What We Can Learn From “The Millionaire Next Door”

January 24, 2011  |  

by Alexander Cain

We often associate and imagine wealthy people with material things: the large and beautiful house, luxury cars, the upscale clothing, and amazing vacations. While we imagine the wealthy to be extravagant spenders, “Millionaire Next Door” tries to settle the argument by asking the source.

Authors Thomas J. Stanley and William D. Danko have a history spanning 20 years of studying the patterns of wealth. They conducted a nationwide survey of 1,115 participants of those with a household net worth of $1 million or more. The survey and interviews conducted asked a wide range of questions including careers, vehicles, investment strategies, and family backgrounds. With this large amount of information, Millionaire Next Door provides consolidated insight to the life of America’s wealthy.

In order to understand the wealthy, we must assign a value to wealth. The Millionaire Next Door defines the label of wealthy in two ways. The first definition of wealthy is anyone who has a net worth of one million dollars or more. Net worth is defined as the current value of one’s assets less liabilities (exclude the principle in trust accounts). To put it in perspective, only 3.5 percent of the U.S. population have a net worth of $1 million or more.

The second definition takes into account a person’s age and net income because the longer one is generating income, the more likely one will accumulate wealth.  The Millionaire Next Door provides a rule of thumb to see if you’re wealthy: “Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”

The Millionaire Next Door then provides seven key characteristics of wealthy. Most of these factors go against the public image of the wealthy.

1) They live below their means. America’s wealthy are the cheapest of the cheap. They spend the majority of their time and energy towards saving and investing their money rather than spending. For millionaires, 50 percent surveyed that the most they ever spent was less than $400 for suits, less than $140 for a pair of shoes, and less than $235 for a wristwatch.

2) They allocate their time, energy, and money efficiently, in ways conducive to building wealth. The wealthy spend an average of ten hours a month towards budgeting and financial planning compared to the national average of about four hours. The wealthy are able and willing to secure their financial security.

3) The wealthy value financial independence over high social status. They gladly use coupons and only 24 percent of millionaires own current year model cars. Every dollar not spent on material goods is put into investment.

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