This article is a summary of the book The Millionaire Next Door.
Thomas J. Stanley’s 1996 bestseller The Millionaire Next Door is a case study on America’s richest.
Over the course of twenty years, Stanley and William Danko had conducted a series of surveys on people with large a net worth.
The latest was a 250-point questionnaire covering household budget, spending habits, and financial goals and fears. TMND was written on the basis of this research.
The book throws light on the millionaires’ secrets of wealth accumulation.
Be warned, however, that this is not an easy book to read. Right from the get go, the author throws out a lot of numbers and statistics.
There’s paragraph after paragraph of data, with little discourse on said numbers. Interspersed throughout the text are buzzwords and acronyms the author made up himself.
It feels like reading an awkward cross between a travel brochure and a corporate mailer.
But real value hides behind the dense language. I’ve tried to present the narrative in a more concise way. Research showed that the rich tend to have some common habits.
And it’s not what pop-culture may have lead you to believe.
What follows is a summary of the masterpiece The Millionaire Next Door.
The Millionaire Next Door Book Summary
UAWs and PAWs
Some respondents to the survey struggled with money.
Despite spending a lifetime making a higher than average income, these people worried they wouldn’t be able to retire.
The reason for this was that they’d splurged their money on a glamorous lifestyle. They’d saved nothing. These people are Under Accumulators of Wealth (UAWs).
The majority of those surveyed were opposites this group. They earned high and saved more. Through good habits and discipline, they’d gained financial independence. Stanley calls people like this Prodigious Accumulators of Wealth (PAWs). There’s a lot to learn from the PAWs.
Live Below Your Means
This is one of the book’s key takeaways that we wanted to include in The Millionaire Next Door summary.
In the early days of the millionaire survey, Stanley had assumed that multi-millionaires would live big. The team had arranged a flashy interview with vintage wine and a gourmet buffet.
Ten decamillionaires had been invited. Over the course of the evening, it turned out that all ten lived completely different lives than what they’d expected.
These were frugal all people that only ate simple homemade food and drank Bud Weiser. Stanley had an epiphany.
Being frugal is the cornerstone of wealth-building
A lavish lifestyle is not conducive to building up wealth. Think of the millionaire athlete that media glorifies: the one with fancy cars and beachfront properties.
It’s a high consumption lifestyle that can only be sustained through credit. And only as long as one has a high income.
Those people crashed and burned soon after their sports career ended. Turns out that the “those who have money spend it lavishly” narrative leads to financial ruin.
Think of the people you see jogging every day.
At first glance, they’ll look like they are fit already and don’t need to be put in all that effort. What we fail to realize is that they are fit because they are working hard.
Same goes for financial fitness. If you want to build wealth, you have to work at managing your money. You have to be frugal.
Start at home
The first step to becoming frugal is to realize that the accessories to your life need only be functional. There’s no need to keep up appearances. That’s what Stanley learned through his research.
How to do that? You can start with your home:
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.
You aren’t what you drive
Financial independence has nothing to do with social status. It’s not uncommon to want to spend money on luxuries.
Especially if one has a high income. But if you want to maintain your wealth for any length of time, you have to realize the importance of thrift.
Sports cars, designer clothes and club memberships are completely irrelevant to a happy life. Stuff like this only ends up becoming a drain on your resources. The sooner you realize this, the easier your path to wealth.
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Time, Energy and Money
The well-educated tend not to accumulate much wealth over their lifetime. The ones skipped college and built a business?
They made millions. Those that work hard at gaining academic knowledge spend most of their early adult life studying, not earning.
When they eventually land a job, and have money in hand, FOMO sets in and they spend it all on luxury items. Things that they think they missed.
On the other side, those that spent their efforts on building a business learn money management early.
Another factor is societal pressure.
The well educated are expected to live in a nice neighborhood and to drive a fancy car. This increases their spending. Peer pressure causes them to consume more and save less.
The third factor is financial illiteracy.
Highly educated people tend not to have much training on money matters. They were never taught about investing.
It’s common for them to lose money on bad investments. It also means that the smartest people are the easiest targets for MLM scammers. Experiences like this cause them to avoid the legit stock market.
Planning and controlling
These are the two pillars of wealth accumulation. Research indicates that those who take advantage of the pay yourself first strategy tend to gain financial independence sooner.
The idea is to invest a large part of your pretax income before you think of your bills and taxes. It’s a situation of scarcity you impose on yourself.
Now you have to carefully plan your expenditure if you want to stay on top of your dues. It helps you avoid spending hard-earned money on frivolities.
At the same time, investments already made work silently towards building wealth.
You need to plan your monthly budget in a way that lets you control your consumption.
All this goes to show that one needs to spend time and energy on managing money. Wealth building is not an easy task.
People who become wealthy allocate their time, energy and money in ways consistent with enhancing their net worth
Family Wealth, Inheritance and Affirmative Action
Stanley’s research revealed two surprising things about millionaires.
The first is that a large fraction were first-generation affluent: people that had built their wealth over their own lifetime.
Secondly, some of these people had siblings that were struggling with money, despite having received regular cash gifts from their parents.
This is what the author calls economic outpatient care (EOC). It’s a demon disguised as an angel. It pushes people into living a high consumption lifestyle that they are not equipped to sustain.
Let’s take an example here.
A rich family had two daughters: Gwen and Meg. While Meg worked hard at building a career, Gwen accepted mom’s kindness and money.
Mom bought the darling daughter a nice house in a fancy neighborhood. Their granddaughter was enrolled into an expensive private school, again paid for by mom.
Over time, Gwen ended up living a fancy life that she couldn’t support alone. On the other hand, Meg became financially independent.
It was her that took care of Gwen after mom passed away.
Affirmative action at home
The above is a real story from Stanley’s research. It shows how those who receive EOC end up becoming dependent on said subsidies.
But that doesn’t mean that parents should never give their children any gifts. However, you should make sure that your gifts make your child strong, not complacent. The gift should serve as a life lesson.
That’s what the author calls affirmative action at home.
You don’t just hand out freebies; you teach your child ways to make and grow money. Here’s a few practical tips:
- Don’t let your kids realize how affluent you are before they have built themselves a successful career. This will let you:
- Teach them discipline and frugality early. You need to show your kids how to live happily far below your means.
- Parents should recognize their children’s achievements. This will encourage them to place value on doing rather than just earning. Once they are experts in their trade, money will follow.
Find Your Niche
This book was written in the late 90s. The turn of the millennium was nigh and the world was about to change.
Stanley saw opportunities for a lot of professions and businesses to boom. Then, the mid to late nineties’ millionaires were just about to retire.
The old generation was handing over the reins to their heirs. Hitherto niche service providers would be given the chance to shine. Stanley predicted that:
- Attorneys and lawyers would be called upon. The rich would want to distribute their assets among their children by taking maximum advantage of tax laws. Specifically, estate law experts and tax specialists would be in great demand.
- Since the rich were getting old, they’d need good medical care. Specialists like psychologists, therapists, dentists and dermatologists among others were encouraged to seize the opportunity.
- The affluent accumulate wealth, not liquid cash. Over a lifetime, they would’ve collected art, stamps, vintage cars, properties etc. As such, the services of pawn brokers, appraisers and auctioneers, and real estate managers would be in demand.
- Everybody needs help managing money. Accountants and financial advisors have always been essential for the rich.
These are some of the examples that stood out to me. Stanley believed that those who grabbed these opportunities could become millionaires themselves.
His research showed that the affluent tend to pay directly for services rendered, rather than go through middlemen.
Skilled professionals can capitalize on this trend. If they build a good reputation, they can easily earn good fees directly from clients.
Looking back from 2022, Stanley’s predictions have been right.
What this shows is that the millionaires choose the right occupation. Now the world is just getting back on this feet after COVID.
A new cycle of business opportunities will arise. And, as before, fortune will favor the proactive.
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Summary of The Millionaire Next Door – Final Thoughts
It’s not an easy task to build an empire, to generate and maintain wealth. And though everybody wants to be rich, only a few ever make it. So what can we learn from the successful?
A high income alone is not enough to guarantee financial independence. Extra care is required if one wants to build wealth that’ll last for generations.
The Millionaire Next Door gives us some hints to how to achieve that.
Most of the millionaires in America tend to have these seven habits in common:
- Living below their means. Millionaires are frugal. They budget and save as much as possible.
- They spend their time and energy to making and saving money. These people actually work at growing their wealth. Investing in a diverse set of businesses allows them to build up assets.
- They realize that luxury items and status symbols are meaningless. It lets them minimize liabilities. You’re not what you drive, after all.
- They inherited nothing. What most millionaires have, they have built with their own hands.
- Millionaires take affirmative action with their kids. These children are taught through example the ways to become self-sufficient.
- They are excellent at selling. The millionaires had astutely targeted business opportunities as they arose.
- And then, the ones that became millionaires chose the right occupation. Once they saw the right opportunity, they grabbed it and pushed themselves forwards into great professional heights. This is what looks like overnight success to outsiders.
It’s important to realize that these are broad generalizations drawn from a limited sample space. Of course, individual circumstances will vary.
What The Millionaire Next Door provides is a summary of the lifestyles typical American millionaires tend to have.
And it’s a good way to start your journey towards financial independence.