A while back, I mentioned the book The Millionaire Next Door to one of my colleagues at The Motley Fool. “That book changed my life,” she gushed. For some people, it really can be that powerful — even fifteen years after it was first published.
In this post, I present an edited transcript of a conversation I had with Dr. Thomas Stanley, co-author of The Millionaire Next Door and author of several other books, including Stop Acting Rich, published in 2009.
Robert Brokamp: In a few sentences, who is the “millionaire next door”?
Thomas Stanley: If you talk about the prototypical person, he's a guy, mid- to late-50s, owns his own business, went to a four-year public college, was a B or C student, saves relentlessly, lives in a neighborhood where he has four to five times more wealth than the guy next door. He does make more money than the guy next door, but has similar consumption habits; the neighborhood has a lot to do with that. These people are not into status, they are not into designer brands, so they are the epitome of why people collect wealth. There is a certain lifestyle that they adopt. It is not just a matter of putting [money] into mutual fund A or B or going with stocks or having a private business necessarily.
It really is a lifestyle. Income only explains about 30% of the variation in wealth. So they are doing something other than just making money and accumulating wealth via investments.
RB: What if someone says to you, “Big deal if I spend everything I make. I live a better life than these frugal ‘millionaires' who have big bank accounts but don't have any fun”?
TS: If you look at the statistics on happiness in life overall, those people who live below their means are happier than people who don't. Some people may tell you they are happy because they've got that leased BMW or they wear thousand-dollar suits or have a closet full of clothing, but that's not what happiness is.
The problem is that people think, “Well, if I just had that sports car, or that thousand-dollar suit, or a $700 pair of shoes, and a club membership, I'd really be happy.” But in the study we did of 933 millionaires more recently since The Millionaire Next Door, I looked at the 46 makes of cars in America and looked at happiness as a function of owning one or not owning one, and there is not one correlation. Even by chance you'd think you'd get one or two, but none. There is no correlation between what people drive and their level of happiness.
The happiest people are the people who have substantially more money than most of the people that live in their neighborhood. So they don't worry about keeping up with the Joneses; they are the Joneses.
RB: A line you had in your most recent book, Stop Acting Rich, from a study by Dr. Glen Firebach, says that people with higher incomes tend to be happier, but it's not income alone. It's income relative to your peers.
TS: Absolutely. Also, for many people, it's really about achievement. In other words, there's a tremendous amount of pride on the part of someone who owns a business. I just wrote up a little thing about a fellow that I interviewed. He's in janitorial services. He has crews everywhere cleaning office buildings and factories. It might not sound like a very exciting business and maybe it's not a big-status business, but the fact is, he does very well in life. Plus he's very, very proud of that. So his pride comes from building a business, his family, and things like that. His pride does not come from the car he drives or the house he lives in.
So once you understand that — and you understand how many millionaires in this country live in homes that are under $400,000 — then you start to wonder: Who are those people that live in million-dollar houses? Well, a lot of people that live in million-dollar houses have very big mortgages, and the price of the house is a very high correlative of everything else that you spend money on.
But people say to me, “How can they be happy if they live in a house that is $250,000, $300,000, $350,000, $400,000? They can't possibly be happy, even though they are millionaires!” No, 95% of those people are very happy. They are at the highest level of satisfaction overall, so they get their satisfaction from things other than products and services.
RB: I'll pick up on that in a little bit. Your studies show that a disproportionate number of millionaires are business owners and self-employed. So what do you say to someone who says, “Then obviously I need to start my own business”?
TS: Most people should not be in their own business. For a lot of the people who started their own business, it was a slow process, just as it was for me. I was a tenured professor, and over time I did a lot of consulting and writing. For me to go out on my own, it wasn't a big leap because I had been doing a lot of that anyway. Most people do it that way.
But the other thing is that there are a whole lot of folks out there in this country who are millionaires [but not self-employed]. For example, I mentioned in the latest book about engineers. Engineers typically are people who are frugal. They view products in terms of their performance characteristics and their durability. So they are big on Toyotas and Hondas and cars like that. And they do quite well. Plus, they [engineers] are analytical; they're very good at investing, typically. Educators do well also. So there are a lot of folks out there who are disciplined and who know how to play the game. You don't have to own a business.
RB: There was an interesting anecdote in Stop Acting Rich about a woman who you said was about 113 pounds and she could still buy these smaller, economical cars, whereas Americans in general get bigger as they get older, and they have to buy bigger cars. I was curious, have you seen any sort of correlation between wealth and health?
TS: Absolutely. We asked people who were wealthy to evaluate their level of health throughout their adult lifetime. Then we also looked at weight, male and female. What you find is that one in 10 millionaire men are over 225 pounds, and most of those people are 6'1” and over. Only 10% of women are over 170 pounds, and most of them are 5'10” and over. So most millionaires are disciplined not only in terms of money, but also in consumption of food. If you think about it over a lifetime, somebody who doesn't spend a lot of money eating and in restaurants and drinking and all these other kinds of things — I mean, the geometric return [i.e., compounded return] on that over a lifetime is really significant.
People spend too much money in restaurants. I see these people that are office workers, they're out there going to lunch every day, sitting down for an hour or hour and a half. It's time, it's money.
So, yes, we found in the correlations that weight is related inversely to health. Most wealthy people are not overweight. They are healthier than most people.
I wrote a blog in response to a Wall Street Journal article about this company that would facilitate investors buying life insurance policies, assuming that the owner of the policy — who is, say, 80 — is going to die in a year, so they will buy the policy from him. You know what I wrote? I would never buy a policy from a rich person; they live too long! I also wrote I don't want to look at my investments in the obituaries; I think there's something morbid about that.
RB: Over the years, have you seen a lot of under-accumulators of wealth “get religion”? What does it take to get these people to change?
TS: I do see a change. The problem is that most people are so involved in the everyday war — getting to work, working 50 or 60 hours a week, making enough money to support a family, and everything else — that they really don't read a lot of things. But I think the beauty of The Millionaire Next Door is that it's empirically based with all the data, and that does have an impact. We got gobs and gobs of email and letters from people who said, “This did change my life.”
What happens is there is one frugal person in the household and one not-so-frugal. That becomes a problem. So you have to switch people over. I think [that's possible], but you have to have credibility with people — that people believe these things and they accept them. But it is not only “I can read a book and change.” If you're an alcoholic, you shouldn't hang around with alcoholics. Well, if you live in what I call a high-consumption neighborhood, it's difficult to change. Often it [requires going] cold turkey. It's downsizing, it's making some changes radically in your environment, but it's worth it. And I see that.
RB: Your books looked at the purchasing habits of millionaires — items such as watches and suits and cars. Have you been able to look at some of the more modern gadgets? What are the habits of the “millionaires next door” in terms of cell phones, iPads, laptops — those types of things?
TS: No, I haven't done that.
The problem you have in this country is these people spend all this money on iPads and laptops and everything else…for what? To play what? Fantasy Football?
The problem is that most people that buy all that stuff are not industrial users. There's no tax write-off, there's no benefit; it's not a capital good. They're not using it to make money. I see people at Christmas time at four o'clock in the morning lining up in front of stores. They wouldn't get up at four o'clock in the morning to go to work.