The Millionaire Next Door
By Thomas J Stanley & William D Danko
Millionaires live lavishly. They fly private jets, drive sleek Bentleys, and wear the newest designer clothes. They also live in expensive houses in Beverly Hills and Atherton. Or is that all fantasy? The reality is much different. Thomas J. Stanley and William D. Danko claim to have discovered the greatest secret of America’s real millionaires. In their book, The Millionaire Next Door, they reveal their discoveries about the simple lifestyle of America’s millionaires.
The Millionaire Next Door has one core premise. You can become financially successful too if you avoid spending more than you earn, commit to investing, and plan your finances well.
“The implication of The Millionaire Next Door…is that nearly anybody with a steady job can amass a tidy fortune.”
Top 20 Insights
1. It is a myth that millionaires drive fancy cars, live in huge mansions in ultra-rich neighborhoods and wear designer clothes. Frugality was found to be a crucial foundation of wealth-building. The authors share the 4 common practices of wealthy households, and how the millionaires play offense with income-generation, and play defense with their spending.
2. PAWs, or ‘Prodigious Accumulators of Wealth’ are exceptionally good at saving their income (15% or more of it), which they invest to become wealthy. On the other hand, UAWs are “Under Accumulators…” They could make a very high income too, but they spend it all to appear high-status, and as a result they don’t accumulate much true wealth.
3. Time, energy, and money are finite resources, and wealthy people channel these resources efficiently to build wealth. They start earning and investing as early as possible in their adult life. Read more from the book or book summary on how the PAWs plan and manage their finances carefully, tracking their expenses closely and minimizing their “realized income” to reduce taxes.
4. Wealthy people prioritize achieving financial independence over displaying a high social status. Find out from the book why staying in a prime neighbourhood or owning a luxury car sets you back in your wealth accumulation.
5. Being financially-prudent also doesn’t mean being miserable – Most PAWs love what they do and how they live; despite their simple lifestyles, these financially independent people are actually happier than their UAW counterparts with a high-consumption lifestyle but no financial security.
6. It is common for parents and grandparents to offer economic gifts and “acts of kindness”, such as paying for the children or grandchildren’s private school tuition fees, or home mortgages. The authors caution against such handouts, and share their advice on the best ways to offer these gifts without inculcating poor financial habits.
7. Most affluent, well-informed parents would want to progressively reduce the size of their estate before they pass away, so they can share the wealth with their children without leaving them with a huge estate tax liability.
8. The affluent surveyed in this book – especially the self-made ones – accumulate wealth because they actively target and pursue market opportunities.
9. Most of the affluent in America are business owners, including self-employed professionals. Yet, less than 20% of these successful business owners pass their businesses to their children, and many even advise their children against business. While there was no clear predictor of which types of business generated more millionaires, most of the affluent business owners interviewed were in “dull” but stable businesses.
10. It doesn’t matter how much you earn; it matters more how much you spend and invest relative to how much you earn. The average people next door became millionaires because they chose the right occupation, faced their fears courageously and handled their money well with great financial discipline and frugality. These were what made them the millionaire next door.
11. Millionaires and PAWs tend to be surprisingly frugal. Most of them spend over 8 hours a month on financial planning and creating a household budget. Some follow a “pay yourself first” strategy of putting aside money for investing first, then spending what’s left.
12. Many UAWs are actually highly educated and highly paid professionals. They fall into a trap of spending more and more money to maintain a “high status” public image. On the other hand, many PAWs are blue-collar business owners free from that social pressure, and they pour most of their income into investments.
13. There is always going to be a difference between those who work hard for their wealth and those who are born with it.
14. Consider whether you are truly benefiting your children when you gift them money. And question if it is actually having a negative impact on their future capabilities.
15. Millionaires learn how to be efficient and responsible with money.
16. Being a millionaire goes beyond “appearance”. Millionaires may not seem ‘wealthy’ from the outside.
17. The first step towards accumulating true wealth is planning how to spend your money.
18. As a wealthy parent, it is important that you take the time to consider how you raise your children. You want to encourage them to be responsible with money.
19. Ensure that your children understand that there is more to life than money. And show them that many things hold more value than money itself.
20. Do your best to ensure that your children don’t have a complete understanding of your wealth until they are mature, disciplined and in a working profession, providing for themselves.
About Thomas J. Stanley and William D. Danko
Thomas J. Stanley (1944-2015) was an American author and business theorist. He authored and co-authored several books on America’s wealthy class. The list includes the New York Times bestseller, The Millionaire Next Door, with William D. Danko.
Stanley earned a doctorate in business administration from the University of Georgia. After graduating, he served in different corporate leadership capacities. He was also a chief advisor at Datapoint Corporation. Founded in 1968, Datapoint was a technology company that manufactured computer terminals. Later in his career, he lectured in marketing at the University of Tennessee and the University of Georgia.
Dr. William D. Danko is a faculty member at the State University of New York. Over the past three decades, he has studied consumer behavior and wealth formation extensively. In addition to The Millionaire Next Door, he has also co-authored Richer Than a Millionaire: A Pathway to True Prosperity. Dr. Danko is a published researcher in the US, Australia, Canada, Germany, Poland, and Switzerland. He completed his Ph.D. at Rensselaer Polytechnic Institute’s (RPI) Lally School of Management.
Stanley and Danko spent 20 years studying how successful Americans gained and spent their money. They engaged around 1,000 respondents, who answered 200 questions each. Many authors spend a lot of time studying and writing about how to get rich. But Stanley focused on understanding how the rich live a life different from ordinary Americans. Stanley passed away in a car crash in 2015.
Lesson #1: Millionaires Don’t Spend as Much as They Earn
As a millionaire, you may have imagined driving the newest Tesla model and drinking the finest wines. But in reality, many millionaires are frugal.
“Many people who live in expensive homes and drive luxury cars do not actually have much wealth. Then, we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighborhoods.” – Thomas J. Stanley
This is not the perception that the media has created about millionaires. Instead, the media displays content that glorifies spendthrifts and moneyed lifestyles. There’s a reason the media markets movies like Crazy Rich Asians and TV shows such as Billions and Gossip Girl. It is because extravagant lifestyles are much more entertaining than financial prudence.
“The advertising industry and Hollywood have done a wonderful job conditioning us to believe that wealth and hyperconsumption go hand in hand.” – Thomas J. Stanley
But if you want to achieve financial success, don’t follow the media’s image. You must plan your spending and learn how to save when you start making more money than you need.
“Whatever your income, always live below your means. Millionaires often build wealth by not spending a fortune on their primary residence, thus making them less likely to live in affluent neighborhoods” – Thomas J. Stanley
The American millionaire is not necessarily a tech professional living in Beverly Hills. They are often the people living a modest life right next door. They spend every dollar buying goods that add value to their lives. Millionaires also don’t necessarily own the most expensive cars. Instead, they may even own second-hand ordinary vehicles.
How Millionaires Practice a Frugal Lifestyle
Effective budgeting and practicing a frugal lifestyle are key to building your wealth. Earning a six-figure salary doesn’t mean you’re wealthy. Even if you’re among the highest-paid employees, taxes will take away a large part of your income. After deducting living expenses, you will have some money to support yourself until the next pay.
But you don’t have to earn millions to save for your future. A simple wealth rule is saving as much as possible when you make more money than you need to live.
“The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.” – Thomas J. Stanley
An essential strategy millionaires use for frugality is developing an atmosphere of scarcity. Although they can afford a $200 dinner, they opt for a $50 meal. Instead of going for the most expensive vehicle, they choose a decent, affordable one.
Lesson #2: Millionaires Devote Time and Energy to Building Wealth
Patience, passion, and perseverance are essential values among people who have accumulated wealth. Stanley and Danko found millionaires invest time and energy in planning their financial future. They focus on building financial assets over other things in life. This often takes years, if not decades.
“Income is what you bring home today. Wealth is what you have tomorrow. And the next day. And the next day” – Thomas J. Stanley
Contrary to the media-perpetuated belief, building wealth isn’t a rapid or one-time event. Instead, it’s a slow, systematic one that takes time to mature.
High income is not a guarantee for building wealth instantly. Most high-income earners classify as either a PAW or UAW:
· Prodigious Accumulators of Wealth (PAWs) are masters of saving money and growing wealth. They have a net worth of around four times higher than many people with a similar income. They focus on attaining financial independence.
· Under Accumulators of Wealth (UAWs) perform below average in saving money. Hence, they fall much behind PAWs despite similar incomes.
How Do You Know if You’re a PAW or a UAW?
Unfortunately, many UAWs are highly educated professionals making high incomes. Yet, they spend their money maintaining luxurious lifestyles. They also try to sustain the standards that society expects them to hold.
“How can well-educated, high-income people be so naive about money? Because being a well-educated, high-income earner does not automatically translate into financial independence. It takes planning and sacrificing.” – Thomas J. Stanley
But how do you determine whether you are a PAW or UAW? Stanley developed a formula you can use to check your PAW or UAW status.
[Your age] x [Your realized taxable annual income – inheritance]10%
The answer you get represents what your net worth value should be. For instance, imagine you’re 41 years old with an annual income of $200,000, $15,000 of investment income, and $50,000 worth of inheritance. You can calculate your net worth using the following formula.
41 x [$200,000+$15,000 – $50,000]10% =$676,500
If your net worth is less than half the value you get, you’re a UAW. If the figure is double your value, you’re a PAW.
Lesson #3: Millionaires Rank Financial Independence over Luxe Social Status
We live in a world of social media where people often have a desire to display moneyed lifestyles for fame. If this is a weakness you have, you’re not alone. Unfortunately, suppressing this urge can be daunting. To appear rich in the outside world, most young people go beyond their means to fit into the perceived wealthy online community.
It’s credit cards that fuel many luxurious lifestyles today, not actual earnings. People want to have the latest designer clothes, lease sports cars, and get a large mortgage on homes. Yet, their financial strength does not allow it. Chasing this lavish life, you can’t have the peace that comes with financial independence. Instead, deep down, away from the public eye, you know you’re not financially successful.
“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.” – Thomas J. Stanley
The ideal American millionaire feels no pressure to prove they live a lavish lifestyle to the world. Instead, they prefer gaining financial independence to looking wealthy. They view financial sustainability as the ultimate prize for growing wealth. Even if they face financial constraints in the future, they wouldn’t be under pressure to sustain their lifestyles.
“To build and maintain wealth over time, it will be necessary for you to approach all financial management – spending, saving, generating revenue, investing – in a different, more disciplined approach than anyone else around you” – Thomas J. Stanley
The Millionaire Next Door shows that financial independence contributes to well-being. Millionaires are happier and more confident in their current and future financial sustainability. They have clear short and long-term goals and objectives, allowing them to plan and budget their needs depending on priorities.
Everyone values the well-being of their families over other things. Focus on financial independence and avoid the social media perception of the “rich.” This way, you can enjoy financial freedom with your family like the ideal millionaire.
Lesson #4: Millionaires Don’t Perpetuate Economic Outpatient Care (EOC)
Young men and women with rich parents often throw lavish parties and show off their expensive lifestyles. However, that’s not good for the youth’s own financial future. In fact, that can be a financial disaster in the making.
Many wealthy parents spend a lot of money on their children through cash gifts and financing non-business travels. Yet, the more money adult children receive, the less they save. This is quite ironic as the basic logic argues that the more you receive, the more you can accumulate. Unfortunately, human beings aren’t logical beings.
Millionaires claim that giving money to adult dependents prevents them from investing. They don’t learn important life skills like saving and using money on things that add value.
Practicing frugality in your life teaches your children to adopt the same lifestyle. Being a spendthrift encourages your children to embrace a lavish lifestyle instead of growing wealth.
Teaching your children the importance of frugality is key to wealth. It helps them develop plans to achieve financial independence.
Lesson #5: Millionaires Raise Economically Responsible Children
No one wants to leave a bad legacy when they die. Everyone wants their legacy held for decades and their descendants to multiply their wealth. But is this always the case?
Dependent children will inherit more wealth from their parents. But they often lack knowledge of investing and accumulating wealth. This leads them to misuse wealth through an affluent lifestyle. Yet Stanley’s interviews show how ideal millionaires perceive raising self-sufficient children. Here are some of their best lessons:
· Never tell children that their parents are wealthy. Children with UAW parents emulate their parents’ spending habits. They also have a desire for an extravagant lifestyle. But the children of PAW parents grow up without knowing their parents’ net worth. This helps them learn to become self-sufficient and responsible for their spending behavior.
· Train your children to practice frugality. Irrespective of how much wealth you have accumulated, practice frugality. Teach your children the same to enable them to live simple lives.
· Your children shouldn’t realize you are wealthy until they are responsible and disciplined adults. By the time they know your wealth, they should be mature enough to take responsibility and make positive decisions for growing the wealth.
· Direct your children towards achievements. Most millionaires emphasize the need to teach their children to become wealth creators. Teaching children that earning facilitates more spending will destroy their economic life. Unfortunately, that’s what many UAW parents do. As a result, when their children get a pay rise, they focus on increasing spending. Instead, they should learn to save or invest money they don’t need.
Lesson #6: Millionaires Leverage Market Opportunities
How do millionaires decide what to spend? Strategic planners understand money secrets. They invest in their families’ medical care and ventures that improve productivity.
Millionaires practice frugality by forgoing unnecessary products and services. Yet they are fearless at taking calculated risks for valuable business opportunities.
They understand investments that can make a difference in the market. They base their spending on research. Research helps them determine if an opportunity is worth the investment. They plan and never haste to adopt premature ideas.
“One of the reasons that millionaires are economically successful is that they think differently.” – Thomas J. Stanley
To follow in the footsteps of a millionaire, learn to plan your investments carefully. High-risk opportunities might be highly rewarding if studied and executed carefully.
Lesson #7: Millionaires Choose Occupations Wisely
What plan do you have to accumulate wealth? Do you want to get to the top of your career or start your own business from scratch?
Interestingly, most millionaires in America are self-employed business owners. You can earn a six-figure salary from your employment. Yet, you spend most of it paying your bills and maintaining your expensive living.
On the contrary, business owners receive income from different sources. These channels enable them to multiply their investments while maintaining a simple lifestyle.
“Wealth is what you accumulate, not what you spend” – Thomas J. Stanley
Establishing a business is not a guarantee of becoming a millionaire. Most businesses don’t achieve owners’ objectives. Failure can result from competition or poor planning.
Millionaires are keen on choosing occupations to invest in. Most average investors presume popular occupations are the most successful. Still, millionaires have a contrary opinion. Here are some ideas on selecting the right occupation:
· Dull Industry. It’s not surprising that many millionaires invest in these seemingly ‘boring’ businesses. Dull industries are the most stable yet less attractive to many people. For example, the commercial cleaning and HVAC industries experience minimal competition. But that same feature has helped several people become millionaires.
· Frugality in Business. You need to exercise frugality in both your personal life and in business. Cut spending in less productive departments. This will help you maximize resources in areas yielding more returns.
· Vast Business Knowledge. Don’t invest in a business just because it promises to be profitable. Most millionaires have expertise in the business areas they invest in. If you’re unfamiliar with the hospitality industry, rethink before opening a restaurant.
Lesson #8: Millionaires Have Clear Goals and Objectives
Just as humans have unique features, the same goes for building wealth. What amount of wealth have you planned to accumulate in one year? What strategies have you put in place to ensure you meet your target?
Most millionaires are master planners and efficient in defining their goals. They prioritize managing their finances. But they don’t get self-satisfied at any stage. Most have daily, weekly, and monthly schedules to track progress.
Goals inform the strategies and channels that they adopt. Millionaires commit to a particular course of action only when they have a clear view of the direction to take and goals to achieve. Taking each step at a time enables millionaires to achieve long-term goals. They break down long-term objectives into manageable short-term tasks. This provides a clear way toward the ultimate goal.
In his book, No Excuses! Brian Tracy posits that only three percent of adult Americans have goals and objectives. This population accumulates wealth many times higher than the rest of the population.
If you’re ready to do what it takes to be a millionaire, start with setting goals and objectives. Breaking down the goals and establishing plans for every step will give you a clear view of your goals.
Lesson #9: Millionaires Have Had Trying Moments
Most of us only focus on millionaire success stories. But we don’t understand the background of such achievements. Most millionaires pushed their limits to achieve what they have. Have you ever thought of working two jobs with no vacations? These are some things that millionaires have endured in their journey.
Wealth-building journeys are rarely easy and demand a strong work ethic. Most self-made millionaires have had to navigate adversities and barriers to attain their level of success. They have also had to make important sacrifices in their present that set them up for a better future.
Consider a sports car that you want to buy today that costs $50,000. Even if you have the cash to purchase it, that’s $50,000 that you cannot invest into the markets to earn a greater return. Millionaires would view that as a sacrifice worth making to earn bigger returns down the road.
“Economic freedom, like the freedom we experience in the United States, has a cost: the discipline and work it takes to get there and then to maintain it. Not everyone is willing to pay that price.” – Thomas J. Stanley
Each story brings out the perspective that there is no easy way to accumulate wealth. It takes sacrifice, perseverance, and discipline.
Final Summary and Review of The Millionaire Next Door
Stanley and Danko’s The Millionaire Next Door presents an honest approach to becoming an ideal millionaire. You don’t have to prove yourself or your wealth to people. Spending your money on expensive jewelry, designer clothes, and cars depletes your wealth.
The Millionaire Next Door shows that becoming a millionaire means saving your excess income. In addition, gaining wealth isn’t automatic when you have more money than you need. Instead, it is a gradual process that may take years. The journey may also involve multiple challenges. Your persistence and willingness to make mistakes and correct them are important. It creates the difference between the millionaire next door and an employee earning a large salary but with little wealth.