In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko skewer the myths about how (and where) most millionaires live, and what it takes to become one. Their extensive research published in 1996 identified the sometimes surprising characteristics and habits shared by many millionaires. For instance, millionaires are often bargain shoppers (they buy used cars and off-the-rack clothing), pay only a small percentage of their wealth in income taxes, and shun the lavish lifestyles we often associate with being rich.
The book explains how to determine what your net worth should be, according to your age and income, and how you can build wealth over time and become a millionaire—if you have the discipline.
Table of Contents
1-Page Summary of The Millionaire Next Door
Most Americans have many misconceptions about wealth. They don’t know how to define it or what it takes to become wealthy. They have a misleading image of millionaires and how they live.
In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko counter the myths and sketch a surprising portrait of the average millionaire, who could be living in your own neighborhood. They assert that many more Americans could become millionaires by adopting the habits and traits common among them.
For decades, the authors studied and profiled America’s millionaires—the 3% of the population with a net worth of more than $1 million, who account for more than half the country’s personal wealth. Although this book was first published in 1996, the principles the authors identify for how to accumulate wealth and ultimately achieve financial independence are still applicable.
The popular image of a wealthy person in the U.S. is someone who has a high-income occupation, or who benefited from an inheritance or windfall—for instance, an athlete with a multimillion-dollar contract. He displays all the status symbols of wealth, including a big house, expensive vehicles, expensive clothing, and private schools for his children. But that image describes a big spender rather than an accumulator of wealth.
What Is Wealth?
Wealth is different from income. Your income is what you earn; your wealth is what you accumulate. If you make a lot of money and spend it all, you’re not wealthy—you’re living a high-consumption lifestyle.
When it comes to wealth, appearances can be deceiving. High-income people can work hard, yet live paycheck to paycheck, not accumulating any wealth—and hard-working people with modest incomes can accumulate great wealth.
Many higher-income people wonder why they aren’t rich—they feel they can barely keep up with expenses. Many lower-income people feel the same way. Neither type of household could survive more than a few months without a paycheck.
But if you start young and embrace the right habits,** you have a better chance of accumulating enough wealth to become a millionaire than you do of winning the lottery**.
Characteristics of the Wealthy
The millionaires in this book could maintain their lifestyles for years without a paycheck—they’re financially independent. They didn’t inherit their wealth from their families. More than 80% of them accumulated it over their own lifetime. They’re self-made businesspeople who have lived in the same town most of their adult lives. They own a business and live in a modest neighborhood. The key to their success is living a lifestyle that makes it possible for them to build wealth.
The authors’ research found average millionaires share these characteristics:
- They live beneath their means.
- They use their time and money efficiently to build wealth.
- They prioritize attaining financial independence over displaying social status.
- They’re skilled at identifying investment opportunities.
- They chose the right line of work.
- They didn’t inherit their wealth; they built it—80% are first-generation millionaires.
- Many are self-employed. They’re entrepreneurs or professionals in unexciting fields—for instance, they may be welding or paving contractors, factory owners, accountants, or auctioneers.
- They’re extremely frugal and budget their expenses. Their total annual realized (taxable) income is less than 7% of their wealth, meaning they spend less than 7% of their wealth a year.
- On average,** they invest 20% of their realized household income a year**. They accumulate wealth by investing in assets that will grow, while reducing taxable income.
The bottom line is that building wealth and becoming financially independent takes hard work, frugality, and discipline.
Are You As Wealthy As You Should Be?
A way to assess your own wealth is by calculating what your net worth should be based on your income and age.
The greater your income, the greater your net worth should be. Also, the older you are—that is, the longer you’ve been earning income—the greater your net worth should be. For people your age, earning the same income as you, there’s an expected level of net worth. If your net worth is significantly below that level, you’re probably living a consumption-oriented lifestyle; if your net worth is significantly above the level for your age/income category, then you’re wealthy.
Here’s how to calculate how much you should be worth:
- Multiply your age by your realized (taxable) annual income
- Divide by 10
For example, for a 61-year-old with an annual income of $235,000, her net worth should be $1,433,500 ($235,000 X 61 divided by 10).
Similarly, for a 41-year-old with an earned income of $143,000 plus $12,000 investment income, his net worth should be $635,500 ($155,000 X 41 divided by 10).
- If you’re in the top quartile (25%) for wealth accumulation in your category, you’re a PAW or “prodigious accumulator of wealth.”
- If you are in the bottom quartile (25%), consider yourself a UAW, or “under-accumulator of wealth.”
To be solidly in the prodigious accumulator category, you should be worth two times your expected level of wealth. Often, prodigious accumulators have four times the wealth of under-accumulators in their category. If you’re at half or less than the expected level for your category, you’re an under-accumulator. Here’s an example of each (both people are in the same income/age category):
- Prodigious accumulator (PAW): Richards, 50, owns a mobile home dealership and his income is $90,200. His net worth should be $451,000, but it’s actually $1.1 million. He lives a modest, blue-collar lifestyle.
- Under-accumulator (UAW): Davidson, 51, is an attorney with an income of $92,330. HiIs expected net worth is $470,000, but it’s actually $226,511. He lives above his means, spending significantly more than Richards to maintain the lifestyle/status associated with attorneys.
The Frugal Millionaire’s Lifestyle
The typical millionaire’s frugal lifestyle could be described as nondescript middle class. Many millionaires don’t stand out in their neighborhoods. Their watchwords are hard work, discipline, frugality, and smart investment.
In football terms, they play both great offense and great defense. They move the ball by generating income and by smart planning and budgeting, and they and their families hold the defensive line by controlling their spending. Both mindsets help them build wealth for the future.
Many millionaires budget their expenses. While you might think millionaires don’t need to budget, the fact is,** they become wealthy and remain that way in large part by budgeting and controlling expenses.**
For instance, millionaires don’t drive high-status vehicles. They often buy quality vehicles that are several years old, and they never lease or finance them. In contrast,** most car buyers spend 30% of their net worth on a vehicle, while millionaires spend only 1%**. Millionaires are also bargain-conscious in other ways: they buy items on sale or at discount or factory outlets.
Frugality and Taxes
Millionaires spend less and invest more to lower their taxable income. A rule they live by is that to build wealth, you need to minimize your taxable (realized) income and maximize your nontaxable income (assets that grow without generating taxable income).
The typical millionaire in the survey had an annual realized income of less than 7% of his wealth, meaning that less than 7% of his wealth was taxable.
Paying income tax is the biggest expenditure for many households. High-income under-accumulators pay the most in taxes because they focus on increasing their earned (taxable) income to support a consumption-oriented lifestyle. They can’t accumulate wealth because their taxable income is too high. In contrast, the typical millionaire or prodigious accumulator may be cash poor due to investing 20% of her annual income in financial assets that appreciate without generating taxable income. (Shortform note:** Examples of such appreciating assets include 401(k) plans and IRAs.) **
Smart planning is essential to wealth accumulation. **Wealthy people spend a significant, but not overwhelming, amount of time—8.4 hours a month or 1.2% of their time—planning their financial future. **They do regular planning each month and prioritize managing their financial assets over other activities.
High-income under-accumulators—many busy doctors are a prime example—feel they don’t have adequate time to plan their financial future. Compared to millionaires, they spend half as much time—4.6 hours a month—on financial planning.
Fully 95% of millionaires own stocks. However**, very few millionaires—less than one in 10—are active traders**. It’s expensive and time-consuming to trade constantly. Active traders or brokers often spend more time trading than thinking about and planning investments. They don’t accumulate much wealth because they don’t give investments enough time to grow. Further, any short-term gains are taxed.
In contrast, millionaires spend more time managing a small number of stocks. They’re focused investors, often investing in industries they’re knowledgeable about.
As previously noted, 80% of millionaires are self-employed, compared to 15% of the general population. The types of businesses owned by many millionaires are considered dull and unexciting by most people. They provide a product or service that’s needed in an industry that isn’t usually susceptible to downturns. These businesses also don’t face much competition, and they’re consistently profitable.
Businesses owned by the millionaires surveyed for this book included: building materials manufacturers, prefab housing, auto parts, auctioneer/appraiser, apparel manufacturer, janitorial services contractor, human resources consultant, real estate developer, beer distributor, construction equipment dealer, and restaurant chain owner.
These types of businesses aren’t typically associated with high status or lavish lifestyles. They don’t interest under-accumulators, whose primary needs are consumption and showing off their status. However, they meet the self-employed millionaire’s needs to create wealth and become financially independent.
How to Become and Stay Wealthy
The experience of the self-made millionaires in this book shows that to become wealthy and stay wealthy you must:
Create and live by monthly and annual budgets. More than half of all millionaires budget their expenses. They’re motivated by visualizing the long-term rewards of achieving financial independence and being able to retire.
**Know what your family spends annually for basic needs **(food, clothing, and shelter). Fully 62% of the millionaires surveyed knew their monthly expenses, compared to 35% of high-income non-millionaires.
Set specific daily, monthly, yearly, and life goals. Most millionaires are goal-oriented and take a long-term view. Their goals are not spending and acquiring material possessions, but being able to retire, be financially secure, and enjoy life. People who are financially secure are happier than those in their age/income category who aren’t. Unlike those living paycheck to paycheck, they don’t worry about the next economic slump.
Spend time planning your financial future. The number of millionaires who spend time planning investments is more than double the number who don’t plan. Many of those who don’t plan are high-income under-accumulators.
Beware of giving ongoing subsidies to adult children and grandchildren, who may become dependent on them instead of self-reliant. Millionaire parents who provide ongoing gifts and subsidies have significantly less wealth than others in their category whose children are independent.
The bottom line is that many more Americans can become millionaires if they’re willing to consume less, control their spending, and focus on steadily building their wealth. The trade-off for spending less of your income today is financial independence tomorrow.
Full Summary of The Millionaire Next Door
Most Americans don’t understand wealth.
- They don’t know how to define it.
- They don’t understand what it takes to become wealthy.
- They have a misleading image of millionaires and how they live.
In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko counter the myths and sketch a surprising portrait of the average millionaire that could resemble someone living in your neighborhood. They assert that many more Americans could become millionaires by adopting habits and characteristics common among millionaires.
For decades, the authors studied and profi…
Read the rest of the “The Millionaire Next Door” summary at my new book summary product, Shortform.
Here’s what you’ll find in the full The Millionaire Next Door summary:
- Chapter 1: Who Is the Millionaire Next Door?
- Exercise: Do You Have Millionaire Habits?
- Exercise: What’s Your Net Worth?
- Chapter 2: Waste Not, Want Not
- Exercise: How Frugal Are You?
- Chapter 3: Use Time and Money Efficiently
- Exercise: Improve Your Game
- Chapter 4: Why Millionaires Drive Used Cars
- Exercise: Assess Your Ride
- Chapter 5: Adult ‘Child Support’
- Chapter 6: Wealth Distribution to Heirs
- Chapter 7: Follow the Money—And Get Rich too
- Chapter 8: Self-Employed Millionaires
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