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Book Review

The Millionaire Next Door
by Thomas Stanley & William Danko
reviewed by Marco den Ouden

Originally published at About.com - 10/12/98
The article is also available at Stocknowledge

How rich are you? Do you have a net worth of over a million dollars? Will you have that much when you retire? Or is it just an impossible dream?

In their best-selling book The Millionaire Next Door, authors Thomas Stanley and William Danko tell you that, not only is it a possible dream, but that the people you think are millionaires, in all likelihood, are not. And the people you least suspect of being wealthy, could well be.

You know that high living lawyer with the Armani suit, the one who lives in the large mansion, drives a fast, expensive, imported sports car, is a member of the prestigious golf club with the $50,000 membership fee and sends his kids to the very expensive private school? Chances are that while he's making lots of money, he's spending it faster than he makes it. He's actually poor!

Meanwhile, the hog farmer down the road who wears blue jeans and a straw hat, drives a pickup truck and lives in a modest non-descript farmhouse, whose kids help out on the farm, and who you thought was probably just scraping by, is in fact, fairly wealthy, a millionaire once , twice or three times over.

This fascinating study of wealth in America lays to rest a lot of myths and misconceptions about the rich.

  • Most wealth is inherited? Bleep! Wrongo! 80% of American millionaires are first generation affluent.
  • Most millionaires live in mansions? Wrong again! The average value of the homes of the rich is $320,000. Half have occupied their homes for over twenty years!
  • Well, millionaires drive current year, expensive, imported cars, right? Bleep! Sorry No cigar. Most millionaires drive domestic made vehicles, the most popular being - are you ready for this? - the Ford F-150 Pickup Truck. Three in ten millionaires drive the F-150. Another 25% drive the Ford Explorer sports utility vehicle. Caddies and Lincolns are only the third and fourth favorites, while Rolls Royces and Ferraris don't even make the top ten favorite list. And most millionaires keep their vehicles longer. Over fifty percent drive vehicles two or more years old. In fact, 36.6% of millionaires buy used cars rather than new!
  • Well surely millionaires wear Gucci shoes and Rolex watches? No - that's only Brian Mulroney (who is a millionaire, but not typical)! Fewer than 25% have ever spent more than $600 for a suit. 50% have never spent more than $140 on a pair of shoes (I guess they don't wear Nikes!). And 50% have never spent more than $235 for a watch.

So what makes a millionaire? 20% are retired, but of the ones still working, two thirds are self-employed business owners. Entrepreneurs. Even though the self-employed make up less than 20% of workers in America they account for two thirds of the millionaires.

But simply being self-employed is not the key factor to what makes a millionaire report Stanley and Danko. The bulk of the book is devoted to explaining the differences between two distinctly different types of personality. One type are Prodigious Accumulators of Wealth (PAWs). The other type are Under Accumulators of Wealth (UAWs). Most people are just Average Accumulators of Wealth.

Are You Wealthy?

Multiply your age times realized pretax income from all non-gift sources. Divide by ten. This is what your net worth should be.
If you have significantly more you're a PAW. Significantly less and you're a UAW.

The UAWs, interestingly enough, are often the people we think of as well to do. People employed in high paying jobs as middle managers, sales professionals, doctors, lawyers, even stock brokers. These people often feel compelled to maintain an expensive lifestyle so they can fit in with the beautiful people and the country club set. They own time-share condos. Millionaires generally do not. They drive fancy cars. Millionaires do not. They wear expensive watches, suits and clothes. Millionaires do not. They live in large expensive homes. Millionaires do not.

The difference between these high income earners/big spenders, and your average millionaire boils down to attitude. The authors list seven factors.

  1. They live well below their means.
  2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
  3. They believe that financial independence is more important than displaying social status.
  4. Their parents did not provide economic outpatient care. (i.e. they did not get handouts from their parents.)
  5. Their adult children are economically self-sufficient.
  6. They are proficient in targeting market opportunities.
  7. They chose the right profession.

The most important one is frugality. The authors emphasize it early and repeatedly throughout the book. Millionaires are frugal. They live within their means. They look for bargains. They live modestly, often in neighbourhoods alongside average folks. They are not ostentatious. Heck, their spouses even clip grocery coupons!

Because of this frugality, they have money to invest. And invest they do. But where UAWs spend lots on status symbols, driven by our consumption oriented society, they are frugal in one area where millionaires tend to spend much more. And that area is financial advice. Millionaires don't mind spending extra for good tax advice, a talented investment advisor or a skilled lawyer. UAWs spend very little in this area.

Perhaps the most interesting element of this fascinating book is the relationship between parents and children. Many parents acquire a comfortable nest egg by the time they retire. But what they do with it can often determine the difference between success and failure for their offspring. Some well-off parents believe they help their children by giving them regular large gifts of cash. In fact, the opposite is true.

Children who are taught to be self-reliant and to fend for themselves develop the maturity and discipline to be successful PAWs themselves. But parents who supplement their children's income with infusions of cash (what the authors call economic outpatient care) often encourage a spendthrift lifestyle. The kids think, "Oh we can spend like drunken sailors because Mom & Dad will bail us out if we get into trouble."

The book is replete with fascinating case studies. There's the two brothers, one a teacher , the other an attorney. The teacher, Henry, makes $71,000 a year. The attorney, Josh, makes $123,000. Which is richer? In fact, Henry the teacher lives below his means and saves, saves, saves. His wealth is approaching a million dollars. Josh the attorney, though, only has assets, including his law partnership, etc. of $553,000. These two brothers are in their forties. The teacher will likely retire with enough money to live very comfortably. The lawyer will probably not be able to maintain the lifestyle he is used to.

Another case involves two sisters. One, Ann, was the rebellious sort. She rejected handouts from her parents. She learned that "the dole comes with a price...do it Mother's way." She moved far away from her parents and became a successful business executive. She saves and invests.

By contrast, her sister Beth and her husband moved in with her parents while he was finishing university. After a business setback, the son-in-law was hired by Beth's father as vice president of administration (formerly office manager). But the price was a lack of self-confidence and a lack of respect. Beth's parents treat him like their flunky, even referring to him as "bozo". Beth and her husband tolerate this because they have come to rely on the handouts.

Parents, unfortunately, often with the best of intentions, encourage weakness by subsidizing it and penalize strength by declining to give money to the children with stronger characters (Gee - sort of like the government, eh?). Stanley and Danko offer ten rules for affluent parents and productive children. It starts with not letting your children know you are wealthy until they have already established successful careers and includes such excellent advice as stay out of your children's family matters and laud their accomplishments, however modest. But the most important rules are to teach them to respect the value of money and not waste it, while acknowledging that there are more important things than money.

So what can you do to become a millionaire? Although two-thirds of millionaires are self-employed, they do not recommend it as a strategy for wealth creation. The average net income for the fifteeen million sole proprietorships in America is only $6200. 25% don't make any profit at all!

What they do recommend is getting into professions that cater to the wealthy. And they recommend following the example of America's millionaires. Be frugal and invest, invest, invest.

I loved this book. It provides much food for thought and is endlessly fascinating. We tend to think of the rich as portrayed on that TV show, Lifestyles of the Rich and Famous. In fact, most of the rich lead a completely opposite lifestyle. The Rich and Famous from TV are very poor role models for those aspiring to wealth.

I also loved this book because it confirms my deep rooted love for the free market economy. The way to success is open to anyone with the will and determination to make it. Capitalism is not an aristocracy of inheritance as the old feudal systems of Europe were. It is an aristocracy of talent, hard work and persistence. Stanley and Danko show that it is immigrants with nothing but determination who have the higher chance of becoming wealthy. (People with either a Scottish or Russian heritage have a one in five chance of being millionaires.)

But mostly I loved this book because it gives solid advice and encouragement for those like myself working to become financially independent. With perseverance we will make it.

Buy it. Read it. Learn from it. This is a great book.


Contents copyright Marco den Ouden       All Rights reserved
Typewriter graphic courtesy Stockfreeimages.com