by lavish spending and hyperconsumption. If
your goal is to become financially independent, then lavish spending and hyperconsumption will waste
the money that you need to be saving and investing in order to achieve that goal.

What is the cornerstone of wealth-building?

The cornerstone of wealth building is being frugal. The book refers to income generation as offense,
and frugality as defense. An income of any size can be consumed, but with proper defense, even a
modest income can accumulate into a substantial amount of wealth. Frugality is living below ones
means. Wealth can only accumulate if you spend less than you make.
Most people will never become wealthy in one generation if they are married to people who are
___________?
Wasteful. To become wealthy in one generation requires extreme discipline. Lavish spending and
hyperconsumption eliminate the ability to accumulate a meaningful amount of wealth in one
generation.
Upon Giving his wife $8 million of stock, from taking his company public, what did his wife continue
doing?
She told him, with sincerity, that she really appreciated the gift. She then continued to cut coupons from
the newspaper.

3. In the example of Theodore Teddy J. Friend:

Provide three (3) reasons why Teddy is considered a UAW.
Teddy grew up poor and it was embarrassing for him. Hes trying to prove his worth with consumption.
A high income is a way for him to overcome his social inferiority. As an adult without a college
education, his still feels the need to out-consume his graduate peers in order to prove his worth. Due to
his hyperconsumption he has less than a quarter of the wealth expected for someone his age with his
income.
Teddy was raised by UAWs who spent everything they made. He was raised in an environment where
income was the only factor limiting consumption. His parents spent all of their free time shopping.
Teddy is the epitome of the Big Hat, No Cattle concept. He has plenty of income with which he could
accumulate wealth, but he instead consumes lavishly.
Teddy keeps himself motivated by intentionally overextending himself with credit. He believes the fear
will keep him motivated to perform at a high level. He believes that if he were really wealthy he would
lose his motivation. Teddys net worth is intentionally mitigated by his misguided strategy to keep
himself motivated.
What is the message Teddys parents sent him about consumer behavior?
One earns to spend. When you need to spend more, you need to earn more. Saving was not a part of
their thought process. They spent everything they earned and believed income was meant to be spent.
They used credit heavily for major purchases.

4. In the example of Mr. W.W. Allan, a self-made multimillionaire:

He never extended credit to people who exhibited the Big Hat, No Cattle philosophy. Why?
In his mind, such people would never be able to repay their debts. They spend, spend, and spend, in
anticipation of having money before they even earn it.
Why did he decline the gift of a Rolls-Royce?
He declined the gift of a Rolls-Royce because it didnt match his lifestyle. Like Benjamin Franklin explains
in The Way to Wealth, When you have bought one fine thing you must buy ten more, that your
appearance may be all of a piece. He goes on to say It is easier to suppress the first desire than to
satisfy all that follow it.
W.W. Allan was also afraid that it might make his employees feel like he was exploiting them if he could
afford such a fine automobile on the profit their efforts had earned him.
5. Regarding Economic Outpatient Care (EOC):
Define Economic Outpatient Care.
Economic Outpatient Care is when parents and grandparents bestow substantial economic gifts and acts
of kindness upon their children and grandchildren.
Like the example of James, many EOC receivers (inaccurately) view themselves as _______________?
The view themselves as being self-made. They are prideful and believe they did it on their own and
will tell you they earned every dollar they have.
As illustrated in the example of Henry & Josh, what is the fundamental rule regarding wealth building?
Be specific.
The fundamental rule regarding wealth building is to live below your means. Wealth cannot accumulate
unless you live below your means and save and invest. Being frugal is a trait among the truly wealthy.
Why did Laura succeed?
Laura succeeded because she had no option but to succeed. She was determined to succeed on her
own. She made a plan and dedicated herself to it.
Why were Sisters Sarah & Alice so different regarding wealth accumulation?
Sarah and Alice were very different regarding wealth accumulation. Sarahs long held attitudes about
being a liberated woman were at odds with her fathers beliefs, and caused him to alienate her
financially. Due to this, and in keeping with her own values, she went out and made something of
herself. Her younger sister Alice lived her life in line with her fathers wishes and accepted heavy EOC
and learned to be dependent on her father. She never learned anything about budgeting because her
father would subsidize her habitual overspending.

What are the two (2) concepts that you found most useful?
How will you apply them to your life?
You Arent What You Drive. Ive recently been debating purchasing a new car. Im fighting an internal
battle over how nice of a car to by. Mr. Allan was worried his employees would feel exploited if he
drove a Rolls-Royce to work. While Im not looking at anything remotely as extravagant, I am concerned
with how my employer may perceive my purchase of a nice car. Im worried it could be impair my ability
to request a raise if they view my purchase as being at all excessive. I further need to evaluate how
much I value my personal image against financial security.
Big Hat, No Cattle. It is tempting to want to appear successful. Often, whether the reasoning is at all
valid or not, we justify the purchase of fine clothing with silly clichs like the clothes make the man
and dress to impress. It is all too easy to justify ones vain desire to dress well with the excuse that you
need to dress nice to advance professionally. It is important to remember that truly wealthy people like
Mr. Allen may hold our attempts to outwardly look successful against us.
In your own words, give your thoughts in a minimum of three (3) paragraphs.
I really enjoyed the book. I was very impressed that near the end it addressed the topic of who has
money, and how they tend to spend it, showing which career paths have the best chance of earning that
money. Also impressive was the guidance given on how to manage ones estate in order to prevent or
reduce the likelihood and severity of family feuds. I liked the guidance given on when and how to gift
wealth in order to avoid damaging ones heirs with EOC.
It seems as though the book made no room for moderate consumption. Throughout this paper I may
have conflated the Benjamin Franklin quote I gave with the Big Hat, No Cattle concept; Like Mr. Allens
concern that a Rolls-Royce may cause him to purchase more status products to fill up the socially
conspicuous puzzle. While reading the book I found myself constantly thinking, But what about
enjoying life? I suppose this is because most people are incapable of moderation and will spiral out of
control filling their socially conspicuous puzzle. The book entertains the idea that some people may
simply be born with more of a desire to consume and seek validation through consumption. It may be
that there is no such thing as a guilty pleasure or indulgent purchase to a PAW, but that all such
behavior is viewed as wasteful, on any level.
It seems odd that most millionaires advise their children to get an education and a steady job when they
themselves did not. I can always see the value of an education, but it seems odd that they would not see
their children as being even better suited for entrepreneurship than they. It would seem that, armed
with a quality education and the lifetime of wisdom gained by a successful entrepreneur parent, as well
as the financial safety net that parent could provide, that entrepreneurship would be the way to go. I
guess this too is counterintuitive and the symptoms of EOC would thwart this dream. The lack of a safety
net was commonly cited throughout the book as a factor that motivated the books wealthy characters
to be successful. Maybe their PAW parents value the safety of a secure job more than the earnings
potential of entrepreneurship and self-employment.

Reflective Writing
Compose 2-3 paragraphs explaining how completing this assignment helped you achieve at least two
(2) of the SLCC Learning Outcomes.
Develop Quantitative Literacies for Chosen field of Study
I am studying finance, and this book assignment and course have definitely helped me develop
quantitative literacies for my chosen field. This book discusses the psychology and habits of the wealthy
and discusses the benefits of saving and investing. This knowledge, coupled with the knowledge I have
gained in this course about how to calculate annuities and compounding interest, go together from the
general to the specific. This book discusses where, how and why to save and invest, and this course has
taught me how to calculate exactly what the results of those savings and investments will be.
Think Critically and Creatively
This assignment involved both critical and creative thinking. This assignment made me think objectively
and critically about my consumption and saving habits, while at the same time analyzing such concepts
as self-worth and social stature. It made me re-evaluate my definition of true success in terms of both
net financial worth and life satisfaction, and the interplay between the two.