"The Millionaire Next Door" - A Book Review by: Raymond F. Kohn

I just finished reading a most fascinating book, toeled: "The Millionaire
Next Door" by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. 1996, $22.00,
258 pages. The authors have been studying the wealthy in this country for over
20- years, and it's this research that is the basis for their book. The authors
are marketing research specialists who advise commercial businesses on the best
ways to market their products or services to the rich of this country.
The authors have taken their two decades of research, numerous interviews,
combined with their personal insights, and wrote a book about what makes the
rich tick, and how they got rich in the first place. The idea is, if we can
learn how the rich got rich in the first place, we could all learn how to become
wealthy too. One of the true benefits of this book is that it finally puts to
rest the many myths, and misguided assumptions, about whom the rich really are
and how they got that way. It is a real eye-opener to say the least.
Despite what you have heard, or read about in the press, or even seen on
television shows like: "The Lifestyles of the Rich and Famous," the vast
majority of "Rich Americans" do not live high profile lives of conspicuous
consumption. In fact, just the opposite is true.
The book opens with a hard hitting "Introduction" which lays the
groundwork for the eight chapters that follow. The introduction states: "Many
people who live in expensive homes and drive luxury cars do not actually have
much wealth . . . Many people who have a great deal of wealth do not even live
in upscale neighborhoods." The authors go on to say: "we have discovered who the
wealthy really are, and who they are not. And, most important, we have
determined how ordinary people can become wealthy."
The authors draw a distinction between "wealth" and "income." There are
many "high income" individuals who have very little "wealth" or "net worth."
These high income individuals literally are spending every dime they earn and
then some, leaving little or nothing left over to go toward the accumulation of
real "wealth."
Here are some quick statistics which help bring home the point: More than
25 million households have incomes above $50,000 per year. More than 7-million
households have incomes above $100,000 per year. But in spite of these high
incomes, these same people have very low levels of "accumulated wealth" (net
worth).
The average American household has a net worth of less than $15,000
(excluding home equity). And, when you remove automobiles, furniture, and
personal possessions, their net worth drops to zero.
Even the very top quintile of Americans are not really wealthy. Their
median household net worth is less than $150,000, and when you exclude their
home equity, it falls to less than $60,000.
The "rich" highlighted in this book are true "millionaires." They are
financially independent. They could maintain their current lifestyle for many
years without ever earning another paycheck. And more important, they are not
the Rockefellers or Vanderbilts, they did not win lotteries, or sign
multimillion dollar contracts with the Yankees. More than 80 percent of the
"rich" are ordinary people who have accumulated their wealth slowly, and
steadily. The typical American millionaire is a compulsive saver and investor.
They are self-made millionaires and are first-generation rich.
Over the many years of research, the authors have noticed seven keys
"common denominators" that many millionaires have in common with each other.
Below is a list of those seven common denominators:
1. They live well below their means
2. They allocate their time, energy, and money efficiently, in ways conducive to
building wealth
3. They believe that financial independence is more important than displaying
high social status.
4. Their parents did not provide economic outpatient care
5. Their adult children are economically self-sufficient
6. They are proficient in targeting market opportunities
7. They chose the right occupation
In the first chapter the authors give you a typical "Portrait of a
Millionaire." Again, the information is most insightful. The typical millionaire
is:
A 57 year old male, married with three children. About one in five is
retired. About two-thirds are self-employed. (Being self-employed is a key
element that comes up often throughout the book: Their research indicates that
less than 20% of the working population in America is self-employed, yet 66% of
millionaires are self-employed. This is not coincidence.) Many of the businesses
they operate are "dull and normal" ranging from janitorial services,
auctioneers, to owners of mobile home parks. Their median taxable income is
$131,000 per year. Median net worth is $1.6 million. 97% are homeowners, and the
average home value is $320,000. 80% are first generation affluent. They live
well below their means, wear inexpensive suits purchased at J.C. Penny's, and
drive older American cars. In other words, most millionaires are not only hard
working, but are serious tightwads. They have an enormous respect for the
American work ethic and don't take their hard earned wealth for granted. And,
more important, they do not show off their wealth with expensive possessions.
They live so modestly, that even their own children are totally unaware of their
parent's millionaire status.
They are fastidious investors, investing nearly 20% of their household
income each year. And, they typically make their own investment decisions. They
maintain strict household budgets, and can tell you exactly how much they spent
on food or clothing during the past year.
For the most part, it takes many years to accumulate wealth, hence the
typical age for a millionaire is over 50. For those of you who are under the age
of 50, the big question becomes -- How do you know if you are on track to
becoming a millionaire? The answer to this question is one of the real values of
this book. The authors have created a formula which takes into consideration
your current age and annual income in determining whether or not you are "on
track" to eventually becoming rich. This formula is one of the most valuable
elements contained in this book.
It is a very simple formula: Take your "Current Age" divided by "10" and
then multiply that result by your "Annual Income": The result will equal what
your "Current Net Worth" should be (excluding your home equity).
If your net worth is less than half the calculated amount, you are
considered an "Under Accumulator of Wealth" (UAW) and will probably never become
a millionaire without changing your ways. If your net worth is as calculated,
you are considered an "Average Accumulator of Wealth" (AAW) and will very likely
become a millionaire before retiring. And, if your net worth is twice the
calculated amount you are considered a "Prodigious Accumulator of Wealth" (PAW)
and will most assuredly reach your goals.
It should be noted that becoming a millionaire is a combination of having
a reasonable good level of current "income" while maintaining a frugal
lifestyle, combined with an aggressive savings and investment program. The
authors make reference to the fact that if your annual income falls below
$75,000 per year, it becomes far more difficult to accumulate wealth because you
have less income to work with. However, it should be noted that there are many
examples of people who have started saving early enough in their lifetimes thus
taking advantage of many decades of compounded investment returns to eventually
become millionaires.
The book's purpose is to highlight the personal traits of PAW's who have
become millionaires. The reader can compare their own sense of monetary values
against those of the typical PAW and find similarities or discrepancies, as the
case may be. You quickly learn that having a "high income" alone has absolutely
nothing to do with being "wealthy." The authors highlight countless case studies
of individuals earning in excess of $200,000 per year, and yet could barely make
ends meet. In one case a physician was earning over $600,000 per year and could
not save enough for his own retirement. He fell into that category of being a
"high consumption - low savings" UAW personality.
While on the other end of the spectrum, the authors highlighted
individuals who had very modest incomes, chose to live well below their means,
and saved every penny they possibly could. Their frugal lifestyle, combined with
a dedication to saving and investing resulted in them being able to accumulate
enormous wealth in their lifetimes.
Living a life of Thrift and Investment is the universal secret of becoming
"rich" in America.
Despite the life lessons regarding wealth accumulation, this book gives
the reader enormous insight into how parents relate to their children. In some
cases, "high consumption" parents raise "high consumption" children who have
never learned the virtues of frugality.
Likewise, at the opposite end of the spectrum, it is so easy for the
wealthy to indulge their own children to protect them from the "slings and
arrows" of life, that the wealthy inadvertently create "dependent adults" who
become serious underachievers with all of the related negative consequences of
such a circumstance.
This portion of the book will give all of us who have children serious
pause for thought.
I am so impressed with this book, that I have been recommending it to
everyone I know. I am insisting that my son read it. And, if I ever loose sight
of the American work ethic, I will reread it again and again.
This book should be mandatory reading for every American in this country.
It's no wonder that it is a New York Times Best Seller.