Time-tested advice in (and not in) The Millionaire Next Door

Time-tested advice in (and not in) The Millionaire Next Door

The Millionaire Next Door (1996) by Thomas J. Stanley and William D. Danko was one of the first books, in a long list of books I read, about accumulating wealth.

While lots has changed since the original publication in 1996, including tools across the financial industry to help savers and investors grow their money and avoid bad things happening to it, the concepts, advice, and path to wealth building remains essentially unchanged.

In fact, the path might never have changed.

“How come I am not wealthy?”

Many people (as claimed in the book) have asked this question.

I too, have asked this question in the past.

But no longer.  

Although The Millionaire Next Door enlightened me about the seven characteristics of the wealthy (I have an eighth to add to their list in the coming paragraphs), because I’ve followed my own principles of wealth building I know we’re on a good path to financial independence.  I’ll share my own building blocks later on too.

First up though, the classic money management traits summarized from Stanley and Danko if you don’t already know them.  The wealthy:

1. Live well below their means.
2. They allocate their time, energy, and money efficiently, in the ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.

What is considered wealthy?

While your definition is likely different than mine, according to the book there is a rough rule of thumb that can be applied:

[Your age] x [pre-tax annual household income from all sources, except inheritances] / 10 = your “expected” net worth.

From there, you’re categorized in one of three ways:

1. Under accumulators of wealth (UAWs) – those whose real net worth is less than one-half of their expected net worth.
2. Average accumulators of wealth (AAW) – on par with their expected net worth.
3. Prodigious accumulators of wealth (PAWs) – net worth twice their expected level.

The latter group is what Stanley and Danko call “builders of wealth” or simply put, wealthy.

For example, if a woman named Anne is age 50, who has a great job earning $150,000 a year and has investments that return $15,000 for a total annual income of $165,000 then:

(age) 50 x $165,000 = $8.25 million / 10 = $825,000 expected net worth for her age.

For Anne to be considered “wealthy” she would need net worth in the range of $1.65 M or more.

I know how I stack up in this formula but to be honest, I’m much more concerned with income generation than net worth.

Read here why you shouldn’t obsess over net worth and instead – consider focusing on how much income your portfolio will need to generate for retirement.

Real questions for real wealth building action

Living below your means, proficient in market opportunities, all sounds fine and good but what does that look like in terms of real action for you and me?

I would consider some reflection time and getting detailed answers on the following with you or your family:

• Do you know where your money is going and how much each month? If not, I would suggest there is a better way to budget.
• Do you know how much the “big ticket” items in your life cost you?  Such as housing and transportation?  Until you figure that out – don’t sweat the small stuff like lattes.
• Do you have any short-term (< 1 year) or long-term money goals? Here are 10 goals some bloggers consider for an early retirement.
• Do you know how much you pay in taxes or what your investment costs are? The wealthy certainly do.

Seven traits need an eighth

While The Millionaire Next Door traits are excellent, I also believe there must an eighth trait to produce wealth.

Health is the ultimate form of wealth.

This means your body and mind are aligned or if not, you are at least aware and willing to work towards some changes as you mature to get your head and heart in sync.  Effective physical and mental well-being are essential for financial success over time.  I believe this is true at any age but I sense early retirees or very successful entrepreneurs likely this know and certainly practice this better than most.

Wellness is therefore an essential but often overlooked building block in your pursuit of wealth creation.  It certainly wasn’t jumping off the page in The Millionaire Next Door.  It’s something you should put higher on your list if you want to end up wealthy. 

I’ve only recently started to become more aware of my own health status and started to put some changes in place to become better.

This leads me to sharing my own, core building blocks for wealth building, in no particular order of importance:

1. A focus on physical and mental wellness.
2. A keen and growing interest in the subject matter. This includes a thirst to understand, analyze, and tailor (financial) information for your use and benefit.
3. A desire to continuously improve. This includes the motivational element to “get better”; be better and learn from mistakes.  The sum of these three things should ultimately lead to:
4. A drive towards financial efficiency.  The intrinsic desire to optimize your life; reduce complexity such that you remove unnecessary waste that does not align with your values or beliefs.

While income helps – behaviours make you a millionaire

It has been said that happiness is more about managing expectations and your desires than it is about income.

While a great income like Ann in my example will absolutely put the cards in your favour to become financially independent, or become the millionaire next door to your neighbours, usually a high income alone is not enough.  

Instead of striving to find the perfect investment, arguing about indexing over dividends, I would encourage anyone (including my younger self!) to get laser-focused on getting a firm understanding about your behaviour with money.  Assess what you do with money and ensure it delivers value for funds spent. Put a price on your goals and your time.  Consider what you’d earn if you invested the money wisely or did anything different with your money spent – avoiding negative opportunity costs. 

For most of us, wealth building is a slow and steady but very boring journey. 

Long-term it’s incredibly exciting because it opens up so many opportunities.

What did you take away from The Millionaire Next Door? Did you like the book?

What would you add to my thoughts?

Related reading:

This is insane, you don’t need $5 million to retire