38. The Millionaire Next Door - Making Money - The American Way
Updated: Oct 8, 2020
The Millionaire Next Door: The Surprising Secrets of America's Wealthy is a 1996 book by Thomas J. Stanley and William D. Danko.
Its a one of the original Treatises written on Personal Wealth Creation in recent history . Thomas Stanley and Danko decoded the unwritten laws those lead to money making and personal wealth creation. Its one of the finest classics on the wealth creation in the order of, 1. Think and Grow Rich by Napolean Hill, 2. The Richest Man in Babylon George Clason and 3.The Science of Getting Rich by Wallace Wattles etc.
This book is a compilation of research done
by the two authors in the profiles of 'millionaires' (note the term 'millionaire' denotes U.S. households with net-worths exceeding one million dollars (USD)).
1.Some of the typical features of an American Millionnaires in 1996 as per Authors.
* I am a fifty-seven-year-old male, married with three children. About 70 percent of us earn 80 percent or more of our household's income.
* About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are self-employed professionals, such as doctors and accountants.
* Many of the types of businesses we are in could be classified as dull/normal. We are welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors.
* About half of our wives do not work outside the home. The number-one occupation for those wives who do work is teacher.
* Our household's total annual realized
(taxable) income is $131,000 (median, or 50th percentile), while our average income is $247,000. Note that those of us who have incomes in the $500,000 to $999,999 category (8 percent) and the $1 million or more category (5 percent) skew the average upward.
* On average, our total annual realized income is less than 7 percent of our wealth. In other words, we live on less than 7 percent of our wealth. Pic : Thomas Stanley
* Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.
* Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent.
* We have a "go-to-hell fund." In other words, we have accumulated enough wealth to live without working for ten or more years. Thus, those of us with a net worth of $1.6 million could live comfortably for more than twelve years. Actually, we could live longer than that, since we save at least 15 percent of our earned income.
Pic : William Danko
* We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.
* Most of our wives are planners and meticulous budgeters. In fact, only 18 percent of us disagreed with the statement "Charity begins at home." Most of us will tell you that our wives are a lot more conservative with money than we are.
* As a group, we are fairly well educated. Only about one in five are not college graduates. Many of us hold advanced degrees. Eighteen percent have master's degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.
* As a group, we believe that education is extremely important for ourselves, our children, and our grandchildren. We spend heavily for the educations of our offspring.
* About two-thirds of us work between forty-five and fifty-five hours per week.
* We are fastidious investors. On average, we invest nearly 20 percent of our household realized income each year. Most of us invest at least 15 percent. Seventy-nine percent of us have at least one account with a brokerage company. But we make our own investment decisions.
The authors compare thebehaviour of those they call UAWs (Under Accumulators of Wealth) and those who are PAWs ( Prodigious Accumulator of Wealth). Their findings, that millionaires are disproportionately clustered in middle-class and blue collar neighborhoods and not in more affluent or white-collar communities, came as a surprise to the authors who anticipated the contrary. Stanley and Danko's book explains why, noting that high-income white-collar professions are more likely to devote their income to luxury goods or status items, thus neglecting savings and investments.
" People who look rich, may not actually be rich " -- Observation by the Authors
2.UAWs versus PAWs
Under Accumulator of Wealth (UAW) is a name coined by the authors used to represent individuals who have a low net wealth compared to their income. A doctor earning $250,000 per year could be considered an "Under Accumulator of Wealth" if their net worth is low relative to lifetime earnings. Take for example a 50-year-old doctor earning $250,000. According to the formula he should have about $1.25 million in net worth (50*250,000*10%). If their net worth is lower, they are an "Under Accumulator". The UAW style is based more on consumption of income rather than on the method of saving income.
A Prodigious Accumulator of Wealth (PAW) is the reciprocal of the more common UAW, accumulating usually well over one tenth of the product of the individual’s age and their realized pretax income.
Most of the millionaire households that they profiled did not have the extravagant lifestyles that most people would assume. This finding is backed up by surveys indicating how little these millionaire households have spent on such things as cars, watches, clothing, and other luxury products/services. Most importantly, the book gives a list of reasons for why these people managed to accumulate so much wealth (the top one being that "They live below their means"). The authors make a distinction between the 'Balance Sheet Affluent' (those with actual wealth, or high-net-worth) and the 'Income Affluent' (those with a high income, but little actual wealth, or low net-worth).
The Millionaire Next Door shows you the simple spending and saving habits that lead to more cash in the bank than most people earn in their life while helping you avoid critical mistakes on your way to financial independence.
3. Here are the some of the Lessons from the Book
Income Does Not Equal Wealth
Yes, higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is invested. On average, millionaires invest nearly 20% of their income.
Danko and Stanley offer a formula for determining whether you have a net worth that is commensurate with your income:
" Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."
The formula also helps in sorting out the millionaires-to-be and the millionaire-wannabes. Those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley. Those in the bottom quartile are under accumulators of wealth (UAWs).
Work That Budget
The majority of millionaires have a budget. Of those who don't, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it.
As for those who do budget and plan out their expenses for the coming year, no, they don't enjoy it any more than the rest of us. But they appreciate the “payoff,” as well as fear the consequences of not doing it. As the authors wrote, “It's much easier to budget if you visualize the long-term benefits of this task.”
Know Where Your Dough Doth Go
Similar to the previous point, almost two-thirds of millionaires can answer “yes” to this question: “Do you know how much your family spends each year for food, clothing, and shelter?” In contrast, only 35% of high-income non-millionaires answered yes to this question. Millionaires are more likely to track their spending.
Time Is Money
All this budgeting and goaling takes time, but millionaires are willing to spend it. Prodigious accumulators of wealth spend nearly twice as many hours per month planning their investments as under accumulators of wealth. The majority of PAWs agreed with the following statements, while the majority of UAWs did not:
“I spend a lot of time planning my financial future.”
“Usually, I have sufficient time to handle my investments properly.”
“When it comes to the allocation of my time, I place the management of my assets before my other activities.”
You don't have to earn a big six-figure salary for planning to pay off. In a survey of 854 middle-income workers, Danko and Stanley found “a strong positive correlation” between investment planning and wealth accumulation. This extra planning doesn't just happen. According to the authors, “Most PAWs have a regimented planning schedule. Each week, each month, each year, they plan their investments.”
Love the Home You're With
Your choice of home — and how often you choose a new one — will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of millionaires have lived in the same house for more than 20 years.
In Stop Acting Rich, Thomas Stanley digs deeper into how your address affects your spending, writing:
Nothing has a greater impact on your wealth and your consumption than your choices of house and neighborhood. If you live in a high-price home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised…. People who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence.
He cites several statistics to back this up, including:
Ninety percent of millionaires live in homes valued below $1 million; 28.3% live in homes valued at $300,000 or less.
On average, millionaires have a mortgage that is less than one-third of the value of their homes.
If you really want to reduce your housing bill, join the 67,000 millionaires who live in mobile homes.
If you're looking to buy a home, Stanley provides this advice: “The market value of the home you purchase should be less than three times your household's total annual realized income.
Love the Spouse You're With
The majority of wealthy people are married and stay married to the same person. Of course, marriage shouldn't be just about money. We're sure that 24-year-old Crystal Harris has other reasons for being engaged to 84-year-old Hugh Hefner; perhaps she loves his pipe. But several studies have shown that people who are married accumulate more wealth than those who are single or divorced.
However, it's important to marry someone with the right financial habits. In the majority of millionaire households studied by Danko and Stanley, the husband is the main breadwinner and tends to be frugal, but the wife is even more frugal. As they wrote, “A couple cannot accumulate wealth if one of its members is a hyperconsumer.”
Don't Drive Away Your Wealth
The majority of millionaires own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles. What is the most popular car maker among millionaires, according to Stop Acting Rich? Toyota.
So who's driving all those BMWs and Mercedes-es? Not millionaires. Eighty-six percent of “prestige/luxury” cars are bought by non-millionaires. In fact, Stanley writes that “one in three people who traded in their old car for a new one were upside down and owed more on the trade-in than its market value.” It's tough to get wealthy doing stuff like that.
The Rich Are Different — They're Happier
At this point, you might be wondering whether all this living below your means is worth it. Sure, millionaires having bigger portfolios — but are they happier? Danko and Stanley's research indicates that they are. According to their research,
“Financially independent people are happier than those in their same income/age cohort who are not financially secure.”
First of all, PAWs worry less than UAWs. There's a peace of mind that comes from living below your means and having money in the bank. But they also don't expect “status” purchases to improve their happiness, because evidence shows it doesn't happen. Among the people surveyed, those who drive a BMW and wear a Rolex are not happier than those who drive a Honda and wear a Timex.
One Wonderful Video on Riches :
15 Secrets of the Rich
Its technically possible to become a Millionnaire in one generation without inheriting anything from parents. The people, who live below means , drive pre-owned cars and budget the spending, who can make it to this Millionnaire's club.
They live very next door to us in Blue Collar Neighbourhoods and in the Middle Class Areas and may probably stay in the same house for close to 20 years. They draw their happiness from Financial Indepence rather than in possession of Social Status Symbols.
Its very much possible and well within our reach to be come a Millionnaire with Stringent Savings and Deligent Investments in One Generation itself.