The goal of The Millionaire Next Door is to determine who the affluent are, where they live and their spending habits. It was unexpected to find out most people who make $1m live in middle-income neighborhoods. The Millionaire Next Door is based on extensive research and surveys.
I found the book relatable and practical.
Book Title: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
Published Date: 1996
Authors: Thomas J. Stanley and William D. Danko
The book can be purchased on Amazon. All quotes in this review come from the book.
The Millionaire Next Door Wealth Standard
The book provides a formula to measure how we are doing at accumulating wealth
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.
A 50-year-old doctor making $250,000/year should have a net worth of $1,250,000. This net worth formula is helpful generally speaking, but there are a lot of exceptions that it doesn’t consider. Like when you started working, how much you have made in your life and other factors. I’m not even close to where I should be with this equation, but we are paying off debt and limiting our spending.
Our culture likes to highlight the wealthy as having extreme spending habits: expensive cars, mansions, fine dining, living in expensive neighborhoods, extravagant purchases, etc. But it turns out these do not represent most people who have a net worth of more than $1m. It is clear the value of $1m in today’s money has decreased, but it still is helpful to think about how most of us can attain wealth by adjusting our spending habits.
Why aren’t you wealthy, you ask? Well, let’s examine your lifestyle. Is it one of great offense? Are you in the $70,000, $100,000, $200,000 income category? Congratulations, you play wonderful offense. But how is it that you keep losing the game called wealth accumulation? Be honest with yourself. Could it be that you play terrible defense? Most high-income earners are in the same situation, but not most millionaires. Millionaires play both quality offense and quality defense. And quite often their great defense helps them outscore/out accumulate those who outearn/have superior offenses. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.
It was valuable to learn how we spend and budget is more important than how much money we make. Earning more can make things easier, but it is not the main factor.
What if your goal is to become financially independent? Your plan should be to sacrifice high consumption today for financial independence tomorrow.
I found it interesting that having a high income does not guarantee wealth. The book asserts that most of these people are not wealthy:
Why are so few people in America affluent? Even most households with six-figure annual incomes are not affluent… They believe in spending tomorrow’s cash today. They are debt-prone and are on earn-and-consume treadmills.
I was surprised to discover that not all high wealth people budget. It seems they have a different method for attaining wealth:
They create an artificial economic environment of scarcity for themselves and the other members of their household. More than half of the nonbudgeters invest first and spend the balance of their income.
Interesting Facts about the Wealthy
Below is a list of the things that were brought up about the affluent in The Millionaire Next Door:
- The wealthy typically invest at least 15% of their take-home pay, with 20% being the average.
- They invest money before they pay their bills.
- High wealth individuals tend to spend a lot of time planning their finances.
- The affluent minimize their realized taxable income and maximize their unrealized income.
- It is easier to accumulate net worth if you don’t live in a high-status neighborhood.
- Well educated professions often lag in wealth because of the “status ascribed to them by society”. They try to keep up a certain standard of living to go with their profession, which can be a massive financial burden.
- “…the consumption of very expensive automobiles has a dampening effect on the probability that one will ever accumulate significant wealth”
- You do not have to be an entrepreneur to be wealthy.
- Regarding gifting children large amounts of money: “The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.”
The Millionaire Next Door helped me realize where I want to go is possible if I can reduce our spending and get rid of the financial habits that are not beneficial to our goals. I also found the book review from Get Rich Slowly to be helpful in summarizing the book.
It is no wonder this book is highly recommended. It has practical insights to become wealthy and unmasks the media lie in what it looks like to be wealthy.
If your goal is to become financially secure, you’ll likely attain it…. But if your motive is to make money to spend money on the good life… you’re never gonna make it.
Have you read The Millionaire Next Door? What did you take from it?
Chris Roane is a financial blogger who loves to be transparent about money-related issues. He’s paid off massive amounts of credit card debt and is the blog author of Money Stir. His main focus on Money Stir is talking about how money relates to our relationships, personal development, and how to plan for the future we want. He’s been quoted on Market Watch, The Ladders, and other publications.