The Millionaire Next Door

“The Millionaire Next Door” by Thomas J. Stanley and William D. Danko

I recently picked up a copy of “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko from my local library. Ok, so I actually got the audio book so I could listen to it while driving. Have I mentioned that I love the library? There is nothing like finding a great book, whether educational or otherwise, and getting it for free! This

Back to the book. Let me start off by offering a warning. If you aren’t at all interested in statistics, this book might be a little overwhelming for you. It uses a lot of percentages and numbers to present its information. While I think they are fascinating, you might feel otherwise if numbers are not your strong suit.

The Millionaire Next Door is the result of years of research done by the authors. Basically, they wanted to know what rich people do to be rich. Do they have high incomes? Did they win the lottery? Did they inherit all of their money? Or is there something else that has enable them to attain great levels of wealth.

The answer? Well, it’s varied, but there are some definite patterns, the most interesting of which being from those who go from rags to riches in one lifetime. What might be surprising to many is that those who attain wealth without outside assistance account for the majority of the millionaires in the United States. This is really interesting for those of us who are trying to develop a long term plan for financial success and financial independence. As Dave Ramsey says, you shouldn’t take financial advise from broke people. Instead, if you want to be rich, you should look at what rich people do and copy it. There are a few key characteristics of the typical millionaire that I have noticed in the book.

Most millionaires have a net worth much higher than that of their neighbors

Most millionaires are frugal. They live below their means. Most of their neighbors have a much lower net worth than they. If they live in a really nice house, it is because they bought the house after they became rich rather than in anticipation of one day becoming rich.

Most millionaires live on a budget. They know where every penny goes and set up spending limits for just about everything. They can tell you exactly how much their household spent last year on items such as clothing, groceries, automobile maintenance, and travel.

Most millionaires pay themselves first. Before spending a dime, these people take out a significant percentage of their income and use it for investments. They understand that it takes money to make money, so they choose to use the money they have to acquire wealth, rather than possessions.

Most millionaires are givers. Whether to a church, charity, family member, or otherwise, they tend to give away significant amounts of money on a regular basis. While this may seem counter-productive to acquiring wealth, it is not. Even outside the benefits many people experience from tithing, or giving a percentage of their income back to God, many millionaires recognize that generous people have more opportunities than do those who are selfish.

Most millionaires are goal-oriented. They know where they want to go and are in it for the long haul. They have researched what they are doing and are confident that they can achieve results. The don’t give in to societal pressures to spend money where they should not because they are too focused on what they should be and are doing. They use their ambition to find new ways of generating income and don’t let up until the goal is reached.

Most millionaires take risks. If you want to start a company, there is a chance that it will fail. If you invest in a company, there is a chance that you will lose every dollar of your investment. But millionaires recognize that it is impossible to attain substantial levels of wealth without substantive levels of risk. The drive to succeed is essential here.

So, from a practical standpoint, what can we learn from these millionaires? I think there are at least 5 points worth noting.

Acquiring wealth takes time

1. If you’re not a millionaire today, you probably won’t be one tomorrow. Millionaires typically accumulate wealth over a long period of time through budgeting and diligence. If you want to be wealthy, it will take time.

2. Financial independence is essential. Most of these millionaires own their own business or are engaged in some other venture that is dependent upon their performance. What is important here is that these individuals recognize that they either succeed or go broke. Because of this, they work even harder to succeed.

3. Know what happens to your money. As I’ve already mentioned, you have to budget if you want to be wealthy. If you made $70,000 last year and can only account for $20,000 of that, you have a problem. Take the time to track and manage your spending with resources such as mint.

4. Get educated. Either through the use of deferred investments such as a 401k or the use of tax deductions, most of these millionaires really understand the tax system and how to make money that is not taxed at 50%. This also means that they recognize that a $20,000 boat really costs them $38,000 due to the taxes on their income. We all have to pay taxes, so make sure you understand the law well.

5. If you want to be a millionaire, don’t act like one. The surest way to not acquiring wealth is to live as if you were already wealthy. This typically means that you should be driving used cars, living in a reasonable house in a reasonable neighborhood, and saving and investing like crazy.

As you continue to organize your financial life, I hope you are able to draw upon the insights and experiences of people that are already doing it and doing it well. The road to financial independence may be long, but is worth every step.

Photos by Ronaldo F Cabuhat and Gnerk.