The Millionaire Next Door was written by Thomas J. Stanley and William D. Danko following a study the two did on the millionaires of America. Initially, the two conducted the project with the full expectation that the millionaires they interviewed would all be living “the good life,” with thousand dollar wrist-watches, tailored brand-name suits, and luxury foreign cars. However, Stanley and Danko soon realized that this was far from reality. What can we learn from Stanley and Danko’s study? And do these lessons remain relevant today?

 

The long and short of it:

Between 1973 and 1996, Stanley and Danko sent lengthy 200 question surveys to those who have a net worth of 1 million or greater and personally interviewed 500 millionaires in preparation for the book. In doing so, Stanley and Danko were able to compile a set of helpful guidelines which most millionaires traditionally operated under. By adopting these practices ourselves, we can improve our own financial health and get one step closer to FIRE.

Millionaire basics

In a hyper-consumerist culture, the importance of playing a good offense (making money) is overemphasized and the need to pair that with a good defense (saving money) is neglected. Consider Warren Buffett, who was a millionaire by the time he was 30 yet infamously frugal. This isn’t just a quirk of his personality, but one of three vital elements to becoming wealthy. They are:

1. High income

As much as we wish it might be different, amassing a considerable net worth does correlate with the amount of money you’re able to bring in on a regular basis. Seek to increase your hourly wage whenever the opportunity arrives. It’s not about needing or not needing the money, it’s about securing your future and moving towards financial independence.

2. Frugal habits

Millionaires can be sorted into two categories. On one hand, there are those who gained their wealth through inheritance/an incredibly lucrative career. Millionaires of this breed tend to be extravagant spenders and Under Accumulators of Wealth (UAW), meaning their net worth is below what would be expected of someone of their age and income. On the other hand are millionaires who earned a fairly high income from their business and/or profession and accumulated their wealth slowly through the years. These millionaires are frugal, generally preferring to lead middle-class life-styles and drive used vehicles. They are what Stanley and Danko call Prodigious Accumulators of Wealth (PAW), meaning their net worth is significantly above what would be expected of someone of their age and income. For the purposes of wealth-building, PAWs represent a much more achievable and sustainable path. 

3. Smart investing 

When done wisely, investing is a vital aspect of building wealth. Left alone in a savings account, money depreciates year after year due to inflation. Not to mention that it’s more difficult to be disciplined in your spending when you keep all your assets liquid, due to how easy it is to transfer money out of a savings account. The most effective way to ensure you don’t overspend is to invest your money. So how do millionaires invest? By staying within their circle of competence, which in this case means investing in the industry they understand well and the people they trust. Millionaire investing is also notable in that most of them invest long-term, frequently holding onto stocks for upwards of a year so as not to incur unnecessary trading fees.

Time spent planning finances translates directly to more wealth

People who make high six figure incomes tend to think that it’s not worthwhile to take the time to properly budget and plan their finances. By blindly going into their finances, UAWs are susceptible to adopt a lifestyle far beyond even their prodigious incomes. More distressingly, this lack of planning also means UAWs are setting themselves up for an unpleasant retirement, where they either don’t retire at all, or are forced to go into debt with a drastically reduced standard of living. Compared to UAWs, PAWs are much more attentive to their spending and investing. On average, Stanley and Danko found that PAWs spent 83% more time on financial planning per month than UAWs (about 4.6 hours vs 8.42 hours per month). The idea isn’t to devote all your time and energy into intricate budgets and day trading. Rather, you should approach spending and investing attentively and consciously, but not over plan.

Expensive purchases come in sets

The most insidious spending trap is the well-to-do lifestyle. When you live in a high-class neighborhood surrounded by regular displays of wealth in the form of expensive cars, clothing, and houses, it becomes a constant social pressure to keep up appearances. It doesn’t matter that your neighbors aren’t millionaires anymore than you are, what matters is looking rich. Thus living in an expensive neighborhood can foster expensive tastes. Although living areas have the greatest influence, expensive gifts can also have this effect. An expensive wine for guests of discerning taste may demand caviar, and the high-class setting would demand expensive formal wear, which would in turn demand expensive transportation. Having just one piece of the “rich people collection” may very well open the floodgates to hyper-consumption. 

PAWs are well aware of this phenomenon and so they make a deliberate effort to avoid up-scale neighborhoods and up-scale associates. PAWs are unmoved by status symbols and would prefer to lead simple lives. Millionaires (PAWs for the most part) are among the top consumers of used vehicles in America. UAWs assume that the car someone drives is the best they are able to afford, but from the PAWs’ perspective, they are letting someone else finance the burden of a rapidly depreciating vehicle so they can get a good-as-new car at a significant discount.

Economic outpatient care

It is the wish of every parent to have their child lead a better life than they did. Affluent parents try to provide their children with everything that will help them succeed in life. This ranges from tuition, to downpayment on a house, to annual monetary aid of $10,000. While some of these efforts are genuinely helpful (mostly university tuition) other well-intentioned attempts at aid are actually damaging. 

Psychologically speaking, people find it much easier to spend someone else’s money than their own. Adult children who receive regular monetary aid from their affluent parents are disincentivized to be frugal, invest their savings, and seek higher income. While affluent parents provide their adult children with monthly stipends, they do so with the implicit desire for the arrangement to be temporary. However, what frequently ends up happening is that their adult children become dependent and find themselves unable to maintain their (upper middle class) lifestyle without their parents’ money. This is a perilous arrangement, as not only does it mean the parents’ wealth is rapidly draining away, potentially endangering their retirement plans, but also the adult children never learn proper money management skills and find themselves without recourse after squandering their parents’ final inheritance.

Best career to become a millionaire

Approximately half of the millionaires surveyed by Stanley and Danko are, perhaps unsurprisingly, entrepreneurs. Stanley and Danko theorize that this may be because businessmen are a demographic especially sensitive to cost and profit. Considering how much money it costs and effort it takes to hire staff, purchase inventory, and maintain a storefront, a businessman would view new cars to be an illogical expenditure, especially seeing as used cars function just as well. It would seem that starting your own business is the way to go, but Stanley and Danko warn against this approach. 

Only 25% of new businesses last 15 years or longer, meaning that for every entrepreneur who succeeds, there are 3 more who fail (source). Founding a company certainly takes skill and creative thinking, but the true deciding factor frequently comes down to luck. Parents who made their fortune as company owners invariably send their children to private schools and universities to become physicians, lawyers, and accountants. No matter how potentially successful the profitable business owner is, the overwhelming consensus suggests that the best approach is to become a self-employed professional, whose best asset is their learned intellect.

 

What makes The Millionaire Next Door unique?

As it both takes time to accumulate wealth, and time to accumulate the experience needed to command a higher salary, nearly all of Stanley and Danko’s survey respondents are in their 50’s or older. The Millionaire Next Door offers a window into what smart investing, increased income, and consistent frugality will look like decades down the line. 

Stanley and Danko compare this vision of genuine success with the superficial success of hyper-consumers with a high income and low net worth. Although the millionaires described all have above-average income (70k being the lowest mentioned and 700k the highest), Stanley and Danko’s description of PAWs gives people of every age and every income level a tangible goal to strive for. Additionally, their emphasis on the relative normalcy and frugality of PAW millionaires highlight that greater wealth is available to everyone, provided they practice good saving habits.

 

Final thoughts:

While there are many good messages to take away from The Millionaire Next Door, I first feel the need to address two important factors that prevent this book from being an ideal guide to money management. The first issue is purely economic and the second concerns systemic oppression. 

Past vs current economics

The economic landscape of today is very different from when Stanley and Danko wrote The Millionaire Next Door. 

Firstly, inflation has severely devalued the notion of a million dollars. A dollar today is worth $0.52 of Stanley and Danko’s dollar in 1996. To have the same purchasing power as you would have had for $1 million in 1996, you now need about $2 million (or $1,944,608.03 to be precise). 

Another difficulty is the rising cost of housing. The average home in America today costs $436,800 where it used to cost $322,541, adjusted for inflation (source). 

The final nail in the rich millionaire coffin is stagnating wages. From 1973 to 2013, productivity of the average American employee has increased by 74.4% while hourly compensation increased by a measly 9.2% (source). Due to all these factors, where six-figure household income was high in Stanley and Danko’s time, today it’s not nearly enough to sustain a middle-class lifestyle, especially in the big city. In fact, according to CNBC, a middle class lifestyle in a big city with retirement savings, enough to pay for the children’s college tuition, vacations, and a house would require an annual household salary of about $350k or more.

Systemic oppression

Stanley and Danko focused their study on households in 1996 with at least a million dollars in net worth, which naturally leads to a very narrow scope of people. As it’s a household, we can assume the majority of respondents are part of the traditional family unit of husband, wife and children. As it’s an affluent household, we can assume that the wife doesn’t need to work and can afford to stay home to take care of the children and manage the budget. Stanley and Danko spoke of the ancestry of millionaires and, surprise surprise, the vast majority have their roots in Europe. This is not a study of how all people regardless of whether they’re white, married, or male can become millionaires, it’s a study of the things existing millionaires self-report they have done that improved their lot in life.

The implicit message of The Millionaire Next Door is easy enough to decipher: “Look at all these normal-seeming millionaires! If you work hard, and properly manage your money, you can also achieve millionaire status before retirement!” It’s a good message, but now looking back on The Millionaire Next Door, we must acknowledge what the original authors did not: becoming a millionaire as a white man vs as a black woman are two very different matters, and these differences are very much deserving of scrutiny.

Is it worthwhile to read The Millionaire Next Door? 

In my opinion, yes, but only if you go into it with the awareness that it surveys a highly limited demographic.

Although the ideas presented by Stanley and Danko are persuasive and directly backed by numerous surveys and interviews with real millionaires, it doesn’t cover much that isn’t already talked about in other finance books. There are some important and unique lessons (if you decide to only read one chapter, I recommend chapter 5), but it’s unnecessary to fully revisit. If you haven’t read any finance books previously, The Millionaire Next Door is a good start, as long as you keep in mind its limited application and supplement it with something more up-to-date. If you have read other finance books and you happen to not fall under a distinguished subset of people, then might be best to give this book a pass.