Haha, Groupon. We already know that its business model has set itself up to fail, but I always enjoy a little anecdotal evidence. This weekend I finally gave in decided I needed a haircut and checked Groupon for any possible “Now!” deals, which are meant to be used the same day. A good haircut and color in my pretentious town runs at least $130, and I saw a deal for much less than that (I don’t want to give the actual price and get the merchant in trouble) a quick drive from me. Groupon puts the salon’s address, phone number and website in its deal detail page. So I call the number and ask if they have time for an appointment and they book me for an hour later. And then I casually ask (because this was definitely an experiment on my end), “Do you want me to buy the Groupon or just come in?” and they tell me to just come in. Three hours later, I walked out with a great haircut, perfect color and a blowout that’s good for a couple days. I got a great deal, and the salon, although it gave me a heavily discounted price, got to keep 100% of my payment and I tipped on the cost of the full-price service. The only loser here was Groupon, who knew nothing about the transaction, and won’t be collecting 50% of the deal as it normally would. Doomed, I tell you. Doomed!

Weekend Reading for General Enlightenment

Free Kindle eBook: The American Frugal Housewife sounds like it would have made a great blog 200 years ago. The feat of a book that was written as a practical guide on being economical in 1828 still being relevant and entertaining today is considerable. Child’s focus on self-discipline, being level-headed and putting children to work from a young age (none of this “useless play”) will resonate with anyone looking to bring restraint and practical wisdom into their lives. She has a dry tone that made me think she was from New Jersey, but it turns out that’s just how they all talked back in the day. You’ll learn about everything from what to season sausage with and the uses of herbs (and that blueberries used to be called the awful-sounding and possibly poisonous and/or acne-inducing whortleberry). It’s fun to learn about things that seem quaint and outdated until you realize it’s still perfectly applicable today. Consider the section entitled, “How to Endure Poverty”:

That a thorough, religious, useful education is the best security against misfortune, disgrace and poverty, is universally believed and acknowledged; and to this we add the firm conviction, that, when poverty comes (as it sometimes will) upon the prudent, the industrious, and the well-informed, a judicious education is all-powerful in enabling them to endure the evils it cannot always prevent. A mind full of piety and knowledge is always rich; it is a bank that never fails; it yields a perpetual dividend of happiness.

and a discussion of her modern society sounds an awful lot like our own (minus the terminology, I don’t know what a bottle imp is either):

Perhaps there never was a time when the depressing effects of stagnation in business were so universally felt, all the world over, as they are now.—The merchant sends out old dollars, and is lucky if he gets the same number of new ones in return; and he who has a share in manufactures, has bought a ‘bottle imp,’ which he will do well to hawk about the street for the lowest possible coin. The effects of this depression must of course be felt by all grades of society. Yet who that passes through Cornhill at one o’clock, and sees the bright array of wives and daughters, as various in their decorations as the insects, the birds and the shells, would believe that the community was staggering under a weight which almost paralyzes its movements? ‘Everything is so cheap,’ say the ladies, ‘that it is inexcusable not to dress well.’ But do they reflect why things are so cheap? Do they know how much wealth has been sacrificed, how many families ruined, to produce this boasted result? Do they not know enough of the machinery of society, to suppose that the stunning effect of crash after crash, may eventually be felt by those on whom they depend for support?

Luxuries are cheaper now than necessaries were a few years since; yet it is a lamentable fact, that it costs more to live now than it did formerly. When silk was nine shillings per yard, seven or eight yards sufficed for a dress; now it is four or five shillings, sixteen or twenty yards will hardly satisfy the mantuamaker.

If this extravagance were confined to the wealthiest classes, it would be productive of more good than evil. But if the rich have a new dress every fortnight, people of moderate fortune will have one every month. In this way, finery becomes the standard of respectability; and a man’s cloth is of more consequence than his character.

Offline Reading: I continued reading on money, debt and society in Harper’s magazine. The June 2012 issue isn’t online yet, but there were two excellent articles about money, “The Price of Admission” on the cost of college tuition and rising student loan debt and “In Recovery: Twelve Steps to Prosperity”. The first article was a brilliantly written dissection of college as a corporation and one with often bipolar views of itself. The second article introduced me to Underearners Anonymous, an anonymous organization similar to AA or NA. The founder had been attending Debtors Anonymous classes, when he decided that underearning was its own, separate disease/addiction. You may not be comfortable with the term disease or addiction describing something that is not a physical or physiological condition, but the organization addresses an important point: are we putting ourselves in a position to earn less than we are worth? I know that I’ve done this many, many times. Consider the “symptoms” of Underearners. Stability Boredom? I’ve been planning to write a post for some time called “How to be Consistent without Getting Bored to Death”. Giving Away Our Time? Happens all the time! In any case, I find the idea of underearning to be highly relevant. While no one operates independently of society and the economic realities of the markets, it certainly doesn’t mean you have to work for $10 an hour when you have taken the time to learn and develop skills that are worth more to an employer or business or when you have work experience that is relevant to a position in a different industry. If I am serious about earning more and paying off a ton of debt in just over a year, then heading to a meeting might be very worthwhile.

Bloggy Reading: There have been some excellent posts lately. It’s so hard to link to them all! My Twitter feed is always full of good reads on the net but here are just a few good ones:

ee musings hit a homerun with On authenticity in blogging. She is an adept writer and each post is always measured, thoughtful, sometimes funny and always realistic. Not realistic in a “life is shit and then you die” kind of way but realistic in that she sounds genuine and I have become a faithful reader. Plus I loved that she wrote her post on living in New Zealand for me and others curious about life there. Oh and I just realized she’s only 23. Seems like some of my favorite bloggers are the younguns!

Another favorite blogger friend, My Broken Coin wrote How to Make it in America. Good advice that’s not standard or recycled. But I don’t expect anything less from a regular Business Insider contributor!

Erin at Dog Ate My Wallet wrote about a friend from the other side of the tracks. Erin comes across as quiet and reserved (unlike bloggers like myself who fill their posts with exclamation marks!! And italics and bold statements!!) but her posts and her comments on my blog and others always blow me away. Her friend Russ lived a difficult life but that didn’t stop him from doing what he could do for his daughters. It reminded me not to judge other people and to live my life, which is always easier said than done.

Anyone who pays $50 for their car is awesome.

Modest Money wrote a great Mother’s Day tribute to his mom. Savvy, hard-working businesswomen always make me happy.

And lastly, it was a while back but Well Heeled Blog did a cool job putting her 5 financial stressors out there. Of course, I don’t wish her any stressors, but somehow, it seems like she got less stressed about it just putting it all out in written form and enumerating each stressor. She has a lot on her plate but darn if she isn’t staying practical and reasonable. I’m impressed.

I had more of you to add but it’s 2 am and I want to watch Mad Men. Next week: May Debt Update, a Triple Book Review and maybe an LA post. Stay posted!

(Continuing the series of the top five books in personal finance, I am reviewing my #1 pick. For the complete list, please check here.)

The Richest Man in Babylon should be required reading for everyone. If you’re going to handle money for yourself or your family at any point in your life, you need to read this book. Some people get great money lessons from their parents or family members. Others are lucky to learn from a mentor or teacher about the basic principles. Still others are sharp enough to pick up these basic ideas on their own, and have made long-range thinking and action part of their daily lives. But the majority of people will spend the majority of their lives quite clueless about money. They may be distinguished and accomplished in their careers. They may have sat through plenty of 401(k) presentations and understand the math behind compound interest perfectly. But their financial decisions will not reflect this knowledge. That’s where the Richest Man in Babylon comes in.

The Richest Man in Babylon (1926) was originally written as a series of pamphlets that were handed out in banks and insurance companies and later put together and completed as a book. This fact alone is enlightening about the role and message of banks in previous generations. When I walk into a Bank of America or any other big bank, all I see is marketing for a lot of “financial products” like home equity lines of credit, credit cards, or auto loans. The home equity line of credit advertisements invariably mention home repairs or a much-deserved vacation, as if home equity is some sort of free money you need to throw at something right away. It wasn’t always like this, and banks once advocated for controlled spending and budgeting and not borrowing for basic living expenses. Come back, Bailey Building and Loan Association!

Since we’re on our own these days to figure out how we should handle our money, start with this book. The full version is here (with a few typos). I like anything written as a parable. The main lessons of the book are repeated throughout and you will soon have ingrained your mind the ideas of 1) keeping a part of what you earn, 2) controlling expenditures and 3) allowing your money to work for you. Keep at least 10% of what you earn, use 20% to pay your debts (if any) and live on the other 70%.

The Richest Man in Babylon is my number one pick for personal finance because it explains all of the basic principles of money so well. If you can get these basics down, a few calculations on your next investment won’t seem nearly so complicated.

I’m on a mission to read five classics in personal finance. I’ve decided upon these five, with a plan to review each for American Debt Project. Get ready to be educated, son!

Top Five Classic Books in Personal Finance

1. The Richest Man in Babylon by George S. Caslon

2. The Millionaire Next Door by Thomas Stanley and William Dank

3. Think and Grow Rich Action Pack by Napoleon Hill

4. A Random Walk Down Wall Street by Burton Malkiel

5. The Intelligent Investor by Benjamin Graham

Let’s start with The Millionaire Next Door because I just finished it.

The Millionaire Next Door(1996) is the work of two marketing professors with doctoral degrees, who happily confirm that people holding doctoral degrees tend to be less wealthy, because they generally got a much later start on acquiring wealth. Wait, who do we consider to be “rich” or “wealthy”? Here it is defined as more than $1 million in net worth, and many of the respondents were in the $1-$10 million net worth category, with over 80 percent of America’s millionaires being first-generation rich (self-made). Authors Stanley and Danko interviewed a ton of these millionaires over many years to come up with seven important conclusions about America’s wealthy.

What are the seven common traits of America’s millionaires?

1. Living well below their means. Using a ton of survey data, these millionaires tended to show, on average, that they did not buy the most expensive or even very expensive cars, watches, suits or shoes. Only 25 percent of the millionaires surveyed own a watch that cost more than $1,100. WHAT? Really? I thought everyone agreed that once you get rich you go out and buy a Rolex…that was even on my financial to-do list! “#43. Go out and buy a Rolex”. Hmm, I’ll have to cross that off the list.

2. They use their time, money and energy in ways that will build wealth. Millionaires spend much more time planning their investments and getting the best advice from CPAs, attorneys and financial advisors.

3. Financial independence is more important than “displaying high social status”. It takes a lot of money to live in a fancy neighborhood, drive luxury cars, take expensive trips and eat at three-star Michelin restaurants. Millionaires spend less money on status and more on assets that appreciate.

4.Their parents did not provide for them. The authors refer to it as “economic outpatient care”. Can you tell they don’t care for it? Relying on parents for financial assistance into adulthood does not make most people wealthy. In fact, it makes them less likely to be wealthy and more dependent on their parents for support.

5. Their adult children are economically independent. Continuing the tradition with the next generation. But it was interesting to note that many of the first-generation millionaires did provide for their adult children economically, which changed the mindset of the children to one of dependence.

6. They target market opportunities. This wasn’t covered in depth, but it is the idea of finding opportunities to market a product or service to an interested audience, such as the affluent.

7. They chose the right occupation. Nothing is guaranteed, but the authors discuss a variety of occupations and businesses that are profitable fields. Most first-generation millionaires are self-employed or business owners, which gave them the time to plan their investments as part of their regular activities.

The book went into depth with each of these ideas and challenged my idea of what being wealthy is. The distinction is clearly drawn between high-income and high net worth. You can have a high income and little net worth. Or your income can be modest and you can have a better than average net worth thanks to your wealth accumulation habits. The authors discuss two types of wealth accumulators, the UAW and the PAW.

UAW vs. PAW (Oo-ah vs. Pah)

The authors referred to UAWs versus PAWs throughout the book. The under-accumulator of wealth (UAW) was the person whose net worth was below what it should be based on their annual income. Want to know how to calculate what your net worth should be?

A Good Net Worth Rule of Thumb Equation

Net Worth = (Your Age) x (Annual Realized Pretax Household Income) / 10

How did you do? Mine was TERRIBLE! I have about 1/10th of my expected net worth. Even if I took a lower income, say, what I was making two years ago versus today, I still only have about 1/8th of what I should have. So I’m what the authors would call a UAW. The PAW (prodigious accumulator of wealth), on the other hand, meets this equation or has a net worth higher than what is expected of them based on their income. They have excellent saving and investing habits that are reflected in the seven traits above.

The PAWs are shown as those who are planning with an eye towards the future: retirement, children’s education, estate considerations and more. The UAWs are like your flashy European cousin: it’s all untz.untz.untz. (that’s techno music for you old-timers) clubs, parties, driving leased Mercedes and trips to Ibiza with these people. They may certainly be high-income producers, but they spend all of it and more, which leaves little room for wealth accumulation. The UAWs may consider themselves to be of a high social caliber, but the appearances of this social status are more important than anything else. The older UAWs are sending their kids to private school when public schools in the area are fine, learning about fine wines and attending charity dinners and generally looking good no matter what.

Conclusion

The Millionaire Next Door is definitely staying in my top 5 personal finance books of all time. It was extremely eye-opening. Even though I have taken personal responsibility for my spending and finances in this past year, I still think like a UAW. If I just earn more, I can spend more! But that’s not really what it takes to be wealthy. And while a dollar amount of wealth is not important to me, a certain amount of stability is. Planning your budget and your investments regularly, working with the right advisors and staying reasonably frugal will go a long way in building wealth. This book will drive home a lot of those ideas as you continue your journey.

Have you guys read The Millionaire Next Door? What did you think of it? Do you like my top 5 list? What would your top 5 list look like? I want to know!