PDF Summary:The Millionaire Next Door, by Thomas J. Stanley and William D. Danko
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In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko skewer the myths about how (and where) most millionaires live, and what it takes to become one. Their extensive research published in 1996 identified the sometimes surprising characteristics and habits shared by many millionaires. For instance, millionaires are often bargain shoppers (they buy used cars and off-the-rack clothing), pay only a small percentage of their wealth in income taxes, and shun the lavish lifestyles we often associate with being rich.
The book explains how to determine what your net worth should be, according to your age and income, and how you can build wealth over time and become a millionaire—if you have the discipline.
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- If you’re in the top quartile (25%) for wealth accumulation in your category, you’re a PAW or “prodigious accumulator of wealth.”
- If you are in the bottom quartile (25%), consider yourself a UAW, or “under-accumulator of wealth.”
To be solidly in the prodigious accumulator category, you should be worth two times your expected level of wealth. Often, prodigious accumulators have four times the wealth of under-accumulators in their category. If you’re at half or less than the expected level for your category, you’re an under-accumulator. Here’s an example of each (both people are in the same income/age category):
- Prodigious accumulator (PAW): Richards, 50, owns a mobile home dealership and his income is $90,200. His net worth should be $451,000, but it’s actually $1.1 million. He lives a modest, blue-collar lifestyle.
- Under-accumulator (UAW): Davidson, 51, is an attorney with an income of $92,330. HiIs expected net worth is $470,000, but it’s actually $226,511. He lives above his means, spending significantly more than Richards to maintain the lifestyle/status associated with attorneys.
The Frugal Millionaire’s Lifestyle
The typical millionaire’s frugal lifestyle could be described as nondescript middle class. Many millionaires don’t stand out in their neighborhoods. Their watchwords are hard work, discipline, frugality, and smart investment.
In football terms, they play both great offense and great defense. They move the ball by generating income and by smart planning and budgeting, and they and their families hold the defensive line by controlling their spending. Both mindsets help them build wealth for the future.
Many millionaires budget their expenses. While you might think millionaires don’t need to budget, the fact is, they become wealthy and remain that way in large part by budgeting and controlling expenses.
For instance, millionaires don’t drive high-status vehicles. They often buy quality vehicles that are several years old, and they never lease or finance them. In contrast, most car buyers spend 30% of their net worth on a vehicle, while millionaires spend only 1%. Millionaires are also bargain-conscious in other ways: they buy items on sale or at discount or factory outlets.
Frugality and Taxes
Millionaires spend less and invest more to lower their taxable income. A rule they live by is that to build wealth, you need to minimize your taxable (realized) income and maximize your nontaxable income (assets that grow without generating taxable income).
The typical millionaire in the survey had an annual realized income of less than 7% of his wealth, meaning that less than 7% of his wealth was taxable.
Paying income tax is the biggest expenditure for many households. High-income under-accumulators pay the most in taxes because they focus on increasing their earned (taxable) income to support a consumption-oriented lifestyle. They can’t accumulate wealth because their taxable income is too high. In contrast, the typical millionaire or prodigious accumulator may be cash poor due to investing 20% of her annual income in financial assets that appreciate without generating taxable income. (Shortform note: Examples of such appreciating assets include 401(k) plans and IRAs.)
Investment Planning
Smart planning is essential to wealth accumulation. Wealthy people spend a significant, but not overwhelming, amount of time—8.4 hours a month or 1.2% of their time—planning their financial future. They do regular planning each month and prioritize managing their financial assets over other activities.
High-income under-accumulators—many busy doctors are a prime example—feel they don’t have adequate time to plan their financial future. Compared to millionaires, they spend half as much time—4.6 hours a month—on financial planning.
Fully 95% of millionaires own stocks. However, very few millionaires—less than one in 10—are active traders. It’s expensive and time-consuming to trade constantly. Active traders or brokers often spend more time trading than thinking about and planning investments. They don’t accumulate much wealth because they don’t give investments enough time to grow. Further, any short-term gains are taxed.
In contrast, millionaires spend more time managing a small number of stocks. They’re focused investors, often investing in industries they’re knowledgeable about.
Employment
As previously noted, 80% of millionaires are self-employed, compared to 15% of the general population. The types of businesses owned by many millionaires are considered dull and unexciting by most people. They provide a product or service that’s needed in an industry that isn’t usually susceptible to downturns. These businesses also don’t face much competition, and they’re consistently profitable.
Businesses owned by the millionaires surveyed for this book included: building materials manufacturers, prefab housing, auto parts, auctioneer/appraiser, apparel manufacturer, janitorial services contractor, human resources consultant, real estate developer, beer distributor, construction equipment dealer, and restaurant chain owner.
These types of businesses aren’t typically associated with high status or lavish lifestyles. They don’t interest under-accumulators, whose primary needs are consumption and showing off their status. However, they meet the self-employed millionaire's needs to create wealth and become financially independent.
How to Become and Stay Wealthy
The experience of the self-made millionaires in this 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 bottom line 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.
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PDF Summary Introduction
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Many higher-income people wonder 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 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.
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...
PDF Summary Chapter 1: Who Is the Millionaire Next Door?
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Net worth—the current value of your assets minus liabilities—is one way of defining wealth.
In this book, being wealthy 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.
Are You As Wealthy As You Should Be?
A way to assess your own wealth is by calculating what your net worth should be based on your income and age.
The greater your income, the greater your net worth should be. Also, the older you are—that is, the longer you’ve been earning income—the greater your net worth should be. For people your age who earn what you earn, there’s an expected level of net worth. If your net worth is significantly below that level, you're probably living a...
PDF Summary Chapter 2: Waste Not, Want Not
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The Importance of Budgeting
Controlling spending and building wealth require budgeting and planning. Under-accumulators allow their income to determine their budget. If they want more, they use credit, thereby spending tomorrow’s money today.
In contrast, many millionaires budget their expenses. While you might think millionaires don’t need to budget, the fact is, they become wealthy and remain that way in large part by budgeting and controlling expenses. It’s like jogging: most joggers don’t look like people who need to jog—they’re physically fit because disciplining themselves to jog regularly is how they got fit and stay fit.
To become wealthy and stay wealthy requires the following financial fitness steps:
1) Create and live by monthly and annual budgets. More than half of all millionaires say they budget. 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. A majority of the...
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Learn more about our summaries →PDF Summary Chapter 3: Use Time and Money Efficiently
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Millionaires are more likely to invest in assets that appreciate in value without producing taxable income, such as 401(k)s and IRAs. Also, they have more of their wealth invested in businesses, real estate, stocks, and other tax-deferred assets.
Investing in Stocks
Fully 95% of millionaires own stocks. Most keep 20% or more of their wealth in publicly traded stocks.
However, very few millionaires—less than one in 10—are active traders. Most don’t closely track the daily ups and downs of the markets or trade stocks in response to current events—32% keep their investments for more than six years; only 9% hold them for less than a year.
It’s expensive and time-consuming to trade constantly. Active traders or brokers often spend more time trading than thinking about and planning investments. They don’t accumulate much wealth because they don’t give investments enough time to grow. Further, any short-term gains are taxed.
In contrast, millionaires spend more time managing a small number of stocks. They’re focused investors, often investing in industries they’re knowledgeable about. Millionaires prefer to deal with brokers who study the markets and don’t act...
PDF Summary Chapter 4: Why Millionaires Drive Used Cars
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One millionaire who always bought used cars claimed he saved enough by doing this over the years to fund his child’s college and graduate school education.
The key to becoming wealthy is acting defensively to protect and grow your money. That means rejecting a high-consumption lifestyle. A used-car-buying millionaire’s high-income UAW neighbors live paycheck to paycheck to maintain this kind of lifestyle.
The problem is that once you buy one status object, you feel compelled to buy more—one thing always leads to another. Fancy homes require decorators and housekeepers, amenities for entertaining, and expensive cars in the driveway. In contrast, building wealth doesn’t require constantly upgrading your lifestyle.
PDF Summary Chapter 5: Adult ‘Child Support’
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How Subsidies Affect Adult Children
Gifts and subsidies enable children who are under-accumulators to live beyond their means and maintain a high-consumption lifestyle in which displaying status is the goal. UAWs’ children typically become UAWs as well because they grow up accustomed to this lifestyle.
Generally, the more cash gifts adult children receive, the less wealth they accumulate because they immediately spend rather than invest it. Cash gifts are habit-forming and discourage adult children from becoming independent. They find it easier to spend their parents’ money than to earn and accumulate their own.
Gift recipients are less likely to accumulate wealth for several reasons:
1) Gifts lead to further consumption rather than saving and investing—for instance, a gift of a down payment on a house in an expensive neighborhood can trigger more spending to keep up with neighbors’ lifestyles and further dependence on parents.
2) Recipients feel entitled to spend their parents’ wealth (they don’t distinguish between their parents’ wealth and their own), yet see themselves as independent. Two-thirds of adult children who receive gifts or subsidies from...
PDF Summary Chapter 6: Wealth Distribution to Heirs
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Unemployed Adult Sons
Like some daughters, unemployed adult sons tend to receive larger and more frequent gifts from wealthy parents than do their financially independent brothers. They’re more than twice as likely to get large inheritances, including property.
This may be because they can’t hold a steady job or they’re professional students. They may live with their parents and serve as a handyman or assistant, or they live nearby. Their parents view them as needing more help than working siblings.
Wealth Distribution Tips
Here are some things wealthy parents can do to encourage independence and smooth the process of wealth distribution:
1) Don’t tell children the family is wealthy. High-income UAW parents emphasize income and consumption—and their children become spenders rather than wealth accumulators. In contrast, some PAWs preach frugality and discipline, to the point that their children often don’t realize their parents are wealthy until they’ve become PAWs themselves.
2) Ensure your children don’t realize you’re wealthy until they’ve learned a profession and established financial stability. Children shouldn’t be thinking about getting your...
PDF Summary Chapter 7: Follow the Money—And Get Rich too
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2) Taxes: Income taxes are the largest income-consuming category for the wealthy. (Shortform note: The top 1% paid about 39% of all income taxes in 2017.) With income inequality growing, a concern of the wealthy is that the federal government may look for ways to tax wealth and raise income taxes. Tax attorneys are critical for building and maintaining their wealth.
3) Immigration: Increasing numbers of wealthy foreigners are looking to become U.S. citizens because of threats to their wealth in other countries as a result of lagging economies and government restrictions.
In countries such as China, many wealthy people also want to move their wealth out of the country to protect it. U.S. law allows foreign nationals to get visas and become U.S. citizens if they invest $1.8 million in a U.S. business and create at least 10 jobs. (Shortform note: this law was passed by Congress in 1990 and extended by President Trump in December 2019.)
As it becomes more difficult to immigrate to the U.S., more wealthy foreigners and entrepreneurs need the help of immigration attorneys. In addition, U.S. corporations need legal advice to recruit foreign professionals and...
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PDF Summary Chapter 8: Self-Employed Millionaires
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A downside is that adult children who are self-employed professionals may seek subsidies from their parents if they get caught up in the consumer lifestyle often associated with these professions instead of living frugally and investing their income.
Millionaire-Owned Businesses
The types of businesses owned by many millionaires are considered dull by most people. They represent a wide variety of fields; they provide a product or service that’s needed, and isn’t usually susceptible to downturns. These businesses also don’t face much competition. They’re consistently profitable.
Following are some businesses owned by the millionaires surveyed for this book:
- Building materials manufacturers
- Prefab housing
- Auto parts
- Auctioneer/appraiser
- Apparel manufacturers
- Janitorial services
- Human resources consulting
- Meat processor
- Long-term care facility owner
- Coin and stamp dealer
- Mobile home park owner
- Office temp recruiting service
- Paving contractor/excavator
- Pest control service
- Public relations
- Engineering and design
- Fundraiser
- Real estate developer
- Beer wholesaler
- Construction equipment dealer *...