Book summary “Ordinary People, Extraordinary Wealth”: summary

Introduction

You likely believe that building true wealth requires high income, inheritance, or risky stock market trading. Financial media constantly tells you to time the market, pick winning stocks, and aggressively pay off your debts. Yet these common strategies usually leave you stressed, exhausted, and stuck with mediocre returns.

Ric Edelman solves this problem by analyzing the actual habits of ordinary millionaires. The central finding shows that true wealth comes from disciplined, long-term saving, standard mortgages, and diversified investments rather than complex financial maneuvers.

The book maps out the specific behaviors of successful investors so you can copy them. You will discover answers to several vital questions.

• Why do wealthy people keep 30-year mortgages instead of paying them off early?
• How should you allocate your retirement funds to maximize long-term growth?
• What daily financial habits distinguish millionaires from average earners?

1. The Mortgage Paradox

Financially successful people choose to carry a 30-year mortgage rather than prepay principal because keeping cash liquid and investing yields higher returns.

Survey data reveals that the overwhelming majority of financially successful people choose to carry a mortgage and avoid prepaying principal. Among survey respondents, 83 percent carry a mortgage despite having an average home value of $255,700 and an average mortgage balance of $142,000, and 90 percent choose not to send extra principal payments.

The Fear of Debt

The cultural aversion to mortgages stems from the trauma of the 1920s and the Great Depression when sudden bank loan calls led to widespread foreclosures. During the Great Depression, the stock market fell more than 75 percent from its 1929 highs, over half of the nation's banks failed, and millions of homeowners lost their properties. Modern financial safeguards and government regulations make a 1930s-style banking collapse and sudden mortgage cancellation impossible today.

Psychological compartmentalization causes people to mistakenly equate saving money on interest with building wealth, leading to poor financial decisions. People isolate the mortgage issue to minimize interest expenses, ignoring the big picture. By paying extra principal or choosing 15-year loans, they give money to the bank that could otherwise be invested in assets yielding higher returns, thereby losing the wealth accumulation war while winning the interest reduction battle.

Karen chooses a 30-year loan and spends nearly $159,000 in interest on a $120,000 house, which drives people who compartmentalize into making extreme choices like bi-weekly payments or large down payments to avoid interest.

Liquidity and Protection

Carrying a large mortgage and keeping liquid savings provides a safety net during job loss, whereas sinking all cash into a down payment leaves a homeowner vulnerable. A mortgage is a loan against income, not home equity. Unemployed homeowners cannot easily borrow against their equity or refinance, meaning those who avoided a mortgage and have no cash savings are forced to sell their homes, whereas those with a mortgage and liquid savings can comfortably cover monthly payments.

Karen and Janet both earn $35,000 and buy a $120,000 house with $12,000 savings. Janet makes a large down payment and 15-year loan with no savings left, while Karen takes a 30-year mortgage and invests her savings. When both lose their jobs, Janet has no cash for groceries and faces foreclosure, while Karen has $12,675 in savings to cover payments for nearly two years.

Paying cash for a home avoids mortgage interest but ties up all capital and ignores tax deductions. Conversely, putting down a smaller percentage, utilizing mortgage interest tax deductions, and investing the remaining cash at a competitive return compounds into a vastly superior net worth.

Julia pays cash for a $200,000 house and reaches a house value of $600,000 in 30 years. Jean puts down 20 percent ($40,000), invests the remaining $160,000 at 10 percent per year, and reinvests her monthly cash flow differences, finishing with a net worth of $1,310,000—more than double Julia's.

You should follow these rules:

• Examine the big picture of your finances rather than isolating single issues.
• Recognize that paying off debt is not the same as accumulating assets.
• Avoid making large down payments or accelerating mortgage principal payments.
• Maximize tax-deductible interest payments while minimizing principal payments.
• Keep cash liquid in competitive investments rather than trapping it in home equity.
• Maintain cash reserves for emergencies, family events, and unexpected expenses.

2. Retirement Plan Allocation

Successful investors do not diversify their employer retirement plan contributions into fixed accounts or bonds, instead placing 100 percent into stocks.

You face three questions when evaluating lump sum investments. Uncertainty about whether current prices are low prevents you from entering the market. Regular paycheck contributions solve this pricing dilemma.

• Determine if you have money to invest.
• Confirm you plan to invest that money for a long time.
• Assess whether prices are low.

There is $1,500,000,000,000 sitting in U.S. bank passbook savings accounts earning 2 percent. Attempting to get rich by picking individual winning stocks is a statistical impossibility akin to winning the lottery. You face a one in ten thousand chance of picking the right fund among 10,000 mutual funds or 7,200 stocks in the market. You must pick the right fund at the exact right time since top performers change annually.

A single stock needs a 1,000 percent gain to turn a $100,000 investment into $1 million. Doubling a small investment yields insufficient retirement funds. Betting your life savings on a single stock is an unacceptably high gamble.

The Power of Equities

Asset class diversification creates greater wealth than safe fixed instruments over long periods because losing investments shrink in portfolio weight while winners compound. A diversified portfolio may underperform a fixed bank CD in the first year due to mixed returns. Over a 10-year period, extreme winning investments grow to dominate the portfolio weighting.

A 10-year comparison of a $100,000 initial investment showed a diversified portfolio reaching $171,725 compared to $162,889 for a fixed CD earning 5 percent. A survey of wealthy clients showed high participation in company retirement plans. About 96 percent of surveyed full-time workers participate in their company retirement plan, and 84 percent contribute the maximum. Large majorities contribute zero to bond funds, fixed accounts, balanced funds, or employer stock. Specifically, 87 percent contribute nothing to bond funds, 75 percent contribute nothing to fixed accounts, 73 percent contribute nothing to balanced funds, and 90 percent contribute nothing to employer stock.

Dollar cost averaging means investing fixed amounts at regular intervals, turning market drops into an advantage by automatically acquiring more shares at lower average costs. Because retirement plan contributions occur automatically with each paycheck over a long career, falling markets allow you to accumulate a higher number of shares at lower costs. This sets up substantial future profits when the market recovers.

• Invest a specific amount of money.
• Invest this money at a regular interval.
• Ensure the money invested is only recently obtained.
• Maintain this system for long periods of time.

A 12-month test comparing different market trajectories showed a falling-rising fund yielded $1,691 compared to $979 for a rising-falling fund. This model invested $1,200 total over 12 months at $100 per month, resulting in a $3.70 average cost per share versus a $5.67 average price per share.

The Danger of Employer Stock

Allocating retirement plan contributions to company stock is extremely speculative and dangerous to both savings and employment. Holding high concentrations of employer stock ties your personal investment wealth directly to the employer's financial health. If the company struggles, stock prices plummet and staff layoffs often follow, forcing workers to sell devalued stock just when cash is needed most.

Employees at Eastern Airlines and IBM watched their retirement savings get devastated when company stock prices crashed drastically. IBM stock dropped from $187 down to $44 per share over 72 months in the 1990s. While 42 percent of all assets in 401(k) plans offering employer stock are placed there, 92 percent of money in Coca-Cola's 401(k) plan is invested in Coke stock due to the proud parent effect.

• Keep company stock holdings to less than 15 percent of your total personal net worth.

3. The Power of Small Beginnings

Most fortunes come from consistent, small investments started early in life rather than inheritances, lotteries, or large windfalls.

Most wealthy people did not acquire their fortunes through inheritances, business ownerships, lotteries, insurance proceeds, or lawsuits, but entirely through personal effort and savings. Survey data shows that only 67 percent received any inheritance, and of those, 33 percent got less than 10 percent of their wealth that way. Over 95 percent obtained their money by working hard, getting a good job, and saving consistently. Only 6 percent of clients owned businesses, and only 2 clients had ever won the lottery.

Ordinary millionaires built their wealth by starting young and consistently making small initial investments, usually purchasing assets for less than $1,000. Investors do not need a large lump sum to begin; they can scrape together small amounts and invest them frequently. The average age when successful investors made their first investment was 24, with 10 percent starting before age 18. The average initial investment was $658, while 24 percent started with less than $100 and 22 percent invested from $100 to $499.

Jay, a lobbyist, started by investing just $100 per paycheck and grew his 401(k) to $700,000 between 1979 and 1993.

Broke Versus Poor

Being broke is a temporary state of wallet that can be fixed through hard work and saving, whereas being poor is a permanent state of mind. While broke individuals overcome their financial deficits by working hard and saving small amounts regularly, poor people spend any minor funds they acquire.

Successful savers maintain the savings habit despite major life disruptions such as changing jobs, relocating, marriage, raising children, or health problems. Although all respondents moved at least once and changed jobs, only 21 percent and 12 percent respectively said those events interrupted their savings efforts. Only 4 percent let go of the savings habit entirely despite temporary stops.

Automating retirement contributions directly from the paycheck eliminates the psychological burden of saving because money that is never seen is never missed. Linda Jackie, a computer systems auditor, states that since money was taken directly from her paycheck, she never saw it and therefore never missed it.

Time Over Money

Wealth accumulation is primarily a function of time rather than large amounts of money, meaning that delaying savings by even a single year causes massive unrecoverable losses.

A 20-year-old saving $45 a month at 12 percent interest accumulates nearly $1,000,000 after 45 years. Waiting until age 21 costs over $109,170 in final accumulation. Anyone can build savings immediately by implementing simple behavioral rules:

• Save 10 or 25 dollars before paying this month's bills.
• Stop spending coins and save your change every month to accumulate 20 dollars or more.
• Use supermarket coupons and save the dollar amount of every dollar-off coupon instead of spending it.

4. The Buy and Hold Strategy

There are only two broad ways to manage money: buy-and-hold and market timing. Market timers claim that avoiding stock market downturns reduces risk and multiplies wealth. However, perfect market timing is entirely fictional, whereas actual clients build wealth by holding quality investments over long periods.

Market timing is an impossible myth, and successful investors rarely move money from one investment to another, avoiding fees and emotional traps.

A hypothetical Investor Two who perfectly timed the market from 1927 to 1998 would turn 10,000 dollars initial investment in 1927 into 54 trillion dollars, while Investor One who simply held stocks for a 71 years holding period grew the same amount to 21 million dollars final value for buy-and-hold Investor One as of December 31, 1998, with a 13.4 percent average annual return for Investor One and a 5 percent annual interest rate earned on cash during market-timing sidelines.

The Myth of Market Timing

Historical data demonstrates that successful market timing is virtually impossible because massive profits occur within very few concentrated days. Academic statistics and historical market performance show that missing just a tiny fraction of top-performing days completely obliterates total market returns.

For the five years ended December 31, 1997, the stock market gained 24.6 percent stock market gain for the five years ended December 31, 1997, but this entire profit occurred in just 40 days in which the entire five-year profit was produced. Between 1926 and 1997, removing the top 8 percent of profitable months wiped out 100 percent of the total return across 864 total months between 1926 and 1997.

Behavioral Finance Traps

Investment failures are primarily driven by emotional responses like fear and greed rather than technical analysis or fundamentals. You act on feelings rather than quantitative models. Fear of global collapse keeps you out of the market, while greed drives you into surging assets based on current headlines.

In 1999, fearful investors avoided the market due to El Niño, international turmoil, military actions, and Y2K, while others rushed entirely into skyrocketing internet stocks achieving 1,000 percent and more gains achieved by internet stocks in 1999 and real estate.

Even during exceptionally volatile years, wealthy clients rarely make changes to their portfolios, proving they stick to the buy-and-hold strategy.

During the highly volatile year of 1998, the Dow Jones Industrial Average gained 17.2 percent gain for the Dow Jones Industrial Average from January 1 to July 17, 1998 by July 17, lost 16 percent loss from July 17 to September 30, 1998 including a 502-point single-day drop on August 31, 1998, and rebounded 20.3 percent rebound from October 1 through the end of 1998 by year-end.

Despite this volatility, 52 percent of clients who made zero portfolio changes in 1998 made zero changes, and 85 percent of clients who made three or fewer moves over a five-year period made three or fewer moves over a five-year period.

5. Ignoring Market Indexes

Evaluating investment success against market indexes like the Dow or the S&P 500 is entirely pointless unless your portfolio precisely mimics them.

Successful investors ignore media benchmarks and instead track their performance against their own Individual Investor Index, which is tailored to their personal retirement goals.

The Individual Investor Index

Financially successful people do not measure their investment success by tracking daily, weekly, or monthly fluctuations of the Dow Jones or S&P 500 indexes. The Dow tracks thirty stocks, while the S&P 500 tracks five hundred stocks. Meanwhile, the Wilshire 5000 tracks seven thousand two hundred listed stocks, and Dow Jones and Company offers one thousand six hundred indexes.

Reacting to daily market volatility leads to impulse buying and selling. Wealthy investors keep their money in diversified portfolios for the long term. They rely on annual statements rather than market news.

Edelman's firm determines through financial planning that clients typically need an average annual total return of 8% to 12% to achieve their specific retirement goals. External index comparisons remain irrelevant to this personal target. Survey data shows distinct patterns among investors:

• 15 percent of survey respondents compare investments to the Dow;
• 11 percent compare investments to the S&P 500;
• 85 percent of clients focus entirely on their own portfolio percentage gain.

Andy Taylor, a retired Marine and teacher, avoids checking the Dow daily because he is in it for the long haul and reviews only annual statements. Robert L. Adams notes that tracking indexes leads directly to harmful impulse trading.

6. Simplicity in Personal Finance

There is a counterintuitive inverse correlation between financial success and the amount of time spent managing personal finances.

People often excuse their lack of wealth by claiming they lack time to focus on money. However, the more time you spend juggling bills and accounts, the less financially successful you usually are. Wealthy individuals spend minimal time on money matters.

Mike and Sally had immaculate checkbook records and spent 10 to 15 hours per week managing household bills across four bank accounts, yet they had $18,000 scattered, $4,000 in credit card debt, and no retirement or insurance plans.

The vast majority of financially successful clients spend very little monthly time on bill paying, checkbook balancing, and investments. Edelman's survey data proves that money management does not require a second job.

Survey data reveals distinct habits among wealthy clients:

• 85 percent of clients spend less than three hours per month paying bills;
• more than a third of clients pay bills in under an hour;
• 97 percent devote less than two hours per month to balancing their checkbook;
• 9 percent do not bother to balance their checkbook at all;
• 82 percent devote less than three hours per month to their investments;
• 5 percent spend more than five hours per month on investments.

Frank DeCola hates paying bills and considers an hour spent doing it an hour too much, yet he maintains strict organization and good credit to achieve success.

Banking and Tracking

Financially successful people maintain very few bank accounts, whereas struggling individuals often juggle multiple accounts and micromanage them.

Edelman's research shows that 82 percent of financially successful people have only two checking accounts and one savings account. In contrast, people with little money often have three to five accounts, constantly transferring funds between them in a confusing shuffleboard game that wastes hours.

Mike and Sally maintained four separate bank accounts with color-coded journal entries, which only added to their administrative burden without building wealth.

Wealthy individuals consider formal budgeting to be a waste of time, but they widely agree that tracking actual expenses is worthwhile. Budgeting is a promise of how you will spend money, whereas tracking expenses reflects how you actually spend it. Budgeting frequently leads to failure and guilt, while expense tracking keeps people aligned with their goals without requiring a cumbersome budget framework.

Only 6 percent of clients follow a budget, and only 21 percent ever had one, whereas 76 percent actively track their actual expenses. Only 24 percent of those with a budget strictly followed it.

You can improve your financial routine immediately:

• reduce the number of bank accounts you have;
• eliminate redundant accounts that serve little purpose other than increasing workload;
• stop struggling with formal budgets and letting them cause guilt;
• track your actual expenses either with software like Quicken, online services, or with simple pen and paper.

7. Family and Media Habits

Successful investors treat money as a family affair, involving children early, and tuning out the constant noise of financial media.

A Family Affair

Many families never discuss money. This leaves children with odd misconceptions. A staff member's 12-year-old daughter was shocked to learn that department stores accept cash because she had only ever seen her mother use credit cards and ATMs.

You must talk openly about money with your children and aging parents:

• teach kids how money works by having them tithe, save, invest, and enjoy portions of their funds;
• let children get used to taxes by having boss withholdings and letting teenagers help prepare tax returns;
• talk openly with your children and aging parents about financial and estate plans.

Bob and Betsy Werner taught their children, aged 35, 33, 29, and 25, that small and early equals late and large. They funded needs like basic sneakers while requiring kids to pay the difference for wants like light-up shoes.

Information Overload

You should avoid paying close attention to financial media or market minutiae. Surveys reveal that only 19 percent of respondents read The Wall Street Journal, and 21 percent or fewer watch CNBC or PBS' Wall Street Week.

Protect yourself from the constant avalanche of information:

• avoid following the market too closely;
• ignore the continuous avalanche of information produced by markets and media;
• invest as much money as you can, as often as you can, and for as long as you can.

10 Key Ideas

1. Financially successful people choose to carry a 30-year mortgage rather than prepay principal because keeping cash liquid and investing yields higher returns.
2. Successful investors do not diversify their employer retirement plan contributions into fixed accounts or bonds, instead placing 100 percent into stocks.
3. Most fortunes come from consistent, small investments started early in life rather than inheritances, lotteries, or large windfalls.
4. Wealth accumulation is primarily a function of time rather than large amounts of money, meaning that delaying savings by even a single year causes massive unrecoverable losses.
5. Market timing is an impossible myth, and successful investors rarely move money from one investment to another, avoiding fees and emotional traps.
6. Even during exceptionally volatile years, wealthy clients rarely make changes to their portfolios, proving they stick to the buy-and-hold strategy.
7. Successful investors ignore media benchmarks and instead track their performance against their own Individual Investor Index, which is tailored to their personal retirement goals.
8. There is a counterintuitive inverse correlation between financial success and the amount of time spent managing personal finances.
9. Financially successful people maintain very few bank accounts, whereas struggling individuals often juggle multiple accounts and micromanage them.
10. Successful investors treat money as a family affair, involving children early, and tuning out the constant noise of financial media.