Revisiting The Millionaire Next Door
Originally Published in Southern Neighbor newspaper May 2011 issue
By Todd Washburn, CFP®
In 1996 Thomas Stanley and William Danko published a New York Times bestseller, The Millionaire Next Door. It explored “the surprising secrets of America’s wealthy”. Based on 20 years of research, a survey of 1000 participants (249 questions each), and in-person interviews, they attempted to pull back the curtain on how the wealthy got wealthy. A hint- 80% were first-generation wealthy. They didn’t inherit it. This book sits in my reception area and almost universally draws a comment from folks. I thought that given the economic events of the last few years, the new-found focus on reducing consumption, paying down debt, and increasing savings, it might be interesting and useful to review what they learned.
A key point in all of this is that these folks don’t get rich quick. To borrow from an old Smith Barney/ John Houseman ad, “they make money the old fashion way, they earn it”. Most don’t inherit it, win the lottery, or sign million-dollar sports contracts. They do it slow and steady, with discipline and a focus on living well-within their means. They understand a very important distinction- wealth is not the same as income. Wealth is what you keep, not what you make. Wealth is your net worth (value of all assets minus the sum of all liabilities (debts)).
Stanley and Danko determined there were seven common denominators among wealth accumulators:
· They live well below their means.
· They focus their time, energy and money efficiently, in ways conducive to building wealth.
· They believe building financial independence is more important than displaying high social status.
· Their parents did not provide “economic outpatient care”- they didn’t support them as adults.
· Their children are economically self-sufficient.
· They are good at targeting market opportunities- ways to make money
· The chose the right occupation- one that they like, do well, and has higher income potential. It’s often self-employment or professional services.
Some of those sound pretty heady, but suffice it to say that each is based on good old common sense.
One point that I think is important to understand. They don’t define “wealthy” by some set net worth value. They don’t say “less than $3 million, poor, more than $3 million, wealthy”. Rather, it’s a matter of your wealth versus what might be expected based on your income and age. It makes sense that the longer you’ve worked and the higher your income, the greater your net worth would be expected to be. It’s relative wealth, compared to those in similar circumstances to yours. A guide they provide is: Your Expected Net Worth (ENW) = (your age x all pretax annual household income except inheritances) divided by 10. To them, a PAW (prodigious accumulator of wealth) is someone with a net worth at least twice the ENW. Someone with half or less of the ENW is a UAW (under accumulator of wealth).
My take-away from all of this is that wealth- financial independence- is available to anyone. It requires discipline to stay the course, a focus on recognizing opportunities, and a plan for where you want to be. It’s a lifestyle, like any other lifestyle. The benefit of this lifestyle though is a life without worry about money. In a time when there is a great deal of anxiety about money, it’s one we all might want to consider adopting.
Stanley and Danko followed this book with another, The Millionaire Mind. I found it to be even more interesting. It looks more deeply into millionaire’s choices and habits- from education and career selection, to how they balance risk, live their daily lives, and even select a spouse. It’s amazing how contrary these folks are from how most of us approach life.
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