149. The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

Rating:  ☆☆☆☆

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Author:   Thomas J. Stanley and William D. Danko

Genre:  Non-Fiction, Economics, Finance, Personal Finance, Self Improvement

258 pages, published October 25, 1995

Reading Format:  Book

 

Summary

The Millionaire Next Door is a compilation of research on the profiles of American millionaires (i.e., U.S. households with net-worths exceeding one million dollars).  The authors compare the behavior of those they call UAWs (Under Accumulators of Wealth) and those who are PAWs (Prodigious Accumulator of Wealth).  A $250,000 per year doctor is an “Under Accumulator of Wealth” if his/her net worth is less than the product of their age and one tenth of his/her realized pretax income.  For example, a 50-year-old doctor earning $250,000 should have about $1.25 million in net worth (50*250,000*10%). If her net worth is lower, she is an “Under Accumulator.”  People are usually UAW’s because they are more focused on consuming their earnings than on saving them.  In comparison, PAW’s accumulate usually well over the product of their age and one tenth of his/her realized pretax income.  Living as a PAW is how most people end up as millionaires.  Most of the millionaire households profiled lived below their means, did not have extravagant lifestyles and spent little on purchases such things as cars, watches, clothing, and other luxury products/services.

 

Quotes

Whatever your income, always live below your means.”

 

“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”

 

“I am not impressed with what people own. But I’m impressed with what they achieve. I’m proud to be a physician. Always strive to be the best in your field…. Don’t chase money. If you are the best in your field, money will find you.”

 

“Good health, longevity, happiness, a loving family, self-reliance, fine friends … if you [have] five, you’re a rich man….”

 

“Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.”

 

“It’s easier to accumulate wealth if you don’t live in a high-status neighborhood.”

 

“If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.”

 

“Money should never change one’s values…. Making money is only a report card. It’s a way to tell how you’re doing.”

 

“it is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.”

 

“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.”

 

“Most people will never become wealthy in one generation if they are married to people who are wasteful. A couple cannot accumulate wealth if one of its members is a hyperconsumer.”

 

“Have you ever noticed those people whom you see jogging day after day? They are the ones who seem not to need to jog. But that’s why they are fit. Those who are wealthy work at staying financially fit. But those who are not financially fit do little to change their status.”

 

“It’s amazing what you can do when you set your mind to it. You’ll be surprised how many sales calls you can make when you have no alternative except to succeed.”

 

“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.”

 

“The median (typical) household in America has a net worth of less than $15,000, excluding home equity. Factor out equity in motor vehicles, furniture, and such, and guess what? More often than not the household has zero financial assets, such as stocks and bonds. How long could the average American household survive economically without a monthly check from an employer?  Perhaps a month or two in most cases. Even those in the top quintile are not really wealthy. Their median household net worth is less than $150,000. Excluding home equity, the median net worth for this group falls to less than $60,000. And what about our senior citizens? Without Social Security benefits, almost one-half of Americans over sixty-five would live in poverty.

 

“America is still the land of opportunity. Over the past thirty years I have consistently found that 80 to 85 percent of millionaires are self-made.”

 

“Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires.”

 

“It is easier to purchase products that denote superiority than to actually be superior in economic achievement.”

 

“Mr. Denzi can teach us all something about accumulating wealth. Begin earning and investing early in your adult life. That will enable you to outpace the wealth accumulation levels of even the so-called gifted kids from your high school class. Remember, wealth is blind.”

 

“They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”

 

My Take

When I was in my early 20’s, my Dad sat me down with an HP financial calculator and demonstrated to me what he called “the magic of compound interest.”  He showed me that if I started a regular program of saving and investing, I could grow my money to a sizable amount.  His advice clicked with me and after almost 30 years of following that simple formula, along with taking some calculated risks, I can happily report that this simple wealth accumulation system works.

The advice given to me by my father is the same advice supplied in The Millionaire Next Door, a classic in the personal finance world.  The basic message is that it is not what you make, but what you keep that matters.  The authors provide numerous examples of high earning professionals who have little to show financially after a lifetime of work.  On the flip side, more modest earners are able to build up sizeable net worths because they live below their means and regularly invest their savings.  This is an important message, especially to young people just starting out in life.  I encourage parents to give their kids a copy of this book, or at least share some of these basic principles with them.