Some personal finance books promise to show the reader how to become a millionaire. The Millionaire Next Door (by Thomas J. Stanley and William D. Danko) is different. It is built on years of research, on a body of statistics and case studies. It doesn’t make hollow promises. Instead, it profiles people who have already become millionaires. This is a subtle but important difference.

Many people who earn high incomes are not rich, the authors warn. Most people with high incomes fail to accumulate any lasting wealth. They live hyperconsumer lifestyles, spending their money as fast as they earn it. In order to accumulate wealth, in order to become rich, one must not only earn a lot (play “good offense”, according to Stanley and Danko), but also develop frugal habits (play “good defense”). Most books focus on only one side of the wealth equation: spending less or earning more. It’s refreshing to read a book that makes it clear that both are required to succeed.

It’s as if people can be classified based on the following table (which is my own invention based on the authors’ findings):

  High Income Low Income
Frugal wealthy breaking even (spartan)
Spender breaking even (lavish) broke

High-income spenders live in a house of a cards. Sure they have the money now to fund their hyperconsumer lifestyle, but what happens when that money goes away? It’s also difficult for low-income frugal folks to acquire wealth. They need to learn to play financial “offense”. But those with low incomes who spend are in the biggest trouble of all.

The wealthy, on the other hand, generally have a high income and a frugal mindset. They share other characteristics as well.

  • 80% of America’s millionaires are first-generation rich. This is contrary to those who would have you believe that wealth is usually inherited.
  • 20% of millionaires are retired
  • 50% of millionaires own a business

The authors write:

In the course of our investigations, we discovered seven common denominators among those who successfully build wealth.

Those characteristics are:

  1. They live well below their means. In general, millionaires are frugal. Not only do they self-identify as frugal, they actually live the life. They take extraordinary steps to save money. They don’t live lavish lifestyles. They’re willing to pay for quality, but not for image.
  2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth. Millionaires budget. They also plan their investments. They begin earning and investing early in life. The authors note that “there is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future”. In other words, the more time someone spends buying things that look good, the less time they spend on personal finance.
  3. They believe that financial independence is more important than displaying high social status. The authors spend far too much time beating home this point: usually millionaires don’t have fancy cars. They drive mundane domestic models, and they keep them for years. (There’s an entire 31-page chapter devoted to how millionaires shop for cars. It’s tedious. It may be the worst chapter I’ve ever read in any personal finance book. And the authors go on ad nauseum about the average price per pound of various vehicles. There’s even an appendix showing the average price-per-pound for the most popular models.)
  4. Their parents did not provide economic outpatient care. That is, most millionaires were not financially supported by their parents. The authors’ research indicates that “the more dollars adult children receive [from their parents], the fewer they accumulate, while those who are given fewer dollars accumulate more”.
  5. Their adult children are economically self-sufficient. This chapter is fascinating. The authors clearly believe that giving money to adult children damages their ability to succeed.
  6. They are proficient in targeting market opportunities. “Very often those who supply the affluent become wealthy themselves.” The authors discuss how one of the best ways to make money is to sell products or services to those who already have money. They list a number of occupations they feel have long-term potential in this area.
  7. They chose the right occupation. “Self-employed people are four times more likely to be millionaires than those who work for others.” There is no magic list of businesses from which wealth is derived — people can be successful with any type of business. In fact, most millionaire business owners make their money in “dull-normal” industries. They build cabinets. They sell shoes. They’re dentists. They own bowling alleys. They make boxes. There’s no magic bullet.

The Millionaire Next Door is a flawed classic. It offers a fascinating portrait of the wealthy, but it buries this beneath mountains of detritus. The book is poorly organized, repetitive, and dull. (The section on car-buying seems to go on forever.) A patient reader will be rewarded with a glimpse at what it takes to become a millionaire, but I can’t help but feel this book could have been something more.

In the past two months I’ve read The Millionaire Maker (my review), Secrets of the Millionaire Mind (my review), and The Millionaire Next Door. I pray I’m done with “Millionaire” books for a while. (I’ve actually re-read Secrets of the Millionaire Mind since I reviewed it last month. It’s excellent motivation for my current place in life.)

Which of the three is best? The Millionaire Next Door has the best reputation. It provides solid information based on real-life examples. But it’s poorly written. Secrets of the Millionaire Mind is a powerful motivational tool, but it feels heavy on anecdote and opinion. Either of these could be useful, depending where a reader is in her financial journey. Either is worth borrowing from the public library.

(Note: I bought The Millionaire Next Door for $3.79 at a local thrift store. Thrift stores are excellent sources for personal finance books. Your public library is even better.)

This article is about Books  Monday, 18th December 2006 (by J.D. Roth)