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The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, is a book by Thomas J. Stanley and William D. Danko. This book is a study of millionaire households in the United States. In this post, you will find out exactly what this book is about and what I thought about it. I was lucky to find it very cheap on Kindle.
This book is one of the best personal finance books I have read. The authors have really gone into a lot of effort to collect all the data from millionaires. And they have drawn some very interesting conclusions from this data.
I am still reading many new personal finance books. And so far, it has been a great ride. There are some really great books about personal finance, investing and frugality. It is just a bit sad that most of these books are missing any international content. They are really made for the United States. However, a lot of their lessons can still be translated into Europe.
The Millionaire Next Door
The authors of the book collected a lot of data on millionaires. They did it by interviewing millionaires in the United States. In this book, you will find how they collected this data and what is the average millionaire in the US. This may surprise you!
You are probably thinking that millionaires have luxury cars and a huge swimming pool in their backyard. And they must have expensive hobbies. If you think so, then keep on reading. You are going to learn a lot of things from this book.
Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier
Indeed, they found out that a lot of high-income earners are not wealthy. The reason is simple, they spend all their income. They are living a high-consumption lifestyle. But, most of the self-made millionaires they interviewed are living a very frugal life. They are saving most of their income. And they are working towards the goal of Financial Independence. A lot of the millionaires already achieved financial independence.
Operate your household like a productive business
In this book, you will find exactly how the millionaires are living. Not only are they living frugal living, but they are also budgeting very strictly. They are also investing. They are operating as a business. And they are hiring the best people (advisors for instance) to help them meet the goals.
Saving is the key to Wealth
Whatever your income, always live below your means
This is the most important advice of the book. If you want to get wealthy (or affluent), you need to live below your means. You need to be frugal. You need to save on most of your things. Even if you earn 300’000 USD a month, you do not need to drive a Porsche. You can live really well with a 3 years old use Sedan car. This is very important. Most of the examples in the book were of high-income. But you definitely can do the same even if you have a smaller income. As long as you live below your means, you will save some money. And you can invest this money to get you faster to your goals.
Economic Outpatient Care
One chapter in the book that I did not expect is talking about how the affluent are giving money to their children. This was very interesting, although a bit long.
Giving precipitates more consumption that saving and investing
It is often more difficult for children of the affluent to become affluent themselves. Indeed, they are used to a nice life but often do not have the same income as their parents. Moreover, a lot of affluent parents give money to their children. The goal is to help them, but the result is often to make them live above their means. This makes them financially dependent on their parents.
The book shows several examples of how the affluent are helping their children. From some good examples (paying for education) to some bad examples (paying for their house). There are even extreme examples where the parents control the life of their children with their money.
If you plan on having children, this is a very interesting chapter that can help you decide how you are going to teach them about money.
Accumulators of wealth
Something really interesting in the book is that they are distinguishing between Under Accumulator of Wealth (UAW) and Prodigious Accumulator of Wealth (PAW). There is a simple formula to compute which one of them you are:
Multiply your age times your realized pretax annual household income from all sources (excluding inheritance). Divide by ten. This, less your inherited wealth, is how much net worth you should have.
If you are in the below quartile, you are a UAW. In the top quartile, you are a PAW. Otherwise, you are just average. For me, this means I should have a net worth of 240’000 CHF. Which I am very far from. I am an Under Accumulator of Wealth. Maybe I am still too young for this test since I only started getting an income around five years ago. And I just finished my Ph.D. I should do the test again in a few years to see how I am doing for fun.
This is a very nice way of distinguishing between the different accumulators of wealth. Of course, this is only a number, you should not pay attention to it too much. The most important point is to reach your own goals.
What I liked
I really liked The Millionaire Next Door. It is very well written and is very interesting. It was a very nice source of information to see how the millionaires were living. You can read what jobs they are doing. What is especially good about this book is the amount of research that has been done by the authors. Every point they make is well documented. There many examples throughout the book for each affirmation about the millionaires.
It shows that by living frugally, well below your means, you can become a millionaire. The examples that are set in the book can really help you towards this goal. Frugality is at the essence of the Financial Independence and Retire Early (FIRE) movement. And most FIRE bloggers have read and liked this book.
What I did not like
Something that is missing from this book is some examples of some young millionaires. There seems to be some form of anti-youth bias in the book. The youngest examples in the book are in their mid-forties. This is far from some examples of early retirees from the internet. These people have a net worth in the millions already.
Another thing that is a bit sad is that most examples are showing very large income, from 300K to 700K. This is not so common, even for the United States. I think you can become a millionaire even without so much income. This should not discourage you since that book is relatively old and things have changed now! Your savings rate is often more important than your income!
Another thing I did not like is that some chapters are going into too many details and examples. They insist upon themselves even when the point of the chapter is simple. For instance, the part about the cars of the millionaires. There is really no need for so many details. And also the chapter about Economic Outpatient Care that had way too many examples.
One other thing that is missing from this book is some global information. Only millionaires from the United States have been taken into account for this study. I can understand that this is already a huge work. But some information about how this is different in other countries would be great. The authors have collected data for many years. They could have collected some smaller samples in other countries as well. Or cited other research for them. If you are from the United States, you do not have to worry about this point.
In summary, The Millionaire Next Door is a very good book on the way millionaires are living. Indeed, most millionaires do not have a high-consumption lifestyle. And most people with high-income are not wealthy.
In fact, Millionaires are becoming wealthy with a simple way of life. By being frugal, planning for Financial Independence and investing. I would recommend this book to read information about millionaires. If you are interested in early retirement, this book may not be very interesting. It focuses on people in their mid-forties. However, it sure is a nice read.
You can get this book on Amazon: The Millionaire Next Door – The surprising secrets of America’s Wealthy. If you want to read more about books, you can take a look at the best personal finance books I have read.
If you already read The Millionaire Next Door, I would be very interested in your point of view! What did you think of this book?