Book Review: The Millionaire Next Door

The Millionaire Next Door: The Surprising Secrets of America's Wealthy

by Thomas Stanley, William Danko
Narrarated by: Cotter Smith
Publisher: Sound Ideas
Total Length: 8 Hours, 50 Minutes
Date Published: June 24, 2008

Publisher: Taylor Trade Publishing
ISBN: 978-1589795471
Number of Pages: 258
Date Published: November 16, 2010



Each time I interview someone for an opening that I trying to fill, I almost always throw out the question, "What book have you read most recently (other than a technical manual), and what did you learn from it?"  It helps gauge a person's analytical skills on something other than a purely technical problem (gives them the opportunity to identify an issue or area of interest and prove that they put some thought into it).  It was during one of these interviews that a candidate mentioned The Millionaire Next Door (TMND).  I ended up sending that candidate a job offer, and I am grateful for the recommendation for my reading list.

Surprised?

• What kind of car do you drive?
• What neighborhood do you live in?
• What is the most you ever paid for a pair of shoes?
• How much did you spend on a college education?
• Are you an entreprenuer?
• Do you believe that hard work pays off?

Danko and Stanley surveyed millionaires with these types of questions and many, many more.  This book is a distillation of the metrics that they found correspond to the success of millionaires.  "In the course of our investigations, we discovered seven common denominators among those who successfully build wealth."

1. They live well below their means
2. The 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.

Wealth Accumulation

Income does not equal wealth.  Stanley and Danko make it a point to distinguish between current income, total net worth and expected net worth.  They provide an interesting calculation to see where you stack up.

"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

Based on this formula, if you are close to the expected value, then you are considered an Average Accumulator of Wealth (AAW).  The ones that have at least twice the expected net worth (Age * Income / 10 * 2) are considered a Prodigious Accumulators of Wealth (PAW).  At the bottom end of the calculation, you are an Under Accumulator of Wealth (UAW) if you have less than half of your expected net worth (Age * Income / 10 / 2).

"Big Hat, No Cattle"

The primary reason that so many people do not achieve the levels of wealth accumulation that they should is because they are too busy trying to appear well off, at the expense of sacrificing true financial security for the façade of keeping up with the Jones'.  The truly affluent are more worried about how many cattle they have, not how big their cowboy hat is.

Education

The wealth accumulation formula is interesting because it takes into account how many years a person has to build their wealth.  One of the major factors that contribute to the time spent building wealth is whether that person pursues post secondary education.  Michael Bloomberg gave a graduation speech last month that mentions this fact (which some criticized him for), but Stanley and Danko's research supports this fact.  The time spent in college, is time lost in terms of accumulating wealth, plus the money spent on college tuition and expenses (see denominator #7 above).

Budgeting Is Like Exercise 

There probably aren't many people that really "enjoy" sitting down and going over all of their expenses and categorizing them and analyzing income and spending trends, but that is was the majority of these PAWs do on a regular basis.  Do you know how much you spent on gasoline last month?  How about eating out?  How about household utilities?  TMND relates this routine practice to that of exercise.  Who is more likely to have a regular exercise routine, those who are in shape or the less than healthy types?  

You might think, why would someone who is rich need to worry about keeping track of all these details?  But that is precisely the point.  They don't keep track of them because they are wealthy; they are wealthy because they took the time to keep track of their budget.

Economic Outpatient Care

Economic Outpatient Care is defined in the book as relying on income from your parents when you should be at a point of providing for yourself (see denominator #4 and #5 above).  Some of the best lessons I got from TMND was the sections dealing how to help your children be successful.  What it really comes down to is that teaching children how to be self sufficient and provide for themselves is much more beneficial than continually investing in their bad spending habits.

Reflections

I originally listened to the audiobook first, but then ended up getting a copy of the paperback to be able to review all of the tables and charts in the book.  I have since loaned out my copy of this book to several friends and they have all be appreciative of the recommendation as well.  Take the time to read this book.  It is definitely an eye opener.