Bobbie’s Book Briefs: The Millionaire Next Door

Recommendation: 10/10
Best Version: Audiobook
Version Consumed: Kindle e-book and Audiobook

While this book and the underlying study comes from the 1990s much of the information is still relevant to those seeking to be financially independent today. Some of their metrics – such as not buying a home that is more than double your income – would not hold true today since the market was very different in the 1990s. More important than the metrics, the common factors of those who become wealthy can serve as great advice for us in a world that encourages you to stay broke, regardless of your income.

If you feel a desire to achieve, create wealth, become financially independent, or build something from scratch, then I highly recommend you read The Millionaire Next Door.


In 1996, Thomas Stanley and William Danko published the book, which compiled their research into the profiles of America’s millionaires. At the time, a lot of what they discovered through their research seemed counterintuitive. The real millionaires didn’t act like millionaires, eat like millionaires, dress like millionaires, or even look like millionaires.

Many of the people the authors expected to be rich, those earning high salaries, such as doctors and lawyers, were not. Moreover, many middle class people who did not appear rich were quite wealthy, when using the following definition
of wealthy:

a person who gets much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle, and a net worth greater than $1 million.

From here, the authors delved deeper into what made someone wealthy and found seven common common factors between them:

  1. Live well below your means
  2. Allocate time, energy, and money efficiently, in ways that are conductive to wealth building
  3. Believe that financial independence is more important than displaying high social status
  4. Parents did not provided economic outpatient care
  5. Adult children are economically self-sufficient
  6. Proficient in targeting market opportunities
  7. Chose the right occupation

The authors discovered that the average millionaire family was a married middle-aged man with three kids and self-employed in a “boring” field, such as contractor, auctioneer, mobile-home park owner, etc… The most common profession for the wives were teacher or stay-at-home. The typical work week was 45 to 55 hours. This family lived on around 7% of their income and invested 20% of their income. Further, 20% of their household wealth is in transactional securities (i.e. stocks). They often define themselves as “tight-wads.” According to the authors, this family would be considered a “PAW,” as opposed to a “UAW.”

Prodigious Accumulator of Wealth (“PAW”): Someone whose actual net worth is greater or equal to twice their expected net worth.
PAWs tend to spend twice the amount of time on their financial planning each month than UAWs.

Under Accumulator of Wealth (“UAW”): Someone whose actual net worth is less than or equal to half of their expected net worth.
UAWs tend to live above their means and emphasize consumption. These people often look like they would be millionaires: nice cars, fancy clothes, eating out.

Net worth by age calculation was determined by the following formula:

([Age x Pre-Tax Income]/10) – Inheritance = Expected Net worth

For example, a 30 year old earning $100,000 with no inheritance would be: [30 x $100,000] / 10 – $0 = $3,000,000 expected net worth.

This seems very high and can be inaccurate during younger ages because many 30 year-olds earning $100,000 have professions that require longer periods of education. As a result, many in this age range would be nowhere near the expected net worth due to only being in their careers for a few years. This formula works far better for someone who has been working for well over a decade.

Be frugal, frugal, frugal


Behavior Characterized by or reflecting economy in the use of resources


Lifestyle marked by lavish spending and hyperconsumption

According to the authors, frugality is the cornerstone of building wealth. It is equally important that their spouse is also frugal. The foundation of wealth accumulation is a defense anchored by Budgeting and Planning (Financial Discipline). People become millionaires by budgeting and planning and controlling expenses. These people remain millionaires the same way.

Rather than attempting to earn more money, millionaires often are those that keep more of what they earn. However, being frugal isn’t exciting. That is why most of the rich people you see on TV are showing off lavish cars, homes, vacations, clothes, jewelry, and other luxuries. Being frugal doesn’t sell air time or get follows on Instagram, but a husband spontaneously buying his wife a rose gold Bentley certainly does.

Not only is the millionaire frugal, their spouse tends to be even more frugal! The authors emphasize how difficult it is to accumulate wealth if one’s spouse is a spend-thrift.


Millionaires set goals and make plans to achieve them. These people spend hours planning and studying to achieve their goals, not just financial goals.

Benefits of PAW status

Those who are financially independent tend to be happier than those in their same income/age bracket who are not financially secure. Independence, not income, is what is correlated with increased happiness.

By contrast, UAWs tend to allow “others,” whether real or imagined, who determine their financial lifestyle. These people tend to buy into the latest technology, fashion, or other trend to keep up either with “the Joneses” or portray a certain lifestyle. One common UAW belief is that one earns money to spend. When you need to spend more, then you need to earn more.

Contrary to UAWs, PAWs tend to focus more on steps to become wealthy. Rather than believing money is meant to be spent, PAWs believe that money should be saved. PAWs are those who seek to keep more of what they earn. By not consuming today, PAWs can be financially independent tomorrow.

Financial Planning

Wealthy people focus on budgeting and planning – playing defense with what they earn to control expenses and keep more of their income.

Great offense in financial planning means earning an income that is greater than the norm. Great defense means being frugal when it comes to spending for consumer goods and services. It is far easier to spend less than it is to increase your income. However, it is easier to earn a lot in the United States than it is to accumulate wealth, because we are a consumption-oriented society

In addition to saving their income, wealthy people manage their assets well. PAWs minimize their realized (taxable) income and maximize unrealized income, such as capital appreciation rather than cash flow. Keep your marginal tax liability low.

For example, if real estate is purchased as an investment and the value goes up, a UAW may purchase the real estate and sell the asset, because of the increase in value, for cash to spend. This would cause the UAW to (1) face tax liability on the profit from the sale and (2) spend their wealth. A PAW would purchase the real estate and hold it, despite the increase in value. This way they would not incur any taxes on their wealth accumulation. Alternatively, PAWs would find ways to sell the asset and use tools to minimize taxable income from the sale and continue to invest and grow their wealth. One way would be to use a like-kind exchange (1031 exchange) to move from one investment property to another and defer the tax liability.

Millionaires have common parenting styles

First, millionaire parents do not tell their children that they are wealthy until the child has matured into a disciplined adult lifestyle and profession.
Second, millionaire parents tend to stay out of their children’s family matters. Moreover, they do not compete with their children and tend to emphasize the adult children’s achievements.
Third, millionaire parents focus on ingraining into their children that there are more important things than money: health, longevity, friends and family.
Fourth, millionaire parents do not want their children to take risks. Instead, they encourage them to seek a good education and receive intellectual capital.

Additionally, those millionaires who are business owners encourage their children to become self-employed professionals: physicians, attorneys, accountants, dentists, engineers, or similar professions. The main reason is that anything can happen to your business, but nothing can take away your intellect or ability.

Unfortunately, these children often postpone entering the job market until their late twenties or early thirties, which is not an advantage for them.

My Key Takeaways

  1. Defense is the key to wealth accumulation, not offense. Keeping more of what you make is more important than how much money you make to begin with. So budget and plan.
  2. Do not let others determine what you should or should not spend your money on. Don’t buy luxuries just because other people expect successful people to buy them.
  3. Choose your partner wisely. A household split on financial orientation is unlikely to accumulate significant wealth. If your husband/wife is a UAW focused on consumption, it will be difficult for someone to save and control expenses without creating friction with their partner.

Some of the advice seems outdated by today’s metrics, such as don’t buy a house that costs more than twice your household annual income. Today, that would mean most people would never buy a home, which is not good. However, the principles offered by the authors are definitely something that would lead disciplined individuals or couples to financial independence and millionaire status.

This book is a great personal finance book for those who want to think about having a healthy relationship with money and change the way they think about wealth.

If nothing else, remember to be frugal!

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