Book Thoughts: The Millionaire Next Door

Think to yourself what a millionaire looks like. Do they have a large house, a fancy new car or the latest gadgets? Do they work in fast paced financial districts or high profile law firms in major cities around the world? If that is what comes to your mind you’d be surprised to find out what most millionaires are like. Thomas J. Stanley and William D. Danko spent over twenty years researching for The Millionaire Next Door and they found that the majority of millionaires don’t live the lifestyles that most people think they do.

This book explains how people become millionaires and what their lives are like. The authors define a millionaire as someone that has a net worth of over $1 million. They also grouped all people into two categories. There are under accumulators of worth (UAW’s) and prodigious accumulators of wealth (PAW’s). UAW’s have a low net worth relative to their annual income, where as a PAW has a high net worth relative to their annual income. The formula the book uses is the person’s age multiplied by one tenth of the person’s annual income. For example a fifty year old that makes $100,000 a year should have a net worth of $500,000. 

While this calculation can be quite skewed for earners just starting out their careers or even in their twenties, it can help determine how well people are saving what they earn instead of just consuming it.

Through their research the authors found that people that make high amounts of income are likely to spend most of it each year. They tend to use their high income to overspend in areas such as housing, transportation and entertainment. UAW’s spend their money to keep up with the Joneses and make themselves look rich.

On the opposite end of the spectrum the book found that many PAW’s earned much lower incomes than expected and practiced strong personal finance principles. They spent way less than they earned, lived well within their means, saved aggressively for retirement and were prugal (prudent and frugal). PAW’s focus on spending money on only what is most important to them.

Key ways to be a PAW instead of a UAW:

  • Spend less than you earn
  • Avoid buying things to prove your status
  • Invest money for good returns
  • Don’t spend tomorrow’s cash today on credit
  • Make good choices (avoid spending unnecessarily on cigarettes, alcohol, etc.)
  • Good car buying habits

By reading this book I confirmed my belief that people who live like millionaires most likely aren’t and those that are millionaires usually don’t show it. You very well may be living next door to a millionaire, but you would never know.

Should you read this book?

If you think that to be happy and financially secure, you have a be a high income earner, spend the majority of your money and show off your wealth this would be a good book for you to read. The Millionaire Next Door is filled with a lot of numbers and statistics, but it is also full of different stories about both prodigious and under accumulators of wealth. I’d recommend this book to anyone who wants to learn more about how to live a simple life with a high net worth.