The Millionaire Next Door

Some personal finance books promise to show you how to become a millionaire and they usually fail to deliver on their promise. The Millionaire Next Door by Thomas J. Stanley and William D. Danko is different though. It is built on years of research, on large amounts of statistics and case studies. It doesn’t make hollow promises. Instead, it profiles people who have already become millionaires. This is a subtle but important difference.

A common thread that runs through the book is that people that are destined to become extremely wealthy are very careful about using credit and tend to save for things before they buy them. The average millionaire in the book drove a second hand American built large family car. They live in middle class suburbs, not necessarily in the best house in the street. You would not know a millionaire by his house or car. Nor would you recognise him by his general lifestyle, the majority of millionaires were not members of yacht clubs and exclusive private golf clubs, and most sent their children to ordinary public schools.

The average millionaire interviewed would describe himself as a "tightwad", and never spent any money that was not absolutely necessary. The average millionaire knows exactly what he spent over the last year on household items like food and domestic bills. They are extremely frugal and tend to avoid flashy brand name stuff, and are compulsive coupon savers and junk mail readers, with a freezer full of cheap meat and frozen vegetables. The guys in this book avoided flashy consumer purchases at all costs. They drove normal cars, they lived in normal suburbs, they ate at normal places instead of gourmet restaurants, they drank beer instead of fine wine and generally did not own a boat.

Sure you still want to be a millionaire?

The project that inspired this book was originally a marketing exercise. The authors wanted to know how to market to the
very wealthy. They did what most people would do first and started writing to people in the top suburbs. What they found instead was a bunch of high-income earners with lots of expensive toys and lots of debt, but a low net value compared to their income. Trying to figure out why this was the case was what brought on the Millionaire Next Door book.

Most books focus on only one side of the wealth equation: spending less or earning more. It’s refreshing to read a book that makes it clear that both are required to succeed.

High-income spenders live in a house of a cards. Sure they have the money now to fund their hyperconsumer lifestyle, but what happens when that money goes away? It’s also difficult for low-income frugal folks to acquire wealth. They need to learn to play financial “offense”. But those with low incomes who spend are in the biggest trouble of all. The wealthy, on the other hand, generally have a high income and a frugal mindset. They share other characteristics as well:

• 80% of America’s millionaires are first-generation rich. This is contrary to those who would have you believe that wealth is usually inherited.
• 20% of millionaires are retired
• 50% of millionaires own a business

The authors list “seven common denominators among those who successfully build wealth. Those characteristics are:

1. They live well below their means.

In general, millionaires are frugal. Not only do they self-identify as frugal, they actually live the life. They take extraordinary steps to save money. They don’t live lavish lifestyles. They’re willing to pay for quality, but not for image.

2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

Millionaires budget. They also plan their investments. They begin earning and investing early in life. The authors note that “there is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future”. In other words, the more time someone spends buying things that look good, the less time they spend on personal finance.

3. They believe that financial independence is more important than displaying high social status.

The authors spend far too much time beating home this point: usually millionaires don’t have fancy cars. They drive mundane domestic models, and they keep them for years. (There’s an entire 31-page chapter devoted to how millionaires shop for cars. It’s tedious. It may be the worst chapter I’ve ever read in any personal finance book. And the authors go on ad nauseum about the average price per pound of various vehicles. There’s even an appendix showing the average price-per-pound for the most popular models.)

4. Their parents did not provide economic outpatient care.

That is, most millionaires were not financially supported by their parents. The authors’ research indicates that “the more dollars adult children receive [from their parents], the fewer they accumulate, while those who are given fewer dollars accumulate more”.

5. Their adult children are economically self-sufficient.

This chapter is fascinating. The authors clearly believe that giving money to adult children damages their ability to succeed.

6. They are proficient in targeting market opportunities.

“Very often those who supply the affluent become wealthy themselves.” The authors discuss how one of the best ways to make money is to sell products or services to those who already have money. They list a number of occupations they feel have long-term potential in this area.

7. They chose the right occupation.

“Self-employed people are four times more likely to be millionaires than those who work for others.” There is no magic list of businesses from which wealth is derived — people can be successful with any type of business. In fact, most millionaire business owners make their money in “dull-normal” industries. They build cabinets. They sell shoes. They’re dentists. They own bowling alleys. They make boxes. There’s no magic bullet.”

And finally, the authors make the point that it is much harder to live a frugal lifestyle in an expensive suburb. Keeping up with the Joneses is much easier when the Joneses can only afford a five year old station wagon, don’t have a boat, can’t indulge in the latest electronic gadgets or fashion and don’t redecorate their kitchen every three years.

In Summary

The Millionaire Next Door is a classic, but with a major flaw - is not very well written and can be repetitive and dull in some areas (the section on car-buying seems to go on forever). However, I believe it is an essential read for anyone who wants to achieve financial freedom and is not expecting to become a movie star or Fortune 500 CEO.

Buy it, read it and use it.