The “Books with Impact” series takes a deeper look at specific books that have had a profound impact on my financial, professional, and personal growth by extracting specific points of advice from those books and looking at how I’ve applied them in my life with successful results. The previous entry in this series covered Voluntary Simplicity by Duane Elgin.
is a book written by Thomas Stanley and William Danko in which the authors did an extensive study of true millionaires in the United States – people with a verifiable net worth of $1 million or more – and used the results of that study to draw some general conclusions on what it truly takes to build financial success.
The big takeaway that most people will get from this book is that the typical millionaire looks nothing like the pop culture idea of a millionaire. They aren’t driving Lamborghinis. They aren’t dressed in $10,000 suits or $100,000 dresses. They don’t live in a mansion. The people you see doing those things are either media creations, are extremely wealthy (more like billionaire than millionaire), or are spending beyond their means.
Actual millionaires are much different. They’re normal members of your community. You probably know a few. Let’s dig into the book to see what insights into true millionaires that the book offers.
Meet the Millionaire Next Door
So, what does a millionaire look like? Starting on page 12, Stanley and Danko offer a long list of traits which mostly describe a fairly frugal older adult. One particular part stood out to me, though:
Who is the prototypical American millionaire? […] About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs.
People that accumulate wealth often tend to be self-employed or own their own business. (In fact, a decent chunk of the millionaires described in the book have a large portion of their net worth tied up in their businesses.) Why? If you’re self-employed or are an entrepreneur, the value of your work goes directly in your pocket. If you’re employed by others, you’re naturally making more money for the business than you’re earning or else it wouldn’t be cost-effective for them to employ you.
In other words, one of the best steps you can take if you’re trying to become financially independent is to start a side gig of some kind. Devote time and energy to it and see if you can grow it into a larger business over the course of a few years. If you can, there’s a good chance you’ll find it quite lucrative.
On page 13, Stanley and Danko provide an interesting formula for figuring out what one’s net worth should be.
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
Most of the people profiled in this book double this number – or more.
I do have one criticism of this formula: it’s very hard on recent college graduates. People who are freshly out of college often have a mountain of student loans, few assets, and the first job in their lives with a healthy salary. If someone graduates from college at age 22 with a $40,000 a year job, this formula estimates that they should have a net worth of $88,000. Unless they spent their college years putting money in the bank and accumulating no student loans, that’s impossible.
Thus, particularly for younger people, I think this formula is more of a “goal” than anything else. By the time you reach 40 or so, it becomes more relevant and you should be shooting to top it. After all, to keep pace with it, you need to be saving about 10% of your income, but once your big life expenses are out of the way, you should be able to save more than that.
Frugal Frugal Frugal
On page 37, Stanley and Danko touch on how valuable a successful marriage is in terms of accumulating wealth.
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.
If both members of a couple are truly frugal, there’s a good chance you’ll be accumulating real wealth over time. If one – or both – of you likes to spend money, then it’s likely that you won’t be doing that.
For financial success in marriage, both of you need to be smart and not wasteful with your money. If you’re both smart with your money, you can reinforce and push each other to greater heights. Otherwise, it’s like a dam with a big crack in it.
Starting on page 40, Danko and Stanley identify four questions that can help identify people who are solid accumulators of wealth.
Do you wish to become affluent and stay affluent? Can you answer “yes” candidly and honestly to four simple questions? […]
Question 1: Does your household operate on an annual budget?
Question 2: Do you know how much your family spends each year for food, clothing, and shelter?
Question 3: Do you have a clearly-defined set of daily, weekly, monthly, annual, and lifetime goals?
Question 4: Do you spend a lot of time planning your financial future?
I can strongly answer yes to two of those four questions (3 and 4) and give a softer yes to two of them (1 and 2, because we usually budget monthly, so I can somewhat achieve those things by just adding together budgets).
For me, the first and third questions really stand out. With the first question, it’s mostly due to the fact that so many people overlook budgets. They don’t sit down and really think about where their money is going and where it should be going. Yes, it takes time and yes, it does sometimes impose “rules” on how you should spend money, but the point of it is to move you in the direction that you want to go. It’s really effective at doing that if you take it seriously and follow it.
As for the goals, I have consistently felt like goal-setting at all levels – short-term and long-term – is perhaps the biggest key to any successes I’ve found in my life, whether personal or professional or financial or spiritual or anything else. Without a goal, I tend to just wander and “play it by ear.” A big goal gives me direction and it also gives me motivation to make somewhat harder choices in my day to day life. I choose to save a little more because of goals. I choose to work a little harder because of goals. Goals are vital, even if they’re not achieved, because they always build something useful.
Time, Energy, and Money
On page 94, Stanley and Danko make some interesting observations about time and investing:
Most PAWs agree with the following statements, while most UAWs disagree:
– I spend a lot of time planning my financial future.
– Usually, I have sufficient time to handle my investments properly.
– When it comes to the allocation of my time, I place the management of my own assets before my other activities.
First, what is a PAW? A PAW, as defined by Danko and Stanley, is a Prodigious Accumulator of Wealth, someone who is building a significant net worth. They define that level as being twice the net worth goal defined by that formula described earlier in this discussion.
Their point in this passage, however, is that significant accumulators of wealth are actively involved in managing their own money. They spend time on it and make it a high priority.
But what does that time mean? On page 100:
Nearly all (95 percent) of the millionaires we surveyed own stoks; most have 20 percent or more of their wealth in publicly traded stocks. Yet you would be wrong to assume that these millionaires actively trade their stocks. Most don’t follow the ups and downs of the market day by day. Most don’t call their stock brokers each morning to ask how the London market did. Most don’t trade stocks in response to daily headlines in the financial media.
In other words, they’re passive but knowledgeable investors. They prefer to be involved, make their own decisions, and fully control their own destinies, but they also prefer a “buy and hold” strategy.
You Aren’t What You Drive
I’ve always had this sinking suspicion that many of the people driving shiny new vehicles can’t really afford them, and the book’s discussion on page 112 reaffirms this notion:
How do millionaires go about acquiring motor vehicles? About 81% purchase their vehicles. The balance lease. Only 23.5 of millionaires own new cars […]. Most have not purchased a car in the last two years. In fact, 25.2 percent have not purchased a motor vehicle in four or more years.
Less than a quarter of millionaires own new cars (two years old or less). The rest own older cars. This doesn’t mean that they don’t buy new cars, but it does mean that most of them drive cars until they’re pretty worn out.
This is the policy that Sarah and I have. We drive cars until they’re getting close to falling apart, then replace it with a late model used (or even a new) vehicle, but only if we can pay cash for it.
But how do they shop for these cars? Page 126 gives some insight:
[N]ote that most millionaires are dealer shoppers as opposed to dealer loyalists. […] Those who are less wealthy are less likely to shop, haggle, and negotiate than those who are millionaires.
I think the reason for this is that people with less money in the bank tend to be either more impulsive or that they’re backed up against a financial need for their purchase (they suddenly have a need for a car or their old car has suddenly failed).
On the other hand, people with a large bankroll are both more patient and more anticipatory of their needs. They’re willing to take the time to shop around and negotiate at several dealers during a car purchase because they’re not pushed there by need due to a failing car. They notice when a car is getting older and needs to be replaced and thus are able to do this with less urgency.
Having money in the bank makes a huge difference in how you make big purchases and I think that really rears its head when it comes to cars.
Economic Outpatient Care
Stanley and Danko introduce a concept that they call “economic outpatient care” around page 145 of the book. Basically, economic outpatient care refers to financial gifts that parents give to their adult children that enables those children to make financial choices that are beyond their current means.
In a nutshell, Stanley and Danko report that economic outpatient care is disastrous for the children. It’s obviously poor for the parents as it drains their net worth, but it’s just as bad for the children. For example, this little nugget on page 152:
Note that in eight of the ten occupational categories, gift receivers have smaller levels of net worth than those who do not receive gifts.
Even though they’re receiving economic outpatient care in addition to their salary, those children are actually doing worse financially. How is that possible? The reason’s pretty simple: economic outpatient care encourages financial irresponsibility.
Stanley and Danko expand on this on page 153:
[W]hy [do] gift receivers in general have a lower propensity to accumulate wealth than do nonreceivers[?]
1. Giving precipitates more consumption than saving and investing.
2. Gift receivers in general never fully distinguish between their wealth and the wealth of their gift-giving parents.
3. Gift receivers are significantly more dependent on credit than are nonreceivers.
4. Receivers of gifts invest much less money than do nonreceivers.
In other words, economic outpatient care creates a dependence-based financial situation even if that’s not the intent at all (and I’d imagine it’s usually not the intent).
The end result of this is on page 168:
The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.
The goal of parenting should be to raise your children to be independent adults. The longer you delay that full independence, the harder it is for your children to ever be independent. The best thing you can do for your children financially is to push them out of the nest.
Affirmative Action, Family Style
The book continues with the financial trend, looking at the broader family lives of people who are prodigious accumulators of wealth.
One element I found particularly interesting is the difference between how underaccumulators of wealth (people far under that “average” net worth number described earlier) and prodigious accumulators of wealth view themselves. On page 192:
What do UAWs […] tend to emphasize in telling us about themselves? Their income, consumption habits, and status artifacts. PAWs speak of their achievements, such as their scholarship and how they’ve built their businesses.
PAWs are achievement-oriented. UAWs are consumption-oriented. When you think of yourself, do you think of the things you own or do you think of the achievements you’ve completed? It’s quite likely that such reflection has a strong connection to your financial state.
On page 203, the authors offer a really interesting list for how to raise a financially independent and successful child:
The affluent who have successful adult children have given us much valuable information on how they raised them. Here are some of the guidelines:
1. Never tell children that their parents are wealthy.
2. No matter how wealthy you are, teach your children discipline and frugality.
3. Assure that your children won’t realize you’re affluent until after they have established a mature, disciplined, adult lifestyle and profession.
4. Minimize discussion of the items that each child and grandchild will inherit or receive as gifts.
5. Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
6. Stay out of your adult children’s family matters.
7. Don’t try to compete with your children.
8. Always remember that your children are individuals.
9. Emphasize your children’s achievements, no matter how small, not their or your symbols of success.
10. Tell your children that there are a lot of things more valuable than money.
This largely matches how we raise our own children. In fact, not long ago, our oldest child was actually worried that we didn’t have enough money to make ends meet so we talked to him sincerely about it and told him not to worry about such things because we did have plenty of money to meet our needs. Why would he worry about it? It’s because he witnesses other families spending a lot of money on unimportant things, things that we simply don’t spend money on.
Our goal is to raise achievement-oriented and work ethic-oriented children who don’t expect to be handed anything and realize that they need to earn it for themselves.
Find Your Niche
This chapter is a bit odd, as it offers career advice. It suggests that people get into fields and businesses that serve the affluent, starting with identifying the areas where the affluent actually spend money. On page 211:
The affluent, especially the self-made affluent, are frugal and price-sensitive concerning many consumer products and services. But they are not nearly as price-sensitive when it comes to purchasing investment advice and services, accounting services, tax advice, legal services, medical and dental care for themselves and family members, educational products, and homes.
Those are the items that Stanley and Danko have identified that the affluent will spend money freely on and thus are opportunities for people to delve into. (Maybe I should sell my money tips instead of giving them away…)
Jobs: Millionaires Versus Heirs
On page 232, Stanley and Danko discuss the careers that the children of the affluent are encouraged to get into:
Fewer than one in five millionaire business owners turns his business over to his children to own and operate. Why? Give credit to wealthy parents. They know the odds of succeeding in business. They understand that most businesses are highly susceptible to competition, counter consumer trends, high overhead, and other uncontrollable variables. So what do these millionaires advise their children to do? They encourage their children to become self-employed professionals, such as physicians, attorneys, engineers, architects, accountants, and dentists.
I’d add things like artists, writers, electricians, carpenters, and so on to this list. The key is self-employed, not the specific career path.
I should note here that I view self-employment as being largely the same as entrepreneurship. You’re running a small business with one employee when you’re self-employed. If that business ever needs to grow, you’ll add more employees.
is one of the very first books I read during my financial turnaround and it was responsible for three key principles that I’ve held dear ever since.
First, people who accumulate wealth are usually quite frugal and rarely flaunt their wealth; people who flaunt their wealth rarely have much in the bank. For the most part, people with actual money in the bank are frugal people; people who aren’t frugal are usually scraping bottom.
Second, one of the best ways to accumulate significant wealth is through self-employment and entrepreneurship. In many ways, The Millionaire Next Door was a big initiator of my career shift into self-employment. It really made me think seriously about how I could start working for myself and enjoy a lot of personal flexibility along the way.
Finally, financial success comes not just from money management, but from how you live your life as a whole. Your relationship with your wife and children is vital. Your relationship with friends and coworkers is also vital. Your ability to set personal goals is also vital. The car you drive, the neighborhood you live in … the list goes on and on. All of these things (and many other elements of life) are intimately connected to your ability to accumulate wealth.
It’s a thought-provoking book. It provides something worth thinking about on virtually every page and different people will come away with different take-home messages. That, to me, is the sign of a great game.