As the economy slows down and stock market declines dominate the news, it has never been more important to understand these issues than it is right now.
Are the nation's wealthy really bathing in Champagne, living in 100-room mansions, driving sports cars, carrying Hermes purses, and driving around in luxury BMWs?
According to Thomas J Stanly and William D Danko, in "The Millionaire Next Door" the answer is no. Most millionaires do not live the millionaire lifestyle. They drive older, domestic cars, shop at discount stores, and live in middle class neighborhoods. They don't wear flashy clothes and they didn't inherit their money from wealthy parents.
The book I read was published in 1998. It would be interesting to see how much or how little things have changed in the past 10 years. But I imagine it would mainly be some minor shifts in the statistics, an increase in younger entrepreneurs, and and increase in the number of female millionaires. The core elements of the book are unlikely to have changed, though.
There are two main points in the book:
- The wealthy don't look wealthy; those who look wealthy are often in debt.
- The most important key to wealth is to spend less than you earn.
What is so profound about these discoveries? Just this: Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.While each section may not appeal to every reader, there is something for every one. Those who relate to raw data will appreciate the charts and stats discussions. Those who prefer actual stories will find something here as well. And those who look for summaries of the key learnings will appreciate the authors' descriptions.
The book starts out with a description of the typical millionaire.
Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life. This person owns a small factory, a chain of stores, or a service company. He has married once and remains married. He live next door to people with a fraction of his wealth. He is a compulsive saver and investor. And he has made his money on his own. Eighty percent of America's millionaires are first generation rich.The language here is intentionally gender specific. Generally, they discuss millionaire households where the husband runs the business and the wife runs the household expenses and budgeting. They don't do that to diminish the role of women in the millionaire household; in fact, appropriately managing the household expenses is a critical role in turning income into wealth.
They expand from this description of the typical millionaire and identify the key characteristics of millionaires.
The authors get into deep discussions about the purchases most people associate with millionaires, and their data shows that millionaires aren't spending money on luxury cars, $1,000 suits, Rolex watches, and expensive homes.
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They choose the right occupation.
About half the millionaires surveyed reported they had never spent more than $140 on a pair of shoes. One in four had never spent more than $100. Only about one in ten had spent over $300. If not millionaires, then who is keeping the high-priced shoe manufacturers and dealers in business? Certainly some millionaires purchase expense shoes. But for every millionaire in the "highest price paid" category of over $300,there are at least eight non-millionaires.The people who are buying the high-end consumer goods and luxury goods are not the wealthy -- they are people who may have a high income, but haven't accumulated wealth. Those individuals are often financing a millionaire life style with debt, and therefore, will never be wealthy.
The authors also touch on the question of immigration. It turns out that immigrants to the US disproportionately become millionaires. It's not that they are bringing wealth with them. They are starting from scratch and then building successful businesses.
Their grand children, however, less likely to become millionaires.
What about the number of years that an average member of an ancestry group has been in America? The longer the time here, the less likely it will produce a disproportionately large percentage of millionaires. Why is this the case? Because we are a consumption based society. In general, the longer the average member of an ancestry group has been in America, the more likely he or she will become fully socialized to our high-consumption lifestyle. There is another reason. First-generation Americans tend to be self-employed. Self-employment is a major positive correlate of wealth.The more integrated into American culture and ethnic group becomes, the less likely it will produce millionaires.
While the authors cite the mixing of cultures as the reason for that, I expect it has more to do with the individuals involved, and less the culture. The fact that someone is willing to uproot their life, move to a new country, settle there, and do what it takes to be successful indicates they have the level of drive necessary to start a business and grow their wealth.
The other area that is particularly interesting is the question of economic out patient care. In other words, what happens when parents give their children money. Do the children build on that?
Sometimes. We often hear stories about successful people who are that way because they inherited wealth and built on it. Donald Trump is one such example. But that's the exception to the rule. Remember, only 20% of millionaires inherited their wealth.
The authors tell stories of people with middle class incomes who live in upper class neighborhoods because their parents are wealthy. The parents subsidize the adult children to help them afford their lifestyle. The problem is that the life style still exceeds their income and subsidy. The adult children come to rely on these handouts and never develop the skills or drive to build wealth on their own. Further, since they do live beyond their means, even if they did have the drive, they don't have the seed money to build true wealth.
There are countless examples of the inverse relationship between economic productivity and the presence of substantial economic gifts. …Independent of college tuition, more than two-thirds of American millionaires received no economic gifts from their parents. And this includes most of those whose parents were affluent.The children of millionaires who receive the least financial assistance (excluding education) form their parents are the one most likely top be successful.
Most affluent people have at least two children. Typically, the most economically productive one receives the smaller share of his or her parent's [sic] wealth, while the least productive receives the lion's share of both economic outpatient care and inheritance.The book can be summed in this story told by one of the millionaires the author interviewed:
My family in Nebraska understood the value of a dollar. Dad used to say seeds are a lot like dollars. You can eat the seeds or sow them. But when you would see what seeds turned into…ten-foot-high corn…you don't want to waste them. Consume them or plant them. I always get a kick out of watching things grow.The presidential campaigns are all talking about wealth. The economic challenges the country faces raise questions of wealth. The housing crisis raises questions of wealth. To understand these issues, don't get caught up in media portrayals of what it means to be a millionaire. Those portrayals don't reflect reality.
The Millionaire Next Door does. It's a great read for anyone who wants to become wealthy or understand what it means to be a millionaire.
You can find more of my book reviews here.