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:
- Live well below their means.
- They allocate their time, energy, and money efficiently, in the ways conducive to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- 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:
- Under accumulators of wealth (UAWs) – those whose real net worth is less than one-half of their expected net worth.
- Average accumulators of wealth (AAW) – on par with their expected net worth.
- 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:
- A focus on physical and mental wellness.
- 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.
- 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:
- 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?
I read the book many years ago and was taken by the key messages that the affluent in America are more commonly mainstream-appearing people who live well below their means. The notion of “stealth wealth” is a very appealing one since it shields you from resentment. Homes, cars, exotic vacations and expensive fashions are all ways that people try to project an image of success that actually detracts from them achieving their goals.
I’m a big fan of “stealth wealth” – and would like to practice it someday if our portfolio value ever gets to a modest level.
I want a nice, but ample home (condo), a decent car but most importantly time and money to do the things I love. That’s enough. Don’t need tens of millions or even $5 M like Suze Orman thinks people do that retire early.
Certainly reaching our $1 M goal, no debt, and having workplace pensions would put us in a very good place with part-time/casual work.
Overall I agree. But I do think the definition of wealth varies greatly by person. The book tries to give us some benchmarks. I also wonder if the goals of the people you refer to aren’t to actually have a lot of those status symbols, rather a large bank or broker account. But the point is they probably shouldn’t, if they are to be truly financially wealthy, which can lead to the stealth wealth.
I read the book a few years ago. Just checked my book case and still got it.
I can’t remember when I read that book first time but I did reread it about 3 years ago. Still pretty much true today although numbers may be off now and its also US based.
You’re absolutely right on adding health (mental and physical) Mark. You know where I stand on that.
I like your core building blocks. They can extend much farther than being limited to financial.
Thank you for your great comments. I totally agree with being a life long learner.
Of your points, other that health, I think the most important item is to track you spending. You cannot save if you do not know where your money goes. I have been doing this for several years now and at year end it is always enlightening. This allows me to focus my spending on the important things as well as make budgets and projections. I guess if you make all kinds of money you do not need to track spending but you can never tell what curves life throws at you.
Tracking your spending is very important but it’s the mindset, I believe Nancy, and the behaviours that follow that will trump any spending tracking or general awareness of spending habit.
Thanks for your comments.
Nailed in on adding #8 – good health is crucial.
As a younger person easy to take for granted. With aging health declines and becomes increasingly more important.
Young folks do take health for granted. I’m really not trying to do that any longer in my mid-40s. I need and I’m starting to make some changes for the better.
So not too much partying at FinCon then 🙂
Looks like everyone had a great time there. Made me add Washington DC to our list of places to visit if we have a chance.
Well, a bit of partying of course.
The national mall in DC is a real treat and I would recommend you go just to see that and some of the museums. I haven’t been to all of them and want to go back for that reason.
There is another factor that I’d probably want to add in: marry the right person and stay married. Marrying the right person gives you a partner as part of the process that you can share your life with (the good parts and the disappointing at times…) – but staying together is just as important – ask anyone who divorces in the 50-65 age bracket and pension plans get blown up, houses get sold (then try getting back into the housing market…), investment accounts get split, etc, etc.
I will add to get a good post secondary education. Without a good paying job it’s difficult to build wealth.
Well said. Completely agree. If necessary, maybe even get another one. I went back to University again after migrated to Canada. Without that, I don’t think I can have a decent job.
Education (and knowledge) is very valuable, as long as you make good decisions with it!
Yes, very important too Robert.
Grey divorces seem to be becoming more common and are certainly not an enabler to being wealthy.
Good health, good marriage can bring many good things.
I 100% agree with both the education and marriage comments. Along with your personal values, these go a long way to predicting how well things will unfold. I’ve seen plenty who have been set back so far by grey divorce that they’ll never be able to catch back up. I know it is a better solution than putting up with someone who is abusive, unfaithful, etc., but the financial impact is huge.
Thank you for bringing this book up! I read it in college and recently read Thomas Stanley’s daughter’s book (The Next Millionaire Next Door) and the advice is spot on. It’s like they wrote a blueprint of how our family reached financial independence. The recipe is repeatable.
I haven’t read her book yet Kim but it’s on my list.
Hope your FI and frugal journey is recovering after FinCon. It was great to chat with you and learn about your journey.
I’ll need to check out your site more!
All the best,
I haven’t seen her book yet either but would be intrigued to learn what you took from it beyond what we could all read on the Amazon review.
A million in 1996 is over 1.5 million in 2019. Just sayin’.
p.s. I’ve not read the book.
Even today, if you don’t take incomes into consideration, any 40- or 50-something with $1 M in the bank might be considered wealthy or at least on the cusp of it depending upon your reference point.
Oh, meant to add, there is likely a free ebook to be found online if you want to read it Lloyd.
Let me know and I can send you the link. Google “The Millionaire Next Door pdf” and you’ll likely find it.
It’s interesting how wealthy being defined here. According to this, our family might be considered as wealthy. But we are really just typical Canadian middle class family, I never consider ourselves as wealthy. Our lifestyle is not a wealthy one for sure.
I recall you are striving to own $2 M in investments alone May. That, along with your paid off house, by many comparisons would be considered wealthy. Not rich, wealthy all the same. Thoughts?
I guess I consider rich and wealthy the same thing. Maybe they are not. LOL. Considering English is not my native language………
Doesn’t matter. Will not change my lifestyle no matter what label I get anyway.
And that’s all that matters May – re: “Will not change my lifestyle no matter what label I get anyway.” The best answer!
I gave up long ago telling or suggesting how others should live their lives or even suggest how to achieve happiness . If asked I’d provide an opinion, but there are just too many variables and personalities.
I certainly give opinions on how and what to invest in but again, no one has to listen.
Very fair. I find advice is a two-way street – there needs to be a dialogue and that includes listening. It’s an overlooked skill.
Advice implies there is someone listening – an overlooked skill 🙂
BTW – listened to your podcast with Alain. Good stuff!
The only thing I’d add is that it’s ok to stop earning at a high rate once you have enough. I do some hobby consulting that brings in six figures working one day a week. But I’ve turned down a seven figure offer to go back to a nine to five job because I have enough millions invested that earning more makes no sense to me. I’d rather have the extra time. Some people can’t walk away from that kind of offer when they would be happier if they did.
Great points and thanks for sharing your own perspective Steveark.
Turning down 7-figures? Jeepers. Hard to do but as you point out, to turn down that kind of money you must be making great money (or already have it anyhow).
Very well done on your end and continued success to you.