Book Review: The Millionaire Next Door

Authors: Thomas Stanley and William Danko

Publisher: Pocket Books, 1996


This book is a must-read for you or a family member if you’re struggling to find financial sense in your life.


Affluent people typically follow a lifestyle conducive to accumulating wealth. Seven common factors include:

  • They live well below their means
  • They allocate their time, energy, and money efficiently, in 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 marketing opportunities
  • They choose the right occupations

Other commonalities include:

  • Both spouses are frugal
  • One in five is retired
  • 2/3rds are self employed
  • Half of the spouses do not have outside careers
  • Annual income is approximate 7% of wealth
  • Half have occupied the same home for twenty years or more
  • 80% are college grads: 38% have advanced degrees
  • Only 17% attended private school; 55% have children in private school
  • They invest approximate 20% of household income
  • 20% of wealth is in stocks, which are held long term

The authors’ wealth formula:

  • Multiply your age by realized pretax income from all sources except inheritance. Divide by ten and subtract inherited wealth.

Categories are prodigious (PAW), average and under (UAW) wealth-accumulators:

A PAW has at least 2 times the wealth in the above formula. Under accumulators are also described as high income/low wealth. High income occupations often do not have high wealth accumulators. These people have the wrong focus: they assume that the means to high net worth requires focusing on generating high incomes. But these people exhibit lousy defense.

“Offence” refers to going out and making money: “Defense” refers to not spending it, the anchor of which is budgeting and planning. For some, budgeting is a formal, time-consuming process of keeping track of what they spend. For others, budgeting is less formal and is controlled by creating an “artificial economic environment of scarcity”. Planning means having goals. Middle-income PAWs show the same propensity to plan and budget as high-income PAWs. PAWs spend more time planning than UAWs. This includes learning about investment management, budgeting, seeking financial counsel and spending time with them.

Their most trusted advisors are their accountants and lawyers. There is a high correlation between wealth accumulation and having high-grade financial advisors, including accountants. The best accountants initially served within a large accounting firm and then went out on their own.

Financial advisors often have too narrow a focus; they sell investment and tax advice. They don’t sell advice on thrift and budgeting because they find it embarrassing to tell clients that their lifestyles are not sustainable.

PAWs enjoy work more than UAWs. The most successful business people share one trait in particular: they enjoy what they do. Starting early is also important. First, it establishes a modus vivendi and, second, longer term compounding pays off.

81% buy their cars; the balance lease. 37% buy their cars “pre-owned”. Half don’t spend more than $24,800 US for a “new” car. Used vehicle buyers are extremely patient in finding the right deal.

Tax is the single largest expenditure; therefore its minimization is valuable. Realized income is highly taxed; unrealized income is not. The goal should be to increase the latter relative to the former. This means building large sheltered portfolios as well as a buy-and-hold strategy for unsheltered funds. Paws are buy-and-hold investors: 9% hold a stock for less than a year. One-third hold a stock for at least six years.

The children of wealth accumulators are particularly prone to being UAWs. They are chronically propped up by “Economic Outpatient Care” from their parents. Almost half of the affluent in America give at least $15,000 annually to their children or grandchildren. (Note that this partially may spring from gift tax laws in the U.S.) Almost half contribute to private school tuition for their grandchildren. These cash gifts are frequently earmarked for consumption and support of lifestyle. These gifts become habit-forming for the recipients. Gift receivers statistically have lower propensity to save than non-gift receivers, and higher propensity to credit card abuse.

The authors’ advice for raising your children to be PAWs:

  • Support pursuit of education
  • Create an environment that
  • Honour independent thoughts and deeds
  • Cherish individual achievements
  • Reward responsibility and leadership
  • Foster courage to be independent
  • Encourage your children to:
    • Run for public office in school
    • Experience sales-type vocations when they are young
  • Minimize discussions about receiving “family welfare” and estate proceeds
  • Teach discipline and frugality
  • Keep your high net worth low profile with your children until they have established a mature, self disciplined adult life
  • Do not give financial gifts with strings attached
  • Be wary of treating your children unequally. Propping up the underachieving one with more aid is counter-productive