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The Millionaire Next Door

January 11, 2019
Thomas J. Stanley and William D. Danko
I was expecting this to be one of those scammy books on manifesting wealth that tries to sell you a program, and was delighted to find that it was the exact opposite. It's one of the most realistic books on building wealth, and I'd recommend it to anyone who's interested in personal finance.
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The book shows you that most millionaires aren't who you think they are. They're the people driving the 15-year-old pickup trucks, the plumbing contractors, the ones living in average houses, the ones who enjoy club sandwiches to caviar. This book touches on the decisions they make that enable them to build such wealth.

The book was written in 1996, so you may need to adjust for inflation. At the time of writing, $1 in 1996 is worth about $1.70 today.

My notes

80% of America's millionaires are first-generation rich. Usually the wealthy individual is a businessman who has lived in the same town for all of his adult life, who owns a small factory or service business, or a chain of stores. He lives next door to people with a fraction of his wealth.

Seven common denominators among those who successfully build wealth:

  1. They live well below their means.
  2. They spend their time and money in ways conducive to building wealth.
  3. They believe financial independence is more important than status.
  4. They didn't have monetary help from their parents.
  5. Their adult children don't rely on them for money.
  6. They are proficient in targeting market opportunities.
  7. They chose the right occupation. (Not what you think.)

Self employed people make up less than 20% of the American workforce but account for 2 out of every 3 millionaires. Three out of four self-employed people consider themselves to be entrepreneurs.

97% of millionaires are homeowners with houses valued at $320k.

Become sensitive to how much you're consuming. Becoming more frugal will help you save more. If you're making $100k but spending $90k, you're not wealthy.

The profile of a first generation entrepreneur who becomes wealthy: thrift, low status, discipline, low consumption, risk, and very hard work. Their low status is actually their building block for success. People from highly educated or wealthy backgrounds are often used to consumption and have a harder time building wealth.


Most people would be surprised that America's millionaires prefer low-cost things to expensive.

Decamillionaires ($10M+) they interviewed didn't have a taste for fancy things. "I drink scotch and two kinds of beer: free and Budweiser!" They are often frugal.

As kids, we are led to believe that millionaires have a high-consumption lifestyle. We learn that hyperconsumption is the main reward for becoming affluent in America. However, the reality is mundane — filled with discipline and financial independence.

Maintaining wealth is just like working out. You have to keep at it. Spend time each month planning your investments and staying on top of your budget.

There are two options to being frugal: budgeting and paying yourself first. We all know what budgeting is, but "paying yourself first" means figuring out how much you can invest, doing that at the beginning of every pay period, and spending what's left over.

The majority (64%) of millionaires set daily, weekly, monthly, annual, and lifetime goals for themselves. The ones without goals are the people who have high incomes or have inherited their wealth.

And 65% "spend a lot of time" planning their financial future.

To build wealth, minimize your taxable income and maximize your capital appreciation (untaxable income). For instance, Ross Perot minimizes his taxes by investing heavily in tax free municipals, tax-sheltered real estate, and stocks with unrealized gains.

Once you're in a high income bracket, it matters less how much more you make and more what you do with what you already have.

It's easier to gain wealth if you don't live in a high-status neighborhood. Less rent/mortgage, less HOA, less car payments, and so on.

If you're not yet wealthy, never purchase a home that requires a mortgage more than twice your household's total annual taxable income.

Cheaper house = less mortgage, less property tax, more money to invest.

They spend their time in ways conducive to building wealth

Interesting: after you reach a high income (~six figures), those with more education tend to have less wealth. Millionaires are typically a business owner with some college, four years of college, or no college. Advanced degrees don't mean much.

People who aren't "gifted" can earn and invest early, and compound interest will help them surpass even their most gifted friends. Wealth is blind. It doesn't care about smarts or degrees.

Certain people throughout the book talk about the benefits of a good private school for the education of their children. Others are content with public schools and enjoy the cost benefits.

One budget creator recommends investing 15% of your pre-tax income each year.

Most millionaires have never spent more than $30,000 on a car.

Millionaires spend time and energy working on things that will increase their net worth. Non-millionaires get caught up in minutia. For instance, it only takes a few minutes to invest in your 401K or an index fund. It takes hours, days, or weeks to buy a new car, research the backstory of a new movie, etc.

75% of millionaires drive old car models (not this year's). Many buy used and drive them for many years. If they drive European luxury cars, they take advantage of the fact that these kinds of cars depreciate heavily after the first three years.

Two cars are sitting next to each other: a new one, and a used one. The new one is $20,000 more. Is the pride of driving a new car worth that $20,000? That's all you're buying: pride. — a man worth $7.5 million who drove his old car for 20 years

Wealthy parents can help their children become wealthy by living under their means and teaching them discipline. Don't shower your children with gifts or display overconsumption.

People who never build wealth tend to make the following excuses:

  • I can't devote enough time to making investment decisions.
  • I'm too busy to spend much time looking over my finances.

Planning and wealth accumulation are significantly correlated, even in people with average incomes.

One of the common misconceptions is that it takes lots of time to plan investments. It only takes a few hours per month (and probably less today, since we have so much of investing automated by things like Betterment and automatic withdrawals).

People who accumulate wealth do not live Spartan lives. They simply live in moderation and err on the side of spending less and being frugal. That doesn't mean cutting out all unnecessary expenditures.

When less-wealthy people invest, they commonly hold near-cash investments such as savings accounts, money market funds, and short-term treasury bills. When wealthy people invest, they hold a greater percentage of their assets in private businesses, commercial real estate, publicly traded equities, pension plans/annuities, and other tax-deferred categories.

90% of millionaires are long-term stock holders. They buy and wait over a year before selling. (Usually 2-4 years, although 32% hold for even longer.)

Only invest in areas where you have knowledge. Invest in trustworthy people. And make sure you have the savings to invest. (If you're young and inexperienced, you'd probably be better off saving, investing in Vanguard funds, paying off debts, and learning before making investments.)

A good metric for finding a financial advisor: through personal recommendations. (Especially through someone like an accountant.)

If you don't have an accountant, get one. Find a good one: look for someone who was hired by a major accounting firm and later started their own practice. Or call the local offices of national accounting firms, who are often very selective in their hiring. You may also want to speak with accounting professors at good colleges and ask them for recommendations.

You aren't what you drive

Non-financially-savvy people tend to look at life as a series of trade-ups from one luxury to another.

A modest multimillionaire entrepreneur, who they call Mr. Allan, is worth ten times the amount of what he should be for his age. He owns two businesses, has investments in commercial real estate, and has lived in the same house for forty years. He drives simple sedans. He focuses on efficiency. He says that money should never change a person's values ("it's only a way to tell how you're doing"). He also warns against one nice purchase leading into another (once you have the nice car, you need other nice things to go along with it). His business partners surprised him with a custom Rolls Royce and he declined it. The Rolls doesn't represent his values. He wants a car he can take fishing — his weekly hobby — and dine in his favorite crummy restaurants. And he doesn't want to alienate his employees.

81% of millionaires purchase their cars. The rest lease. They typically pay $24,800. 37% buy used.

Most popular millionaire cars (this book was written in '96):

  • 9.4% own Fords, usually F-150s or Explorers
  • 8.8% own Cadillacs
  • 6.4% own Jeeps (usually the Grand Cherokee), Lexuses, or Mercedes
  • 5.9% own Oldsmobiles
  • 5.6% own Chevys (usually Suburbans or Trailblazers)
  • 5.1% own Toyotas (usually Camrys)

The real growth in the millionaire sector comes from entrepreneurship. Successful entrepreneurs tend to be more price sensitive, as they judge each purchase in terms of productivity.

They split millionaire car buyers into four groups: they either shopped for new or used cars, and either shopped around or went through a preferred dealer (usually a family member or a customer of one of their businesses to reciprocate). The millionaires with the highest ratio of net worth to income fell into the "buy used and shop around" camp. For every dollar they make in income, they had $17.20 in net worth. (Average net worth of around $3 million – which, adjusted for 2019's dollars, is an average of $4,818,058.63.)

Their parents didn't give them monetary help

Usually, wealthy people do not receive subsidies from their parents. Those that do often lead lives of mega-overconsumption that doesn't fit their real income.

In general, the more dollars adult children receive, the fewer they accumulate. The less they receive, the more wealth they accumulate.

The sons and daughters of the affluent are high volume consumers who have little wealth despite their traditional colonial homes, upscale neighborhood, childrens' private schools, luxury vehicles, etc.

More than 46% of the wealthy give at least $15,000 to their adult children or grandchildren.

Households that receive cash gifts from parents have, in many cases, 25% to 40% less net worth and 20% to 30% less income than those who don't.

Don't weaken the already weak. Too much looking out for someone can make them dependent.

Their adult children don't rely on them for money

Their children are economically self-sufficient. The wealthy ones aren't usually the ones who accept their gifts.

Many wealthy people bring in an outside-the-family co-executor of their estate, such as an attorney, to help mitigate the issues of inheritance.

Rules for raising successful adult children:

  1. Don't tell your children that you're wealthy.
  2. Teach discipline and frugality.
  3. Assure they won't realize you're affluent until they're mature and established in a profession.
  4. Minimize discussions of inheritance. Don't talk about who gets what, especially with alcohol involved. You'll forget — they won't — and then there will be conflict.
  5. Never give cash to your children as part of a negotiation strategy.
  6. Don't interfere in the lives of your adult children. Ask permission to even just give them advice.
  7. Don't compete with your children.
  8. Always remember that your children are individuals.
  9. Emphasize your children's achievements, no matter how small, not their or your symbols of success.
  10. Teach your children that there are a lot of things more valuable than money. (Health, happiness, family, self reliance, etc.)

Some rules one of the wealthy men gave his children:

  • Be tough. Life is. There's no promise of a rose garden.
  • Never say "poor me".
  • Don't abuse your belongings.
  • Close the front door. Don't let the heat out.
  • Say yes to those who need help before they ask.

The typical first-generation affluent American is a business owner.

I'm not impressed with what people own. But I'm impressed with what they achieve... always strive to be the best in your field. If you are the best in your field, money will find you.

It's easier to make money honestly than dishonestly in this country. You will never succeed in business if you rip people off! Life is the long run.

They capitalize on market opportunities

You can become wealthy by providing a service to people with lots of money. They aren't as sensitive to the price when it comes to purchasing for their business, financial services, or grandchildren.

Recommended careers to capitalize on the growing millionaire population: estate law, tax law, immigration law. The top percentage of dentists, plastic surgeons, dermatologists, allergists, psychologists, psychiatrists, and chiropractors. Asset liquidators such as appraisers and auctioneers, coin and stamp dealers, pawn brokers, real estate management companies. Proprietors and teachers in private or specialized schools, especially those with SAT/college prep. Accountants. Home building, mortgage, renovation, and remodeling contractors. Real estate agents, and pretty much the whole housing development sector. Fundraising counselors for philanthropies. Marketers of vacation services for the wealthy, such as world tours. Strive to be in the top 1% of quality for one of these services.

They choose the right occupation

Most of the affluent in America are business owners, including self-employed professionals. Twenty percent of the affluent households in America are headed by retirees. Of the remaining 80%, more than two thirds are headed by self-employed owners of businesses. In America, fewer than one in five households, or about 18%, is headed by a self-employed business owner or professional. But these self-employed people are four times more likely to be millionaires than those who work for others.

Many companies that produce millionaires are boring/dull with steady earnings growth over time. Pest control, sand blasting contractor, meat processor, janitorial services contractor, citrus fruits farmer...

You can't predict if someone is a millionaire by the type of business he's in. After 20 years of studying millionaires across a wide spectrum of industries, they concluded that the character of the business owner is more important in predicting his level of wealth than the classification of his business.

Most people who make it big in business set their own very high standards.

Many wealthy entrepreneurial parents discourage their children from becoming entrepreneurial, thinking that it will be too competitive for them.

Most successful owners will tell you that they have tremendous freedom. They also say that entrepreneurship is much less risky: risk is having one source of income. Business owners have many customers, many sources of income, and thus much less risk.

They don't advise that everyone becomes a business owner. Many small businesses fail or have trouble turning a profit.

Entrepreneurs commonly have these beliefs:

  • I'm in control of my own destiny
  • I can solve any problem
  • The only way to become CEO is to own the company
  • There are no limits on the amount of income I can make
  • I get stronger and wiser every day by facing risk and adversity
  • Their number one belief: I enjoy what I do, and I take pride in going it alone