Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Book Review -- The Millionaire Next Door: The Surprising Secrets of America's Wealthy

First published in 1996, this wildly popular book has sold over three million copies, according to the New York Times. And it's easy to understand why: it offers a rare peep through a social keyhole, revealing surprising details about how millionaires really accumulate and manage their wealth.

Turns out there are no secret tax loopholes, no private societies and no bathtubs full of caviar. Rather, authors Thomas Stanley and William Danko, through their surveys of over 500 millionaires and more than 11,000 high-net-worth and high-income respondents, found that millionaires rarely look the part, and becoming a millionaire is rarely the result of luck, inheritance, Ph.D.'s, or even intelligence. 

In fact, Stanley and Danko found that people who accumulate wealth typically exhibit seven characteristics: 

1.    They live way below their means.
2.    They use their time, energy, and money efficiently.
3.    They believe financial independence is more important than showing off wealth.
4.    Their parents didn't give them money.
5.    Their children can support themselves.
6.    They're good at finding wealth-building opportunities.
7.    They chose the "right" careers.

By poring over their statistical evidence, Stanley and Danko also found that the vast majority of millionaires do three things: work hard, plan, and exercise self-control. 

Millionaires aren't born -- they're made, according to the book. Most accumulate their wealth by themselves rather than inherit it. They often do this by owning their own businesses -- and those businesses usually aren't in flashy industries. Instead, millionaires tend to stick to industries they know something about. 

In between offering rules of thumb about how big your mortgage should be (never more than twice your household's total annual realized income) and what your net worth should be at your age (Age times pretax annual household income excluding inheritance, divided by 10), Stanley and Danko note that millionaires aren't day traders, either. As investors, they're all about buying and holding. Only about 9% held investments for less than a year, though they spend about 20 hours a month managing their investments. (See how quickly you can become a millionaire with our Million Dollar Savings Calculator.)

But perhaps the book's most surprising finding is that most millionaires worship frugality. They often don't live in high-status neighborhoods (though they are homeowners) and don't buy expensive watches, for example. A whopping 90% of the millionaires the authors surveyed said they refuse to spend $1,000 on a suit, and about 40% buy used cars instead of new ones. They marry other frugal people, too -- they tend to have spouses who like to plan and budget rather than shop and spend. 

However, there is one thing millionaires do spend heavily on, according to the book: education. About 80% of millionaires went to college, and about 55% of their children are in private schools. 

Nonetheless, in the millionaires' rulebook, flashy overconsumption is for wannabes. "It is unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles, and such," Stanley and Danko write. "To them, superior people have excellent tastes in consumer goods. But it is easier to purchase products that denote superiority than to be actually superior in economic achievement. Allocating time and money in the pursuit of looking superior often has a predictable outcome: inferior economic achievement."

That last part highlights a huge misconception many Americans have about money -- one the authors are eager to explain: there's a massive, deep, life-altering difference between high income and wealth. What millionaires have learned is that it's not what you spend, it's what you keep that matters.