Hiya, today it’s time for another book recommendation. You might have heard of it already: it’s called The Millionaire Next Door.
The title might let you suspect a romantic novel by Rosamunde Pilcher. But no fear, the book is non-fiction. The Millionaire Next Door is one of the classics in the personal finance space. And a big favourite with the Financial Independence or FIRE crowd.
What’s it about?
Co-authors Thomas J. Stanley and William D. Danko present a summary of their wide research into behavioural and wealth building patterns of millionaires. To be more specific: their research into American households with a net-worth of more than one million dollar.
From this, Stanley and Danko conclude which consumptive, as well as general behaviour is conducive to building up wealth and gaining financial independence, and which is rather detrimental. I read the original edition from 1996. It has been updated and I assume that figures have been adapted to inflation. In any case the findings seem to be pretty timeless to me.
Which findings are interesting?
Since I read the book after I had already been into the idea of financial independence for some time, I wasn’t very surprised about the findings. But they are in stark contrast to the common picture of millionaires amplified by the media. You know what I mean: jet-set, glamour, parties, never further than a cigar’s length or Birkin Bag away from champagne, caviar and cocaine.
Obviously that kind of lifestyle exists as well. It might be paid by genuine wealth or by highly-leveraged cash-flow. If living like that is your goal, this book is not for you. As you can guess by the title, the “Millionaire Next Door’s” life is pretty tame. But attainable even with pretty average salaries and within one generation.
Success patterns you can learn from
The authors point out behavioural patterns that will – given comparable incomes – lead to disproportional accumulation of wealth. In this post I want to highlight the three things I find most relevant – so you’ll get an idea but there’s enough left to read for yourself.
Frugality and planning
Stanley and Danko state very clearly how important a good “defense” – frugality – complementing a good “offense” – the salary – is. If you think about it, it’s quite obvious. No matter how much you make: if you spend more you’ll end up with debt instead of wealth. Interestingly responsibility for the “defense” often lies with the women/wives in the households the authors examined. Which doesn’t necessarily mean that those women were not working outside the home. The sample showed a disproportional occurence of self-employed/(small) business owner household with both partners working in the business.
No matter what profession, the “Millionaire Next Door” is aware of all costs and expenses. The “defense” not only includes the tracking of expenses, but the planning of future spending, often by budgeting, as well. The household is being run very similarly to a business in that respect. That might seem evident given the high numbers of self-employed. But success in this are is not a given at all as the high rate of businesses failing in their first years shows.
A lifestyle without status symbols
Another common theme among the “Millionaires Next Door” is a rather low-key lifestyle and little appetite for expensive status symbols. There are some well-paid jobs in which a certain social status pressure exists such as doctors, lawyers or managers. This is a barrier for building wealth: those who want to keep up with the Joneses and can’t do without a large house, an expensive are or luxury vacations have less money left for building wealth.
There is one profession that seems to have advantage in this area: teachers. Teachers in the USA are not paid particularly well. But in their social circles, material status pressure seems to be rather low. Even if this situation is not transferable to other countries 1 to 1, it’s an interesting point. If – even with a high-paying job that has higher social status expectations attached – you manage to keep a heterogenous circle of friends and don’t feel obliged to move into the most expensive neighbourhood, your above-average income can provide a kick-start on your path of wealth-building. And that’s exactly the principle successfully employed by the trendsetters of the FIRE-movement.
There’s a long section on cars in this context as well. I actually found it too long. But I generally very much agree with their conclusions.
Don’t keep your children financially dependent on you
The last point I want to highlight is the correlation between successful building of wealth and financial support of your children. Stanley and Danko refer to something they call “economic outpatient care”. Their findings show that the people who successfully build wealth and become a “Millionaire Next Door” are disproportionally those who don’t receive any financial support from their own parents as adults. This doesn’t only refer to direct support such as money presents, but to the financial support of a certain lifestyle as well. Think paying for grandchildrens’ private school tuition, for example.
That makes total sense to me. But there is a contradiction in the book that the authors don’t address explicitly: Quite a few of the millionaires portrayed plan to spend a part of their wealth on their children and grandchildren, for example to pay for the grandchildrens’ college education, or to help their children buy a home. That very much sounds like “economic outpatient care” to me. Totally relatable on an emotional level. But given Stanley and Danko’s findings maybe not such a good idea after all.
So that’s it for a first impression. I really liked the book and I’ve actually re-read it several times. Works very well to motivate me when frugal fatigue sets in…
But check it out yourself:
Financial Independence Rocks!