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 wealth? Are expensive material possessions examples of wealth?
Wealth is different from income, it is the abundance of assets you accumulate to ensure you can afford not to work if you don’t want to. If you make a lot of money and spend it all on expensive material possessions, you’re not wealthy—you’re living a high-status lifestyle.
Learn the characteristics of the wealthy and answer the question, what is wealth?
What Is Wealth?
What is the meaning of wealth? Wealth and income aren’t the same things. Your income is what you earn; your wealth is what you accumulate. If you make a lot of money and spend it all, you’re not wealthy—you’re living a high-consumption lifestyle.
When it comes to understanding what is wealth, appearances can be deceiving. High-income people can work hard, yet live paycheck to paycheck, not accumulating any wealth—and hard-working people with lower incomes can accumulate great wealth.
Many higher-income people wonder, “what is wealth?” and why they aren’t rich—they feel they can barely keep up with expenses. Many lower-income people feel the same way. Neither type of household could survive more than a few months without a paycheck. Both believe that financial independence is out of reach; it seems to be a matter of luck or inheritance.
But if you truly understand what is the meaning of wealth, start young, and embrace the right habits, you have a better chance of accumulating enough wealth to become a millionaire than you do of winning the lottery. You have a 1 in 4,000 probability of becoming wealthy in your lifetime due to a windfall. But the proportion of households with a net worth of over $1 million is 3.5 in 100.
Definition of Wealthy
Most people would say someone with a lot of expensive material possessions is wealthy. But most people living high-consumption lifestyles have little accumulated wealth; they spend all they earn. Instead of acquiring material possessions, especially status symbols, the truly wealthy focus on building financial assets that appreciate or increase in value.
Net worth—the current value of your assets minus liabilities—is one way of defining what is wealth.
In this book, what is the meaning of wealth is defined in two ways: 1) having a net worth of at least $1 million, and 2) having a high net worth for someone of your age and income.
(Shortform note: at the time this book was published, 3.5% of U.S. households had a net worth of at least $1 million. In 2018, the figure was 3%, or 11.8 million U.S. households.) About 95% of millionaires have a net worth of $1 million to $10 million. They are the focus of this book because their level of wealth is attainable by many Americans.
Characteristics of the Wealthy
The millionaires in this 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 this 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 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.
So, what is wealth? Many more Americans can truly understand and 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.
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