The Millionaire Next Door and Wealth Building

This article is an excerpt from the Shortform book guide to "The Millionaire Next Door" by Thomas J. Stanley and William D. Danko. Shortform has the world's best summaries and analyses of books you should be reading.

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What is The Millionaire Next Door book about? Is The Millionaire Next Door still relevant today?

William D. Danko and Thomas Stanley’s Millionaire Next Door book explains the characteristics of the everyday millionaire and shows how they make, keep, and grow their wealth. These wealth-building principles outlined in Thomas Stanley’s Millionaire Next Door remain relevant today.

Read on to learn how The Millionaire Next Door book can help you become wealthy too.

Who Is The Millionaire Next Door?

High-income people who spend freely and ostentatiously fit the Texas description, “big hat, no cattle.” In other words, they put on a show, but lack substance—they have very little accumulated wealth.

In contrast, The Millionaire Next Door book shows that those who are truly wealthy typically don’t flaunt it—for instance, they don’t wear expensive clothing or jewelry, or drive luxury or even late-model cars. They aren’t interested in status symbols.

The research in William D. Danko and Thomas Stanley’s Millionaire Next Door paints the following picture of the average millionaire:

  • They didn’t inherit their wealth: 80% accumulated their wealth in their lifetime.
  • Many are self-employed. They’re entrepreneurs or professionals in non-flashy fields—for instance, they may be welding or paving contractors, factory owners, accountants, or auctioneers.
  • They live below their means. For instance, they live in modest-looking, rather than showy, homes. They wear non-brand name clothing and accessories, and often drive used cars.
  • They’re extremely frugal and budget their expenses. Their total annual realized (taxable) income is less than 7% of their wealth, meaning they spend less than 7% of their wealth a year.
  • On average, they invest 20% of their realized household income a year. They pay for expert financial and legal advice, but also study the markets and make their own investment decisions.
  • They’ve accumulated enough to live without working for at least 10 years.

Characteristics of the Wealthy

The millionaires described in The Millionaire Next Door book could maintain their lifestyles for years without a paycheck—they’re financially independent. But they didn’t inherit their wealth from their families. More than 80% of them accumulated it over their own lifetime.

The typical millionaires in The Millionaire Next Door book defy stereotypes of the wealthy. They’re self-made businesspeople who have lived in the same town most of their adult lives. They own a business, are married, and live in a modest neighborhood. The key to their success is they live a lifestyle that makes it possible for them to build wealth.

The authors’ research found that average millionaires share these common characteristics:

  • They spend far less than they earn (live below their means).
  • They use their time and money efficiently to build wealth.
  • They prioritize attaining financial independence over displaying social status.
  • Their parents didn’t provide them with financial support as adults.
  • Their adult children are self-supporting.
  • They’re skilled at identifying investment opportunities.
  • They chose the right line of work.

These findings in The Millionaire Next Door book stem from years of research, including interviews with over 500 millionaires and surveys of 11,000 high-net-worth or high-income people in the 1990s. The bottom line is that building wealth and becoming financially independent take hard work and discipline

Many more Americans can become millionaires if they’re willing to consume less, control their spending, and focus on steadily building their wealth. The trade-off for spending less of your income today is financial independence tomorrow.

The Role of Inheritance/Ancestry

People often think it takes inheriting wealth to become rich. However, the authors’ research on millionaires shows inheritance plays a minimal role:

  • Fewer than half received any inheritance; under 20% inherited 10% or more of their wealth.
  • Just 19% receive income or wealth from a trust or estate.
  • Under 10% expect an inheritance in the future.
  • Under 25% received a gift of $10,000 or more from a relative.
  • Only half received college tuition from their parents.
  • Fewer than 10% received part ownership of a family business.

People of average backgrounds who become millionaires have confidence in their own ability to achieve wealth. There is opportunity in the U.S. for anyone wanting to become wealthy because social and economic status aren’t predestined. This dates as far back as 1892, when a study of more than 4,000 U.S. millionaires found that 84% had achieved their wealth rather than inheriting it.

Achievement matters more than inheritance or ethnic origin. Many first-generation Americans become wealthy through hard work, frugality, and discipline—the same traits shared by millionaires as a whole. 

Also like millionaires as a whole, first-generation Americans tend to be self-employed. However, their children and grandchildren tend to be less successful economically and often consume the family fortune entirely. 

This is because their parents want them to have a better life, so they encourage them to spend years in college to become professionals with a higher status, rather than entrepreneurs. They enter the labor market late and start earning later. They reject their parents’ austere lifestyle in favor of American-style consumerism. Thus the second- and third-generation Americans with wealthy parents typically become UAWs.

So while some people work, plan, and invest to become wealthy, many of those who inherited affluence spend it away. 

How to Become and Stay Wealthy

The experience of the self-made millionaires in The Millionaire Next Door book shows that to become wealthy and stay wealthy you must:

1) Create and live by monthly and annual budgets. More than half of all millionaires budget their expenses. They’re motivated by visualizing the long-term rewards of achieving financial independence and being able to retire.

2) Know what your family spends annually for basic needs (food, clothing, and shelter). Fully 62% of the millionaires surveyed knew their monthly expenses, compared to 35% of high-income non-millionaires.

3) Set specific daily, monthly, yearly, and life goals. Most millionaires are goal-oriented and take a long-term view. Their goals are not spending and acquiring material possessions, but being able to retire, be financially secure, and enjoy life. People who are financially secure are happier than those in their age/income category who aren’t. Unlike those living paycheck to paycheck, they don’t worry about the next economic slump.

4) Spend time planning your financial future. The number of millionaires who spend time planning investments is more than double the number who don’t plan. Many of those who don’t plan are high-income under-accumulators. 

5) Beware of giving ongoing subsidies to adult children and grandchildren, who may become dependent on them instead of self-reliant. Millionaire parents who provide ongoing gifts and subsidies have significantly less wealth than others in their category whose children are independent.

The key message of The Millionaire Next Door book is that many more Americans can become millionaires if they’re willing to consume less, control their spending, and focus on steadily building their wealth. The trade-off for spending less of your income today is financial independence tomorrow.

The Millionaire Next Door Book and Wealth-Building

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  • How and where most millionaires live
  • Surprising characteristics and habits shared by many millionaires
  • How you can become a millionaire over time if you have the determination

Joseph Adebisi

Joseph has had a lifelong obsession with reading and acquiring new knowledge. He reads and writes for a living, and reads some more when he is supposedly taking a break from work. The first literature he read as a kid were Shakespeare's plays. Not surprisingly, he barely understood any of it. His favorite fiction authors are Tom Clancy, Ted Bell, and John Grisham. His preferred non-fiction genres are history, philosophy, business & economics, and instructional guides.

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