Book review: The Millionaire Next Door

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 IncomeLow Income
Frugalwealthybreaking even (spartan)
Spenderbreaking 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.)

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prlinkbiz
prlinkbiz
13 years ago

Although I have not read this book, I have read the follow up, The Millionaire Mind, which was very good. It was recommended to me by a multimillinaire friend! lol I have found that one to be hugely insightful, much more organized, and something I refer to frequently.

I did think the points made about parents giving adult children money hindering rather than helping was fascinating!

Duane Gran
Duane Gran
13 years ago

I’ve read the book, along with The Millionaire Mind, and appreciate them both. Book on finance topics often serve as motivational pitches, but these two books provide a clear insight into the habits of the wealthy.

I’m surprised to hear The Millionaire Next Door being described as dull. I found it incredibly inspiring. Whenever I need a dose of financial medicine, so to speak, I flip open this book to re-calibrate my values.

Meaghan
Meaghan
13 years ago

Absolutely agree with you on this book- I had heard most of the information repeated before on blogs like this, but was looking forward to reading it for myself, since it’s such a classic. I found it so poorly written, and like it had no clue who its audience was- was it targeted towards people who wanted to be millionaires or people who sell stuff to millionaires? The one thing I found that was really illuminating, though, was the chapter on ‘economic outpatient care’, and how the gender of their children affected how much economic outpatient care they received. Looking… Read more »

Stingy Student
Stingy Student
13 years ago

I’m so glad you mentioned buying books cheaper or using your public library. I think it’s ironic that people who are trying to save to be rich would be willing to spend the money for a brand new book. Unless it’s brand new, you can find used books for much less and it saves more trees, it’s a win-win! Also, check out paperbackswap.com – I just signed up, and it’s a pretty neat concept.

nes
nes
13 years ago

Millionaire Next Door is classic. I will keep this book forever. I am one of those that tends to fall in the “low income” bracket, but with some discipline and living below my means, I should be okay. I think people make personal finance way too complicated. “Spend less than you earn.” It’s simple.

Another underrated book that a lot of people do not know about is “Getting Loaded” by Peter Beilagus. Read it. I’m sure you will like it.

nes
nes
13 years ago

Peter “Bielagus”. Sorry I spelled it incorrectly the first time.

Roger
Roger
13 years ago

It’s slightly incomprehensible that you found this dull–I enjoyed it a great deal. I do agree that their conclusion that millionaires buy cars by the pound was faintly ridiculous, but I think the point of the car chapter was that most non-millionaires spend way too much of their money and time buying transportation devices.

RJ
RJ
13 years ago

When I read this book about a year ago, I enjoyed it but skimmed some of the more tedious sections. It seems to me that the book best works as a general guide to developing a mindset for wealth; I’m not sure I fully agree with some of the specific points or positions in the book. The formula for determining the net worth or wealth that one ought to have [AGE X INCOME, then DIVIDED BY TEN], and the procedure for evaluating the result (UAW, AAW, PAW), are useful in a global sort of way, but not for the specific… Read more »

Andreas
Andreas
13 years ago

#8, were do the authors write that inheritance should not be included in the calculation of net worth? I recently read this book, and I don’t remember them mentioning anything like that.

J.D.
J.D.
13 years ago

I want to make it clear that I think the ideas in this book are great. I do think it’s a classic personal finance book. It does a great job of showing the real way millionaires behave in contrast with the way most people view them. I’ll forever view somebody with a flashy car as a big spender, not neccessarily somebody who is rich. The ideas here are fantastic. My complain is with the delivery, which is dry and tedious. I should also note that I listened to the book on audio, which may have had an impact. If I… Read more »

RJ
RJ
13 years ago

Hi #9, Since I don’t have the book with me, there is a chance the inheritance precept comes from somewhere else (the mind is the third thing to go)…. But I nonetheless recall that the precept comes from the authors’ formula on how to calculate net worth. From what I remember, the idea is linked to Point 5 in J.D.’s synopsis above: true wealth is built through one’s own work, not through one’s inheritance of the product of another person’s work.

Angela
Angela
13 years ago

I wonder if the inheritance thing is that you shouldn’t pre-empt it. I mean, if you’ve inherited $100,000 then that is part of your net worth, but if your parents are currently worth $100,000 and you are their sole beneficiary then you shouldn’t as the money isn’t yours. Just a suggestion.

majeest
majeest
13 years ago

The idea of omitting inheritance from net worth was purely about determining whether you’re frugal or not. If a significant fraction of your net worth is from inheritance, that doesn’t prove you’re frugal, just lucky.

Determining whether you’re a prodigious, average, or under-accumulator of wealth is calculated by multiplying your current age by your current salary divided by ten and then comparing that number to your net worth, less any inheritance. It has nothing to do with calculating net worth for any other purpose.

dimes
dimes
13 years ago

This book reads like a fleshed-out statistical report. Sure it’s great to know that most millionaires have three children and wives who are either homemakers or teachers, but what does that prove? That the only thing separating us from a millionaire life is having three kids? I DON’T THINK SO. There’s precious little on how people actually become successful, just what ones who already are do. It’s some sort of fallacy of logic. Post hoc ergo propter hoc? Cum hoc ergo propter hoc?

HC
HC
13 years ago

Dimes, it’s not even a very good statistical report.

It is NOT a random sample. Obviously, if they are tracking millionaires specifically, that limits the universe of respondents. Fine. But the conclusions in this book were drawn from the sample of millionaires WHO ARE MOTIVATED BY $100 SURVEY PAYOFFS. That can’t possibly be representative of the millionaire population.

Don’t get me wrong; I found the book interesting, and it did make me rethink some frugality issues, especially the car chapter. But it is not up to most research standards.

NLG
NLG
13 years ago

From all the reviews I’ve read of this book and similar ones, I don’t feel the need to read it. It sounds mostly like a motivational-type book (similar to Kyosaki’s life works).

I’m not saying there isn’t good information in there. I just don’t think it would benefit me any more than reading reviews, and just following a few different PF blogs.

squished18
squished18
13 years ago

#15 – HC said it far better than I could have. There seems to be a fundamental flaw in the way the research was conducted. Further research is necessary to corroborate the findings. A valuable piece of work, but there may be important nuances missing. Second point. The one eye-opening message there was for me after reading TMND was that I don’t want to be the millionaire next door. It now seems pointless to accumulate vast amounts of wealth relative to your income potential and not spend/use it. Not going bankrupt or not having to stress out about finances seem… Read more »

Duane Gran
Duane Gran
13 years ago

NLG — The book is far from being motivational hype. In fact, is the furthest thing from it. The authors present statistical analysis of how wealthy people behave and there is no salesmanship about it at all. squished18 — While not immune from error I would need really compelling counter evidence to claim that the statistical methods used where in error, especially given that it was written by statisticians. As for the point of the book, it isn’t to glorify the behavior of the miserly. Most of the millionaires were confident about their life purpose and wealth was a consequence… Read more »

brad
brad
13 years ago

squished18 said It now seems pointless to accumulate vast amounts of wealth relative to your income potential and not spend/use it. True enough, what’s the point of having money if you’re not going to do something with it, but in fact wealth generates more wealth. And once you’ve built enough wealth to take care of your own needs, you can start giving away the rest, and that’s when things really get interesting. Bill Gates just gave away 35 percent of his fortune. That’s going to have a huge impact on children’s health and welfare in developing countries. My own plan… Read more »

terry
terry
13 years ago

I earn minimum wage, how am I supposed to live beyond my means?

Bob
Bob
7 years ago
Reply to  terry

Terry, I know it’s six years since you posted, but I hope you found a job earning more than minimum wage. If not, then I would suggest redefining your priorities and finding a more appealing job. Best of luck to you and I hope all is well.

Bob

squished18
squished18
13 years ago

Duane Gran: “As for the point of the book, it isn’t to glorify the behavior of the miserly.” I may need to re-read the book, but that was exactly the message I got from it when I read it. What was the message you picked up from it? “Most of the millionaires were confident about their life purpose and wealth was a consequence of their habits, not a goal.” I missed that part. (Not being facetious.) I’ll be looking for that in the re-read, but there didn’t seem to be anything about life purpose in the book when I first… Read more »

Duane Gran
Duane Gran
13 years ago

squished18, In all fairness, I may be conflating my memories because I also read The Millionaire Mind, which expands on the statistics with stories from the people they interviewed. That follow up book paints a picture of people who are grounded in the way they value faith, family and community in such a way that wealth is a side effect of their habits. Because of reading both books I may be a bit too charitable in my handling of The Millionaire Next Door. Come to think of it, TMND does send a strong message about fantasy versus reality and beats… Read more »

squished18
squished18
13 years ago

OK, I’ll put The Millionaire Mind on my to-read list. Thanks for the response.

2 Pennies Earned
2 Pennies Earned
13 years ago

I really enjoyed the detailed information on the habits of millionaires that this book provided–things like how the most common vehicle of a millionaire is a pickup truck and how millionaires often buy antique furniture because it lasts forever and is the only furniture that might increase in value. I purchased the audiobook, and really enjoyed listening to part 1. Part 2 was so similar to Part 1 that I actually thought I was listening to the same part all over again because of some computer glitch. But that wasn’t the case! Terry–When I was supporting myself on a slightly… Read more »

Vineet
Vineet
13 years ago

I just got done reading this book and I’m really glad I did. If there’s one thing I got out of it, it was to learn to be frugal. However, I just don’t know if I can ever get myself to drive a used American made car.

rbracken
rbracken
11 years ago

I am so sorry the majority of you all did not find this book useful, helpful, or educational. My financial planner gave this to me 12 years ago when I was a 40 year old newly divorced professional female with 2 young kids, Despite 2 high incomes my ex and I were living above our means, seduced by easy loans and a seemingly endless amount of credit. Thank goodness I took the advice in this book to heart before this latest recession. No one is saying dont have fun or dont but a vacation home or that car you want.,… Read more »

KWilliams
KWilliams
11 years ago

This is a great book. It makes it very clear that they way to accumulate wealth is to simply spend less than you earn. The authors do a great job of explaining this point by descrbing the differences between UAW’s(Under Accumulators of wealth)and PAW’s(Prodigious accumulators of wealth), which basically boils down to their spending habits. This book is great for anyone, no matter what stage of your life your in.

Nicole
Nicole
10 years ago

So I was halfway through the book and I’m like… the chapter on car buying didn’t seem so bad, and really it was just half a chapter.

Then I got to the next chapter. Turns out I was premature. Now I understand.

(I also wonder about their sample selection… someday maybe I’ll check out TMM to see if they can convince me in that book.)

Sudhir
Sudhir
7 years ago

I really can’t understand this obsession with being rich and a millionaire..its very much like the designer tags that people like to hoard to mirror an image of themselves. I have’nt read the book but let me give my take on this. I am merely 24 y/o and I love doing charities, watches, women, boats, heritage houses, a pied e terre, history, travelling to view these historical sites, fast cars and track days..yet I do not aspire to be a millionaire. I just want to move to a high wage country and work in a line I like so I… Read more »

Ramaswamy
Ramaswamy
6 years ago

I read the book a couple of times. You can read my review of the book in my blog (http://manofallseasons.blogspot.in/2014/06/book-review-millionaire-next-door.html).
I wish your review were more detailed, there are some excellent learning points in the book.
I agree with you that the topic on car purchase is tedious.
I also read the ‘Millionaire’s mind’. I think it is too much inspiration and less of practical suggestions.

Peter Callomon
Peter Callomon
1 year ago

One of the best places to buy second hand books that are read only once is Amazon marketplace. Factor the postage in and buy within the country you live and you will get an absolute bargain. I never buy new books if I can help it. “Owning yourself” came from a dealer who bought a massive collection of books from Oxfam. There are plenty of different examples of this.

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