The Millionaire Next Door

By Thomas J. Stanley & William D. Danko

Introduction
o The median typical household in America has a net worth of less than
$15,000, excluding home equity.
o 80% of Americas millionaires are first generation rich
o Affluent people typically follow a lifestyle conducive to accumulating
money.

The Seven Factors Conducive to Accumulating Money

1. They live will below their means.
2. They allocate their time, energy, and money efficiently, in 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.

Meet the Millionaire Next Door

Portrait of a Millionaire
o Self-employed people account for two-thirds of the millionaires.
o Many of the types of businesses we are in could be classified as dullnormal.
o About half our wives do not work outside of the home.
o Our households total annual realized (taxable) income is $131,000
(median, or 50th percentile)
o We have an average household net worth of $3.7 million.
o On average, our total annual realized income is less than 7% of our
wealth. In other words we live on less than 7% of our wealth.
o We live below our means. We wear inexpensive suits and drive Americanmade cars.
o We have a rainy day fund. We have accumulated enough wealth to live
without working for ten or more years.
o As a group, we believe education is extremely important for ourselves, our
children, and our grandchildren.

The Millionaire Next Door (continued)

o We are fastidious investors. On average, we invest nearly 20% of
household realized income each year.

Wealthy Defined
o We do not define wealthy, affluent, or rich in terms of material
possessions. Many people who display a high consumption lifestyle have
little or no investments or appreciable assets.
o Net worth is defined as the current value of ones assets less liabilities.
Based on this definition 3.5 million of the 100 million households in the
U.S. have a net worth of $1 million or more.

How to Determine If Youre Wealthy

o Wealth Predictor - Multiply your age times your realized pretax annual
household income from all sources except inheritances. Divide by ten.
This, less any inherited wealth, is what your net worth should be.
Expected wealth (or net worth) = 1/10th Age x total annual income
o PAW Prodigious Accumulator of Wealth you are in the top
quartile for wealth accumulation
o UAW Under Accumulator of Wealth you are in the bottom quartile
for wealth accumulation.
o In order to be a PAW, you should be worth twice the level of wealth
expected.
o For example, Mr. Smith is 41 years old and has total annual income from
all sources totaling $155,000. Based on the Wealth Predictor formula he
should have a net worth of $635,500 (41 x 155,000 10).
o For Mr. Smith to be a PAW he should have a net worth of $1,271,000 (or
2 times his expected level of wealth).
o For Mr. Smith to be a UAW he would only have a net worth of of his
expected net worth or $318,000.

Frugal Frugal Frugal

THEY LIVE WELL BELOW THEIR MEANS

A Foundation for Building Wealth

o Being frugal is the cornerstone of wealth-building

Playing Great Defense

o The affluent tend to answer yes to three questions:
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The Millionaire Next Door (continued)

o
o

o
o

Were your parents frugal?

Are you frugal?
Is your spouse more frugal than you are?
The last question is highly significant. Not only are most prodigious
accumulators of wealth frugal, their spouses tend to be even more frugal.
Millionaires play both quality offense and quality defense.
Most of these men play great offense in the game called income
generation.
Most of these households also play great defense; that is, they are
frugal when it comes to spending for consumer goods and services.
The foundation stone of wealth accumulation is defense, and this defense
should be anchored by budgeting and planning.
Do you wish to become affluent and stay affluent? Can you answer yes
candidly and honestly to four simple questions?
Does your household operate on an annual budget?
9 More than half of those who dont budget invest first and
spend the balance of their income, a Pay Yourself First
Strategy.
Do you know how much your family spends each year for food,
clothing and shelter?
Do you have a clearly defined set of goals? (weekly, annually, etc)
Do you spend a lot of time planning your financial future?
9 On average, millionaires spend significantly more hours per
month planning their future investments and managing their
current investments, than high-income non-millionaires.

The Ultimate Consumption Category

o The typical millionaire in our survey has a total annual realized income of
about 6% of his wealth. This means that less than 6 percent of his wealth
is subject to some form of income tax.
o An important rule for those who will likely become affluent:
To build wealth, minimize your realized
(taxable income) and maximize your unrealized
(wealth/capital appreciation without a cash
flow).
o Income tax is the largest annual expenditure for most households. It is
tax on income, not on wealth and not on the appreciation of wealth if this
appreciation is not realized; that is, if it does not generate a cash flow.

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The Millionaire Next Door (continued)

CONTRASTS AMONG AMERICAN TAXPAYERS

HOUSEHOLD
DESIGNATION

CATEGORY OF
WEALTH
ACCUMULATION

TOTAL ANNUAL
PRETAX REALIZED
INCOME FOR
HOUSEHOLD

NET WORTH
(ASSETS LESS
LIABILITIES) FOR
HOUSEHOLD

REALIZED
INCOME AS A
PERCENTAGE
OF NET WORTH

FEDERAL
INCOME
TAX

TAX AS A
% OF
INCOME

TAX AS A
% OF
NET
WORTH

Typical
American
Household

Under
Accumulator
of Wealth (UAWs)

$32,823

$36,623

90%

$4,248

13%

12%

Typical
High Income
Household

Under
Accumulator
of Wealth (UAWs)

$220,000

$370,000

59%

$69,440

32%

19%

Typical
High Income
Household

Prodigious
Accumulator
of Wealth (PAWs)

$220,000

$3,550,000

6%

$69,440

32%

2%

o The typical American household pays the equivalent of 12% of its wealth
(net worth) in income taxes each year.
o On average the millionaires (PAWs) pay only 2% of their wealth in income
taxes each year.
o The typical UAW pays 19% of their total net worth in taxes each year,
almost 10 times more than a typical PAWs percentage.
o How could anyone expect to become truly wealthy when the equivalent of
nearly 60% of ones wealth is subject to income tax each year?

High Status Neighborhoods

o About half of all millionaires do not live in high-status neighborhoods.
o Its easier to accumulate wealth if you dont have to realize more income
to live in a high-status neighborhood.
o Another important rule for those who want to become wealthy:
If youre not yet wealthy but want to be
someday, never purchase a home that requires
a mortgage that is more than twice your
households total annual realized net income.
o Living in less costly areas can enable you to spend less and to invest more
of your income.
o You will pay less for your home and less for your property taxes.
o You will find it easier to keep up, even ahead, of your neighbors and still
accumulate wealth.

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The Millionaire Next Door (continued)

Time, Energy, and Money

THEY ALLOCATE THEIR TIME, ENERGY, AND MONEY EFFICIENTLY, IN WAYS CONDUCIVE TO
BUILDING WEALTH

Planning & Controlling Consumption

o PAWs allocate nearly twice the number of hours per month to planning
their financial investments as UAWs do.
o There is a strong positive correlation between investment planning and
wealth accumulation.
o UAWs spend less time than PAWs consulting with professional investment
advisors, accountants, attorneys and attending investment planning
seminars.
o Without knowing how much your family spent last year on each budget
category its difficult to control your spending.
o If you cant control your spending, youre unlikely to accumulate wealth.
o The goal should be to set aside for investing purposes at least 15% of
your pretax income each year.
o There is an inverse relationship between the time spent purchasing luxury
items such as cars and clothes and the time spent planning ones future.

Financial Goals: Words Versus Deeds

o Many high-income producing PAWs and UAWs share similarly stated goals
concerning wealth accumulation.
o More than 3/4ths of both groups indicated they had the goal of becoming
wealthy by the time they retire.
o Most of us want to be wealthy, but most of us do not spend the time,
energy, and money required to enhance our chances of realizing this goal.

Time Allocation
o Most PAWs agree with the following statements, while most UAWs
disagree:
I spend a lot of time planning my financial future.
Usually, I have sufficient time to handle my investments properly.
When it comes to the allocation of my time, I place the
management of my own assets before my other activities.
o Conversely, UAWs tend to agree with the following statements:
I cant devote enough time to my investment decisions.
Im just too busy to spend much time with my own financial affairs.
o Planning is typically found to be a strong habit among people who have a
demonstrated propensity to accumulate wealth.
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The Millionaire Next Door (continued)

You Arent What You Drive

THEY BELIEVE THAT FINANCIAL INDEPENDENCE IS MORE IMPORTANT THAN DISPLAYING
HIGH SOCIAL STATUS.

o PAWs love working, while a large portion of UAWs work because they
need to support their conspicuous consumption habit.

Buying Cars, Millionaire Style

o Only 23.5% of millionaires own new cars.
o Most have not purchased a new car in the last two years. In fact 25.2%
have not purchased a car in four or more years.
o The typical millionaire (one in the 50th percentile) spent about $29,000 for
his most expensive car, or less than 1% of his net worth.
o The typical car buyer spends the equivalent of at least 30% of their net
worth for such purchases.
TOP 10 AUTOS PURCHASED BY PAWS

1
2
3
4
5
6
7
8
9
10

Auto
Manufacturer
Ford
Cadillac
Lincoln
Jeep
Lexus
Mercedes
Oldsmobile
Chevrolet
Toyota
Buick

% of Mkt
Share
9.4
8.8
7.8
6.4
6.4
6.4
5.9
5.6
5.1
4.3

Most Popular Model

F-150 Pickup, Explorer
De Ville/Fleetwood Brougham
Town Car
Grand Cherokee
LS 400
S Class
Olds 98
Suburban, Blazer
Camry
Le Sabre, Park Avenue

o 58% of PAWs purchase American autos

o Many American millionaires have a propensity to purchase full-sized
automobiles that have a low cost per pound.
Full-sized American vehicles cost $5 to $7 per pound
Luxury vehicles - BMW, Mercedes, Lexus cost $14 to $22 per pound
o PAWs take joy in driving vehicles that do not denote so-called high status
o Successful entrepreneurs judge each expenditure in terms of productivity
o Other investments, in their mind, are much more productive than very
expensive autos, so they defer purchasing luxury vehicles.
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The Millionaire Next Door (continued)

Economic Outpatient Care

THEIR PARENTS DID NOT PROVIDE ECONOMIC OUTPATIENT CARE.

o What is it? Refers to the substantial economic gifts and acts of kindness
some parents give their adult children and grandchildren.
o In general, the more dollars adult children receive, the fewer they
accumulate, while those who are given fewer dollars accumulate more.

Whats Wrong With EOC?

1. Giving precipitates more consumption than saving and investing.
2. Gift receivers in general never fully distinguish between their wealth and
the wealth of their gift-giving parents.
3. Gift receivers are significantly more dependent on credit than are nonreceivers.
4. Receivers of gifts invest much less money than do non-receivers.

Teach Your Children To Fish

o What can you give your children to enhance the probability that they will
become economically product results?
Give them a good education
Create an environment that cherishes individual achievements,
rewards responsibility and leadership.
Teach your kids to live on their own. In the long run its in both
the best interests of the child and the parent.
o Independent of college tuition, more than two-thirds of American
millionaires received no economic gifts from their parents.

The Product of EOC

o Children who receive EOC typically lack initiative.
o They are economic under-achievers but have a propensity to spend.
The more dollars adult children receive, the
fewer dollars they accumulate, while those
who are given fewer dollars accumulate more.

The Product of Zero EOC

o Want to instill courage into your children? Encourage them to work where
one is compensated according to ones performance, the sales profession.
o You will be surprised how many sales calls you can make when you have
no alternative except to succeed.

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The Millionaire Next Door (continued)

Affirmative Action, Family Style

THEIR ADULT CHILDREN ARE ECONOMICALLY SELF-SUFFICIENT.

Rules for Affluent Parents and Productive Children

1. Never tell children that their parents are wealthy.
Children of UAWs were told that their parents were wealthy
resulting in them becoming UAWs.
Children of PAWs are much more likely to never know that their
parents are wealthy until they were adults.
2. No matter how wealthy you are, teach your children discipline and
frugality.
PAWs teach their children by example.
3. Assure that your children wont realize youre affluent until after they have
established a mature, disciplined, and adult lifestyle and profession.
Establish trusts for children until they are older enough that it will
have little effect on their way they life.
They will already have adopted their own lifestyle.
4. Minimize discussions of the items that each child and grandchild will
inherit or receive as gifts.
Never make light verbal promises of gifts
Kids wont forget, but you may potentially causing future conflicts
with siblings.
5. Never give cash or other significant gifts to your adult children as part of a
negotiation strategy.
Give because of love, not as a means of coercion or out of guilt.
6. Stay out of your adult childrens family matters.
7. Dont try to compete with your children.
Dont boast of your achievements
Never start a conversation with When I was your age, I had
8. Always remember that your children are individuals.
They differ from each other in motivation and achievement.
Will economic outpatient care reduce these differences? Not likely.
Subsidizing underachievers tends to enhance differences in wealth,
not reduce them.
9. Emphasize your childrens achievements, no matter how small, not their
or your symbols of success.
Teach your children to achieve, not just to consume.
Earning to enhance spending should not be ones ultimate goal.
10. Tell your children that there are a lot of things more valuable than money.
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