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"The Millionaire Next Door" – A Book Summary

Unless you are a hermit or an ascetic, you would want to be a millionaire. And if you are already a millionaire, then you would like to be a billionaire. Welcome to the book review of “The Millionaire Next Door.” It is a top-rated bestseller written by Thomas J Stanley, Ph.D., and William Danko, Ph.D. It gives a glimpse of the secrets behind the financial independence of the top billionaires in the United States.

The show “Who Wants to Be a Millionaire” is famous not just because of the knowledge factor in the quiz show but the curiosity of the viewers to see who the next millionaire will be. According to Daniel Kahneman, “Money does not buy you happiness, but lack of money certainly buys you misery.”

The Making of the Millionaire Next Door

The book results from years of research into the making of millionaires, specifically in the United States. Significantly the authors point out that affluence is not necessarily wealth. Living in an expensive home in an upscale neighborhood with a range of expensive cars does not mean wealth. According to the research, many people who have wealth do not live in these exclusive addresses.

The research into this fascinating subject led the authors to discover the secrets of wealthy people and advise various corporations on strategies to selling to the affluent. Though the book was written in the latter part of the 1980s and subsequently revised in the 90s, the principles discussed are still relevant.

Wealth is Not the Same as Income

Significantly, the authors point out that wealth is not income. Having a high income only means you have the means to live a lavish lifestyle. You are not getting wealthier if you make a million dollars a year but are spending it all. The authors emphasize that wealth is what you accumulate and not what you spend.

Wealth Is Not The Same As Income
Wealth is Not The Same as Income

However, it is not luck, not inheritance, or advanced college education that guarantees you to be wealthy. Wealth is the result of a lifestyle of hard work, perseverance, planning, and, most importantly, self-discipline.

But then, there are hundreds of thousands of people in this world who work hard, plan well but are not affluent. According to the latest survey by Schwab’s 2021 Modern Wealth Survey, the threshold to be considered wealthy in the United States is a net worth of US$ 2.6 million. Just over 8% of American households are millionaires. However, the percentage of the wealthy is much lower.

How Do You Know If You Are Wealthy?

The authors have produced a formula to identify if you are wealthy.

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

For example, if John is 40 years old and makes $200,000 a year, and has an investment income of 50,000, he would multiply 250,000 by 40 the result will be $10,000,000. Dividing this with 10 will give the net worth of 1,000,000.

If the person is in the top quartile for wealth accumulation, he is a PAW or Prodigious Accumulator of Wealth. But those in the bottom quartile would be a UAW or Under Accumulator of Wealth. And those in between would AAW Average Accumulator of Wealth.

The Seven Factors of Wealth Accumulation

Most of the millionaires discussed in “The Millionaire Next Door” are ordinary people who accumulated their wealth in one generation. However, they achieved this not by winning lotteries or signing up endorsement contracts with leading brands. Significantly, they are compulsive savers and investors and made their money on their own. Moreover, the lifestyle they follow typically accelerates wealth generation.

The authors conducted hundreds of research and studies to understand the secret behind wealth accumulation. Further, several hours of in-depth interviews with self-made millionaires enabled them to gain considerable insight. They discovered that building wealth takes discipline, sacrifice, and hard work.

On average, the affluent wealth builders invest 20 percent of the household realized income each year and work for an average of forty-five and fifty-five hours per week.

The book identifies seven factors of Wealth Accumulation.

1. They Live Well Below Their Means

One of the main factors the authors identified amongst the millionaires is their frugal nature. Significantly they found that being frugal is the cornerstone of wealth-building. Surprisingly, this discovery shatters the common belief that “those who have money spend lavishly” and “if you don’t show it, you don’t have it.”

The next-door millionaire will not be wearing expensive suits or driving in luxury cars. Further, they are not interested or even care about wearing branded goods to display their wealth. The book quotes a case study of boxing promoter Don King who was shopping for shoes spent a whopping $64,000 in just one store buying 110 pairs of shoes. Interestingly, a pair of alligator loafers was the most expensive one at $850. Significantly, only 1 percent of the millionaires in the survey conducted by the authors spent that kind of money on buying shoes.

Frugal Lifestyle
The Affluent Live a Frugal Lifestyle

However, the media portrays the buying behaviors of Don King. Unfortunately, the hundreds of millionaires who spend a quiet lifestyle are not interested in bespoke or designer suits or shoes. Whereas the publicity the likes of Don King receives leads the youth to believe that buying branded stuff is a sign of wealth.

The wealthy and affluent people do not believe in spending tomorrow’s cash today. Further, they are not debt-prone and not consumption-oriented. They take time in planning and budgeting their annual income. Additionally, they use their credit cards as a means of saving than spending.

2. They Allocate Their Time, Energy, and Money Efficiently in Ways Conducive to Building Wealth

Wealthy people allocate their time, energy, and money in ways consistent with enhancing their net worth. Research shows that the Prodigious Accumulators of Wealth (PAW) allocate twice the number of hours per month to planning their financial investments as Under Accumulators of Wealth (UAW). Surprisingly, the authors found that a negative correlation between wealth and education.

The relationship between wealth and education is negative. High-income PAWs are significantly less likely than UAWs to hold a degree. Most of the high-income wealthy people are not well educated or hold degrees.

Despite lack of education, the PAWs spend enough time to optimize wealth generation. Significantly they begin earning and investing early in their life. They spend time budgeting and planning their expenses as well as income. Their focus on frugality and living within their income influences their children too.

Consequently, their adult children do not think their affluent parents' wealth is theirs. Besides the adult children do not expect constant financial support from their parents.

The Prodigious Accumulators of Wealth also spend enough time planning their taxes. They typically look at income tax as a portion of their total wealth rather than as a portion of their realized income.

Interestingly they spend a lot of time planning their financial future and handling their investment properly. According to the author's research, the PAW spent over 100 hours in a year in financial planning compared to UAW who spend about 55.2 hours.

Wealth Management and Planning
Wealth is a result of planning not just education

Typically, most PAWs invest in the stock market but are not active traders. While they spend their time deciding on the right stock to buy, they do not trade or monitor their stock performance on a day-to-day basis once the decision is taken. A substantial percentage of the wealth generators hold their stocks for an average of four to six years.

3. They Believe That Financial Independence is More Important Than Displaying High Social Status

The mantra discovered by the authors in the book “The Millionaire Next Door,” is that wealthy people do not look wealthy. According to W.W.Allan, a self-made millionaire, “If your goal is to become financially secure, you will likely attain it. But if your motive is to make money to spend money on the good life, you are never gonna make it.”

Many people who never achieve financial independence have a much separate set of beliefs. Although some could be high-income producers, they only work to spend and not become financially independent. Undeniably the PAWs love working, while a substantial proportion of UAWs work because they need to support their conspicuous consumption habit.

Most PAWs do not believe in displaying their wealth by luxury cars or a high consumption lifestyle. Many of them even do not own big houses and prefer a simple lifestyle. What is the maximum that these millionaires ever paid for their motor vehicles?

Fifty percent of the millionaires surveyed never spent more than $29,000 in their entire lives on a motor vehicle. About 20 percent never spent more than $19,950.

When this is compared to the average American, they spend the equivalent of at least 30percent of their net worth for buying a motor vehicle. In other words, an average American buys new motor vehicles at a price that is 72 percent of what a typical millionaire ever spent on a motor vehicle.

Another aspect discovered in this research was that most millionaires believe in buying new cars rather than used cars. This is because they feel that buying a new car is simpler, requires less time and effort. New cars are more reliable and cost less in maintenance—however, some have used motor vehicles, loyalists, too.

Behind the frugal behavior of America’s millionaires 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 constantly inoculate themselves from heavy spending by constantly reminding themselves that many people who have high-status artifacts have little wealth.

A dollar is used to grow more dollars. In the words of a real millionaire, “My family understood the value of a dollar. Dad used to say seeds are a lot like dollars. You can the seeds or sow them. But when you would see what seeds turned into a ten feet corn, you do not want to waste them. Consume or plant them. I always get a kick of watching things grow.”

4. Their Parents Did Not Provide Economic Outpatient Care

Economic Outpatient Care refers to the substantial economic gifts and “acts of kindness” some parents give their adult children and grandchildren. Interestingly many wealth builders achieved their millions by living a frugal and disciplined life. However, they are not frugal when providing their children and grandchildren with ‘acts of kindness”. They feel compelled to support their adult children and their families.

Consequently, what is the result of this economic largesse? The wealth builders who provide a certain form of economic outpatient care have significantly less wealth than those parents within the same age, income, and occupational cohorts whose adult children are financially independent.

Another result is that these adult children of millionaires, instead of becoming wealth builders become wealth consumers. They become living proof that “It is much easier to spend other people’s money than dollars that are self-generated.” They never learn the maxim that made their parents successful, “Whatever your income, always live below your means.”

Adult children who sit around waiting for the next dose of economic outpatient care typically are not very productive. Cash gifts are too often earmarked for consumption and the support of an unrealistically high lifestyle. This Economic Outpatient Care to the adult children typically results in

  • Giving precipitates more consumption than saving and investing

  • Gift receivers never fully distinguish between their wealth and the wealth of their gift-giving parents

  • Gift receivers are significantly more dependent on credit than are non-receivers

  • Receivers of gifts invest much less money than do non-receivers

Often, because of this Economic Outpatient Care, the parents' business often does not last beyond their lifetime. The adult children who ‘inherit’ the business often do not have the skill or the will to build it further. “The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.”

5. Their Adult Children are Economically Self Sufficient

For the average millionaire in the United States who has successful adult children, raising them is an art by itself. They adopt strategies and rules to ensure that their children are economically self-sufficient once they are an adult. The authors found the following pattern with the typical millionaire in raising children as responsible adults.

  1. Never tell children that their parents are wealthy: According to the research, many high-income people never reveal to their children about their wealth. Contrarily case studies have shown that children of UAWs are more likely to be high earners than wealth accumulators. This is because as children, they were told by their parents that they are wealthy. This creates a feeling of wanting to live the lifestyle of a wealthy person.

  2. No matter how wealthy you are, teach your children discipline and frugality: The PAWs always teach them discipline and frugality. And this they taught by the example of living frugally. “Kids are very smart. They will not follow rules that their parents themselves do not follow.” The children are taught to be tough, independent, and responsible.

  3. Assure that your children will not realize you are affluent by this time until they have established a mature, disciplined, and adult lifestyle and profession: The PAWs set up trusts for their children, ensuring that the money will only be distributed to them once they cross forty years of age. The parents y this time, their own children would have established themselves a career and may not be dependent on these funds.

  4. Tell your children that there are many things more valuable than money: Money is important, but there are many other equally important things than money. PAWs are taught the value of good health, loving family, strong bonds of friendship, reputation, integrity, achievement, etc.

6. They Are Proficient in Targeting Market Opportunities

The wealthy Americans who swear by wealth accumulation also create wealth for others. This is done by providing a ready market for the various service providers. And very often, those who supply to this affluent market become wealthy themselves. With a lot of money being created in less time, the market size of the affluent is growing at a fast pace.

The PAWs themselves are excellent marketers and use every opportunity to have a target marketing opportunity. yThey leverage their wealth as a critical mass and get the best of the rates from their service providers. Many people have many business opportunities, including attorneys, tax consultants, real estate agents, etc.

7. They Chose the Right Occupation

Most of the affluent in America are business owners, including self-employed professionals. Retirees head twenty percent of the affluent households in America. Fewer than one in five households, or about 18 percent, is headed by a self-employed business owner or professional. But these self-employed people are four times more likely to be millionaires than those who work for others.

But being self-employed comes with its own challenges. The affluent know the risks and the odds of succeeding or failing in business. They also seem to understand that only a small minority of self-employed professionals fail to profit in any given year. In comparison, the profitability of most professional service firms is higher than the average for small businesses in general.

The authors argue that businesses face several challenges and that keeping up with the ever-developing compliances is the biggest challenge. The affluent always encourage their children to choose professional careers where the skills and the intellect make money for them.


Though Thomas J Stanley and William Danko wrote the book over three decades ago, some of the principles quoted are relevant even today. Wealth creation in the current technological world could be easy. But the trick is to maintain that wealth. The challenge is also to grow the wealth.

The world is increasingly becoming consumeristic, and, in such a world, living a frugal life is not easy. We must learn the art of balancing our desires and building wealth. Wealth creation is also in an accelerated mode today. Thanks to technology, there are more ways to make money than ever before.

Wealth building is a habit. Moreover, it is a fun habit once you cultivate it. You must build your wealth and pass it on to the next generation to help them multiply the wealth.

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