The Millionaire Next Door

Who the millionaires really are

Thomas Stanley and William Danko spent about twenty years studying affluent Americans. They surveyed households with a net worth of one million dollars or more, interviewed them in focus groups and compared the results with high-income households that had little wealth. The book opens with the central surprise: most millionaires do not fit the popular image. They do not live in gated mansions, drive new luxury cars or wear expensive suits. They live next door.

The profile that emerges is specific. The typical millionaire in the study is a man in his late fifties, married to the same woman for decades, with three children. About two thirds are self-employed. Most own what the authors call dull-normal businesses: welding contractors, auctioneers, rice farmers, pest controllers, paving companies, coin and stamp dealers. Their median household income is about $131,000 a year, and their median net worth is about $1.6 million. They live in homes worth far less than they could afford. Roughly 80 percent are first-generation affluent. They did not inherit their money.

The authors draw a sharp line between income and wealth. Income is what you earn each year. Wealth is what you keep. A household can earn a large salary and have almost no net worth because it spends everything to maintain a lifestyle. The book's recurring Texas phrase for this is "big hat, no cattle": a person who looks rich but owns little.

From the data, the authors list seven traits that most millionaires share. They live well below their means. They allocate time, energy and money in ways that build wealth. They believe financial independence matters more than displaying social status. Their parents did not support them financially as adults. Their own adult children are economically self-sufficient. They are good at spotting market opportunities. And they chose the right occupation.

PAWs, AAWs and UAWs

The book's most useful tool is a formula for judging whether a household is doing well for its age and income. Multiply your age by your pretax annual household income, then divide by ten. Subtract any inheritance. The result is what the authors say your net worth should be. A household with twice that figure is a prodigious accumulator of wealth (PAW). A household with half or less is an under accumulator of wealth (UAW). Those in between are average accumulators (AAWs).

The formula strips income out of the comparison. A doctor earning $700,000 a year with a net worth of $400,000 is a UAW. A plumber earning $60,000 with a net worth of $500,000 is a PAW. The authors argue that this is the right way to judge financial behavior, because high earners who save nothing are poor in every sense that matters for independence.

Two doctors anchor this part of the book. Dr. North and Dr. South earn about the same large income. Dr. North's family drives older cars, lives in a modest house and invests consistently. His children know the household budget. Dr. South leases new luxury cars, lives in an expensive neighborhood, spends heavily on clothes and club memberships, and has little left to invest. Dr. North is a PAW with several times Dr. South's net worth, despite the same earnings. The difference is behavior, not income.

Frugal, frugal, frugal

The chapter on frugality is the heart of the book. The survey data on spending is detailed and often cited. Most millionaires in the study had never spent more than $399 on a suit, $140 on a pair of shoes or $235 on a wristwatch. Half had never spent more than $29,000 on a car. Many buy used cars, and a surprising share drive American pickups and sedans several years old. The authors name specific brands and model years to make the point: these are not people who care about looking affluent.

The authors contrast this with Theodore "Teddy" Friend, a high-income salesman who spends on luxury cars, a large house and a boat. He feels he must look successful to his clients and his neighbors. His net worth is small. He is a UAW, and the authors use him to show how status spending traps high earners.

Frugality in the book is a household practice, not a personal quirk. Most millionaire households run a budget. They know what they spend each year on food, clothing and housing. Their spouses are usually as frugal as they are, and the authors note that a spendthrift spouse is one of the surest ways to stay a UAW. They also point out a simple pattern in housing: millionaires buy homes that cost far less than the maximum a bank would lend them, often in neighborhoods where their income places them well above the average. This keeps their property taxes, insurance and social pressure to spend low.

The authors also address how wealth feels. Many PAWs in the study said they did not worry about money because they had more than they needed. UAWs with much higher incomes reported constant financial stress. The book argues that living below your means buys peace of mind long before it buys a large net worth.

Time, energy and money

Millionaires in the study spend more time planning their finances than high-income UAWs do. PAWs spend about twice as many hours per month managing investments and budgeting. They know where their money goes. They set goals, such as reaching a certain net worth by a certain age, and they track their progress.

The authors give a sales professional named Mr. Rodney as a counterexample. He earns a large income, has no time to budget or plan, and relies on the next commission to cover his spending. People like him often say they are too busy to manage money. The authors reply that a few hours a month of planning return more than almost any other use of the same time.

The book also explains why most millionaires are not active traders. Their investment approach is to buy and hold. Many hold the same stocks for years. About a fifth of their wealth is in publicly traded securities, and the rest is largely in their businesses, real estate and retirement accounts. They distrust financial advisors who push frequent trades, and they prefer advisors recommended by their accountant or attorney.

You aren't what you drive

The car chapter is the most detailed look at a single spending category. The authors sort millionaires into four groups by how they buy cars: new-car buyers who are brand loyal, new-car buyers who shop around, used-car buyers who are loyal to a dealer and used-car buyers who shop around. The used-car shoppers have the highest net worth relative to income. They let someone else absorb the first years of depreciation and they spend the hours saved on earning and planning.

A memorable story is Mr. W. W. Allan, a self-made millionaire who was offered a Rolls-Royce by business associates as a gift. He turned it down. He said he could not drive it to his modest restaurant, could not park it in his neighborhood without drawing attention and could not throw fish in the back when he returned from a day at the lake. The car would have forced him into a lifestyle he did not want.

The authors make a broader point about status goods. Their data show that the people who buy the most expensive cars are often not millionaires. They are high-income UAWs who use the car to signal success. Millionaires signal nothing. Many of them say that their neighbors have no idea how much they are worth.

Economic outpatient care

One of the book's sharpest findings concerns gifts from affluent parents to their adult children. The authors call these gifts economic outpatient care (EOC). This includes cash for a down payment, tuition for grandchildren, paying off loans, and regular allowances to adult children who earn too little to support their lifestyles.

The data show that EOC does not work the way parents hope. Adult children who receive regular gifts save less, spend more and accumulate less wealth than children of equal income who receive nothing. The gift is treated as income and spent. The authors state the pattern bluntly: the more dollars adult children receive, the fewer they accumulate. Recipients also tend to buy homes in neighborhoods they cannot afford, which raises their spending further and makes them dependent on more gifts.

The authors offer rules for affluent parents. Teach children frugality before they know the family is rich. Do not tell them what you are worth. Fund education, not consumption. Never give cash to a child to buy status. And do not use money to control adult children, because it breeds resentment and weakness at the same time.

Affirmative action, family style

The book shows how parents distribute EOC. They tend to give the most to the children who are the least economically productive. A son who struggles in his career gets more help than the daughter who runs a business. Daughters who stay home with children receive more than sons who earn well. Parents call this fairness. The authors call it a pattern that rewards dependence and punishes self-reliance, and they note that it often sets up bitter fights over the estate later.

They also describe how a strong, self-made parent can produce weak children. A business owner who gives adult children jobs with large salaries and little responsibility creates employees who could not survive elsewhere. The authors contrast this with millionaires who make their children work, pay for their own cars and start their own ventures.

Find your niche and choose the right job

The final chapters turn to opportunity. The affluent spend a great deal of money on specific services, and the authors list where it goes: estate attorneys, accountants, appraisers, tax specialists, real-estate brokers, dentists and physicians who serve the wealthy, and businesses that help them pass wealth to the next generation. They argue that serving the affluent is a durable niche because the number of wealthy households and the size of their estates keep growing.

On careers, the authors return to the data. Self-employed people are about four times more likely to be millionaires than employees. Most of the millionaire business owners are in unglamorous industries with few competitors from elite schools. The authors do not say everyone should start a business, and they note that most new businesses fail. Their point is that the owner of a boring, profitable business often builds more wealth than a high-salary professional who spends to match colleagues.

The last comparison is between millionaires and heirs. The children of the affluent are more likely to become professionals, especially doctors and lawyers, because their parents push them toward safe, high-status careers. These heirs earn well but often become UAWs, because the status of the profession comes with a costly lifestyle. The self-made parents, meanwhile, built their wealth in fields no one admired.

What the critics say

The most common criticism is survivorship bias. The authors studied people who became millionaires and found frugal business owners, but they did not study the many frugal business owners whose companies failed. Nassim Taleb makes this point in Fooled by Randomness. Critics also note that the data come from the mid-1990s, so the dollar figures are dated and the strong returns of that decade flattered buy-and-hold investors. Some readers find the book repetitive and object to its focus on spending while saying little about income growth.

Who should read it

Read it if you earn a decent income but your net worth does not grow, or if you want a plain benchmark for how you are doing. It is also useful for parents who are deciding how much to give adult children. The data are old, but the behavior it describes has not changed.