The Millionaire Next Door Book Summary

Posted on December 28th, 2012

Book: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas Stanley, William Danko


By surveying people in so-called upscale neighborhoods across the country. In time, we discovered something odd:

  • 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.


Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.

Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.

Building wealth takes discipline, sacrifice, and hard work.

  • Do you really want to become financially independent?
  • Are you and your family willing to reorient your lifestyle to achieve this goal?

Many will likely conclude they are not. If you are willing to make the necessary trade-offs of your time, energy, and consumption habits, however, you can begin building wealth and achieving financial independence

Determine Your Wealth

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

The Illusion Of Wealth

It is unfortunate that some people judge others by their choice in foods, beverages, suits, watches, motor vehicles, and such. 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.

Three words that profile the affluent?


Webster’s defines frugal as “behavior characterized by or reflecting economy in the use of resources.” The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and hyper-consumption.

Johnny’s traditional family values and his lifestyle of hard work, discipline, sacrifice, thrift, and sound investment habits might threaten the audience. What happens when you tell the average American adult that he needs to reduce his spending in order to build wealth for the future? He may perceive this as a threat to his way of life.

The affluent tend to answer “yes” to three questions we include in our surveys:

  1. Were your parents very frugal?
  2. Are you frugal?
  3. Is your spouse more frugal than you are?

A self-made millionaire stated it best when he told us: I can’t get my wife to spend any money! Most people will never become wealthy in one generation if they are married to people who are wasteful. A couple cannot accumulate wealth if one of its members is a hyper consumer

Do you know how much your family SPENDS EACH YEAR FOR FOOD, CLOTHING, AND SHELTER?

Almost two-thirds of the millionaires surveyed (62.4 percent) answered “yes” to this question. But only about 35 percent of high-income-producing nonmillionaires answered “yes” to this question.

Millionaires see things differently. Their goal is to become financially independent. For example, to have $5 million by the time you and your significant other retire. Domestic consumption is directly related to achieving this goal. Tabulating helps control consumption. It also reduces the probability of allocating too many dollars to product and service categories that are not really important.

Do you have a clearly defined set of DAILY, WEEKLY, MONTHLY, ANNUAL, AND LIFETIME GOALS?

Always be goal-oriented. I have a clearly defined set of daily goals, weekly goals, monthly goals, annual goals, and lifetime goals. I even have goals to go to the bathroom. I always tell our young executives that they must have goals.

Most millionaires are goal-oriented. So are most other millionaires. For every 100 millionaires who answered “no” to this question, there are 180 who answered “yes.” Who are the “noes”? Many of the high-income and inherited-wealth types discussed in the last section. Many senior citizens and retired millionaires who have already reached most of their goals also answered “no.” You may wish to reflect for a moment on the comments made by an eighty-year-old multimillionaire:

Authors: The first question we always ask is about goals. What are your current goals?

Mr. Clark: It was $438 an ounce yesterday in London! After Mr. Clark turned on his hearing aid, we repeated the question.

Mr. Clark: Oh, goals, not gold… . I see. My goals. I’ve accomplished what I’ve tried to do… . My long-range goal was, of course, to accumulate enough wealth so I can get out of business and enjoy life. I’ve been down the road… . I’ve got an international reputation. Mine is one of the greatest welding companies in the world. I never want to retire. But now my goal is my family and self-satisfaction about what I’ve accomplished.

Financially independent people are happier than those in their same income/age cohort who are not financially secure. Financially independent people seem to be better able to visualize the future benefits of defining their goals. Mrs. Rule, for instance, visualizes all her grandchildren graduating from college. She visualizes their success after college. She never sees herself being financially dependent on others, even if she is disabled in the future. Her goals are congruent with those of most millionaires in this regard.

Do you spend a lot of time planning your FINANCIAL FUTURE?

For every 100 millionaires who answer “no,” there are 192 who answer “yes.” Again, many who answer “no” are either high-income types with relatively low levels of accumulated wealth, those who inherited all or most of their wealth, or wealthy seniors/retirees.

On average, millionaires spend significantly more hours per month studying and planning their future investment decisions, as well as managing their current investments, than high-income non millionaires

Too many high-income/low-net worth types live from paycheck to paycheck, fearing a sudden downturn in our economy.

Millionaires know that the more they spend, the more income they must realize. The more they realize, the more they must allocate for income taxes. So millionaires and those who will likely become affluent in the future adhere to an important rule: To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).

Most millionaires measure their success by their net worth, not by their realized income. For the purposes of wealth building, income doesn’t matter that much.

Remember, it’s inevitable—death and taxes. People accumulate significant wealth by minimizing their realized/taxable income and maximizing their unrealized/nontaxable income. We once asked a high-income/low-net worth corporate manager (we will refer to him as Mr. Rodney) a simple question: Why is it that you never participated in your corporation’s tax-advantaged stock purchase plan?

Mr. Rodney reported that, unfortunately, he could not afford to participate. It seemed that all his income went toward his $4,200 monthly mortgage payment, two leased vehicles, tuition bills, club dues, a vacation home that needed to be fixed up, and taxes.

Ironically, Mr. Rodney wants “eventually to become financially independent.” But like most UAWs, Mr. Rodney is not realistic in this regard. He has sold his financial independence. What if he had taken full advantage of the tax-advantaged benefit from the time he was first employed? Today he would be a millionaire. Instead, he is on the perpetual earn-and-consume treadmill.

Being a well-educated, high-income earner does not automatically translate into financial independence. It takes planning and sacrificing. Perhaps you aren’t as wealthy as you should be because you traded much of your current and future income just for the privilege of living in a home in a high-status neighborhood. So even if you’re earning $100,000 a year, you’re not becoming wealthy. What you probably don’t know is that your neighbor in the $300,000 house next to yours bought his house only after he became wealthy. You bought yours in anticipation of becoming wealthy. That day may never come.

Here is another one of our rules. If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.

People who become wealthy allocate their time, energy, and money in ways consistent with enhancing their net worth. PAWs allocate nearly twice the number of hours per month to planning their financial investments as UAWs do.

It is difficult to accumulate wealth when one is in school. The longer one stays in school, the longer one postpones producing an income and building wealth. Most experts on wealth agree that the earlier one starts investing one’s income, the greater the opportunity to accumulate wealth. Begin earning and investing early in your adult life. That will enable you to outpace the wealth accumulation levels of even the so-called gifted kids from your high school class.

In reality, many people who live in luxury have little money left over after funding their high-consumption lifestyles. PAWs tend to have just the opposite feelings. To them, money is a resource that should never be squandered. They know that planning, budgeting, and being frugal are essential parts of building wealth, even for very high-income producers. Even high-income producers must live below their means if they intend to become financially independent. And if you’re not financially independent, you will spend an increasing amount of your time and energy worrying about your socioeconomic future.

Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction. The Norths have a budget that calls for them to invest at least one-third of their pretax household income each year. In fact, during the year that we interviewed Dr. North, he and his wife invested nearly 40 percent of their annual pretax income. How were they able to do this? In short, they consume at the same level as the average family that earns about one-third as much as they do.

Consider the frugal orientation of Dr. North. He stated emphatically, for instance, that he never bought a suit that was not offered at a discount or a special price. This is not to suggest that Dr. North is poorly dressed. Nor does he wear cheap suits. Rather, he purchases quality clothing, but not at full price and never on impulse. This behavior was part of his socialization process as a youth: When I was going to school, my wife taught. We had a small income… . Even then we always had a rule … to save— even then we saved. You can’t invest without something… . The first thing is to save. Even when I was eleven years old, I saved my first $50 from working in a grocery store. It’s just like today . .. only today the number of zeros change…. More zeros, but it’s the same rule, same discipline. You must take advantage of investment opportunities… . You have to have something to take advantage of excellent opportunities… . It’s part of my background.

The Home Team - Husband And Wife

We determined long ago that the habits of both husband and wife account for variations in accumulating wealth. Your spouse’s orientation toward thrift, consumption, and investing is a significant factor in understanding your household’s position on the wealth scale.

Who is the tightwad in your household? In the case of Dr. North’s family, both he and his wife fit the profile. Both live well below their means. Both contribute to planning their well-thought-out annual budget. Neither objects to buying used motor vehicles. Both can tell you how much their family spends each year for a variety of products and services. Neither objected to sending their children to public elementary and high schools. Both place a high priority on being financially independent. Yet these goals never translated into shortchanging their three children. The parents funded their children’s college educations as well as their graduate school and law school tuition and fees. They also provided them with funds to purchase homes and for related expenditures. The Norths paid for these expenditures out of investments that they set aside for their children.

The Norths are very different from the Souths in their spending behavior. Both Dr. and Mrs. North come from backgrounds of frugality and thrift. Throughout their marriage they have communicated with each other about resource allocations. Their budgeting system is basic to their controlled-consumption lifestyle.

Both their purchases are listed on one single statement each month. Each month they determine how much remains to be allocated for each consumption category, and at the end of each year they refer to these statements to compute their total expenditures for each category. Using this statement facilitates budgeting and making appropriations for the following year. Most important, their planning, budgeting, and consuming are coordinated events. Unlike the Souths, the Norths have one joint checking account to help facilitate the budgeting of items not paid for with their credit card.

Only those clients with considerable wealth want to know exactly how much their family spends on each and every category. Do you know exactly how much your family spent last year for each and every category of product and service? Without such knowledge, it’s difficult to control your spending. If you can’t control your spending, you’re unlikely to accumulate prodigious amounts of wealth. A good start is to keep an accurate record of each and every expenditure that your family makes each month.

Luxury vs Wealth

There is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future. Consider this fact: Most millionaires we have interviewed never in their lifetimes spent near $65,000 for an automobile. In fact, as we will report in Chapter 4, more than half the millionaires we interviewed never paid more than $30,000 for a motor vehicle. Remember, though, Dr. South is not a millionaire. Certainly in terms of net worth, millionaires are better able to afford a $65,000 automobile. But they ignore such opportunities. As so often is said, “That’s why they’re millionaires!” Certainly

Most of us want to be wealthy, but most of us do not spend the time, energy, and money required to enhance our chances of realizing this goal. Time Allocation Most PAWs agree with the following statements, while most UAWs disagree:

  • 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 own assets before my other activities.

Nearly all (95 percent) of the millionaires we surveyed own stocks; most have 20 percent or more of their wealth in publicly traded stocks. Yet you would be wrong to assume that these millionaires actively trade their stocks. Most don’t follow the ups and downs of the market day by day. Most don’t call their stock brokers each morning to ask how the London market did. Most don’t trade stocks in response to

Comparing Times Dr. North allocates about ten hours in a typical month, or 120 hours a year, to studying and planning his future investment decisions (see Table 3-6). In contrast, Dr. South allocates three hours a month, or fewer than forty hours a year.

You Aren’t What You Drive They believe that financial independence is more important than displaying high social status. Mr. Allan, as well as those people whom he has backed financially, have never felt that their purpose in life was to look wealthy. According to Mr. Allan, “That’s why I’m financially independent”: If your goal is to become financially secure, you’ll likely attain it… . But if your motive is to make money to spend money on the good life, … you’re never gonna make it.

Many people who never achieve financial independence have a much different set of beliefs. When we ask them about their motives, they speak in terms of work and career. But ask them why they work so hard, why they selected the careers they did, and their answers are much different from Mr. Allan’s. They are UAWs, and UAWs, especially high-income producers, work to spend, not to achieve or become financially independent. UAWs view life as a series of trade-ups from one level of luxury to the next.

Money should never change one’s values… . Making money is only a report card. It’s a way to tell how you’re doing. Building wealth is not something that will change your lifestyle. Even at this stage of life, I don’t want to change the way I live.

Negotiating A Car Deal - The Smart Way

If he noticed a vehicle that caught his eye, he would contact the dealer by phone. At the same time he would telephone sellers who had their vehicles listed in the classifieds. He eventually made a purchase from a private party at a price substantially lower than at any dealer he had contacted. He told the seller: I am not in a hurry. Give me a call in a month or so and I’ll make you an offer. But right now you’re asking nearly as much as all the dealers I have been in contact with in the past few weeks.

He tells the same thing to all the people he contacts. He also has a favorite time of the year to negotiate. He claims he is most successful in cutting deals from the last two weeks of December into February. During the winter season, he says, sellers don’t find a lot of shoppers out and about. Christmas-related expenses and activities and the cold weather distract and discourage most potential buyers from shopping during this period. They do not discourage many used vehicle-prone shoppers. It is not at all unusual for buyers in this group to have four or more sellers competing simultaneously for their business during these months!

Wealth Mindset

Behind their frugal behavior is a strong set of beliefs. First, they believe in the benefits of being financially independent. Second, they believe that being frugal is the key to achieving independence. They inoculate themselves from heavy spending by constantly reminding themselves that - YOU AREN’T WHAT YOU DRIVE many people who have high-status artifacts, such as expensive clothing, jewelry, cars, and pools, have little wealth.

We have stated many times the belief of countless millionaires who have told us: It’s much easier in America to earn a lot than it is to accumulate wealth. Why is this the case? Because we are a consumption-oriented society. And the high-income-producing nonmillionaire neighbors of used vehicle-prone shoppers are among the most consumption-oriented people in America. Many UAWs also believe that people drive the best they can afford.

Parenting and Wealth - Teach Your Children How To Be Wealthy

In general, the more ECONOMIC OUTPATIENT CARE dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more. It is much easier to spend other people’s money than dollars that are self-generated. Gift receivers … the adult children of the affluent feel that their parents’ wealth/capital is their income . .. income to be spent. Fundamental rule regarding wealth building - whatever your income, always live below your means.

“If not cash, then what form of gifts are more beneficial?” They are eager to learn how to enhance the economic productivity of their children. Here again, we remind them that teaching their children to be frugal is critical. Often those who are trained to be otherwise as children become adult hyperspenders, needing cash subsidies during their young and middle adult years.

Teach your own to live on their own. It’s much less costly financially, and, in the long run, it is in the best interests of both the children and their parents. The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.

The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more. This is a statistically proven relationship. Yet many parents still think that their wealth can automatically transform their children into economically productive adults. They are wrong. Discipline and initiative can’t be purchased like automobiles or clothing off a rack.

Is a rent-free environment ideal for a young entrepreneur? We don’t think so. Nor is the gift of a business. The most successful business owners are the ones who put much of their own resources behind their ventures. Many succeed because they have to succeed. It’s their money, their product, their reputation. They have no safety net. They have no one else to rely upon for their success or failure.

Affluent business owners have overcome most of their fears. They have inoculated themselves from many fears by becoming completely self-sufficient. And it was the very struggle to become economically self-sufficient that helped these business owners overcome them. Taking financial risk is evidence of courage.

Webster’s defines courage as “mental or moral strength to resist opposition, danger, or hardship.” It implies firmness of mind and will in the face of danger or extreme difficulty. Courage can be developed. But it cannot be nurtured in an environment that eliminates all risks, all difficulty, all dangers. It takes considerable courage to work in an environment in which one is compensated according to one’s performance. Most affluent people have courage.

Find Your Niche And Be Proficient In Targeting Market Opportunities

The character of the business owner is more important in predicting his level of wealth than the classification of his business. PAWs need to achieve, to create wealth, to become financially independent, to build something from scratch. UAWs more often need to display a high-status lifestyle…

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