The Millionaire Next Door: The Surprising Secrets of America’s Wealthy (Revised 2010) by Thomas J. Stanley, William D. Danko
We often think of the millionaire lifestyle the way media portrays it – opulent homes, luxury vehicles, lavish spending sprees on consumer goods. What The Millionaire Next Door depicts is a strikingly different situation. Most millionaires realize that a heavy-consumption lifestyle isn’t conducive to achieving wealth, and eschew this lifestyle for one of frugality.
Originally published in 1996, authors Stanley and Danko compiled their observations from hundreds of millionaires they interviewed. They divide the book into seven sections, describing the main ways in which millionaires differentiate themselves from non-accumulators of wealth. Some sections are rather outdated, such as the pricing on used vehicles from the 1990s and early 2000s, but a few chapters stand the test of time:
Chapter one details how most millionaires live well below their means, thus allowing them to amass their fortunes. Those interviewed over a 20-year span reported living in less expensive neighborhoods and houses, driving used vehicles, and avoiding custom-made clothing. Most cited frugality as the cornerstone of their wealth-building, noting that defense (saving money by budgeting and planning) is more the foundation stone of their wealth accumulation than offense (making money).
The authors go through painstaking measures to prove this point, noting that there are Under Accumulators of Wealth (UAWs) and Prodigious Accumulators of Wealth (PAWs). UAWs have a low net worth relative to income, while PAWs have a high net worth relative to income. Earning well over six figures, does not equate to being a prodigious wealth accumulator. Rather playing defense is critical to amassing wealth.
The key takeaway here is that you can make $200,000 a year by playing great offense, but if you play terrible defense, spending $220,000, you’re not really amassing wealth. Similarly, you can have a smaller yearly income of $50,000, but if you play great defense and only spend $35,000, you are well on your way to accumulating wealth.
Chapters two and three cover car-shopping methods, time spent on budgeting, and financial goal-setting. High wealth-accumulators spend roughly eight hours a month on investing and budgeting. Over 60% of millionaires surveyed reported knowing how much their household spends per year on food, clothing, and other goods, down to the nearest dollar. Most millionaires forego the need for ‘status-symbols’, and instead invest that money to accumulate wealth.
The third chapter is aptly named “You aren’t what you drive,” a friendly reminder that the material objects we own should not reflect who we are as people.
The final chapter of note offered advice for affluent parents. This includes teaching your children discipline and frugality no matter how wealthy you are. Thus, ensuring that your children won’t realize you’re affluent until after they’ve established a mature and disciplined lifestyle. Also, parents should emphasize their children’s achievements over accumulation of status-symbols.
If you feel your household struggles with accumulating wealth, this book is for you. While the book is a bit dated, even with the revised edition, the main ideas still apply. If want insight into becoming wealth-oriented instead of consumer-oriented, then it is a great place to start.
Star Rating: 2/3 stars
My biggest takeaways from the book:
There were some rather striking statistics noted in this book, based upon years of interviews:
- UAWs spend three times as much time exercising per month as they do planning their investment strategies.
- Fully one-half of the millionaires surveyed never spent more than $235 for a wristwatch in their lives, nor spent more than $399 for a suit or clothing for his/herself or anyone else.
- PAWs allocate nearly twice the number of hours per month to planning their financial investments as UAWs do. Eight hours a month is sufficient for most PAWs.
- 25.2% of millionaires had not purchased a motor vehicle in four or more years, and only 23.5% of millionaires owned a car’s most recent model.
Where I’ll go from here:
The last two books I’ve read have been incredibly useful in analyzing my spending habits and encouraging me to save more. I hope the posts thus far have inspired you to alter some spending habits and make more informed financial decisions. I will be switching back to a book on investing, as I would like to continue refining my investment decisions. I will be reading a book Warren Buffett has recently recommended, The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks.
As always feel free to share your thoughts! Do you feel that you’ve made sound financial decisions this year? What small changes can you make to your lifestyle to help you accumulate your wealth?