The Next Millionaire Next Door
Some of you may remember the book by Thomas Stanley and William Danko called “The Millionaire Next Door”. It was released in 1996 and quickly became a New York Times Bestseller. I was newly married at the time and already had a strong interest in personal finance topics thanks to my dad. I read the book and it had a big impact on my life. And if you liked the book back then, I've got great news! They just released the next iteration of the book, called The Next Millionaire Next Door.
The book seeks to answer the question: What does it take to become wealthy today?
The simple (but not easy) answer is: the consistent exercise of certain behaviors that have been shown to relate to financial success. Millionaires continue to demonstrate a disciplined approach to their finances, allowing them, over time, to transform income into wealth. In The Next Millionaire Next Door, Dr. Thomas J. Stanley and DataPoints’ founder and president, Dr. Sarah Stanley Fallaw, provide data-backed insights into what it takes to become the millionaire next door today, including:
Identifying and ignoring the myths about wealth and income
Understanding how those around you influence your financial behaviors
Living below your means
Identifying and developing your own behaviors that are conducive to building wealth
Finding careers and opportunities that allow for both economic and lifestyle-related freedom
Gaining knowledge and composure to invest and grow wealth
When I work with clients, I help them focus on these very qualities that will help them build wealth over time. I use assessments and behavioral coaching to help clients get and stay on track. As I've said repeatedly here, there's a lot more to financial success than just picking the right investments. There are plenty of behavioral aspects that have a bigger impact.
For the original Millionaire Next Door book, the authors were market researchers whose initial goal was to better understand the tendencies, habits, attitudes, and other psychographics of affluent consumers. Basically, they sought a deeper understanding of the millionaire mindset. After conducting a comprehensive survey of nearly 1,000 affluent individuals in the early 1990s, they follow up with a series of interviews with another 500 affluent individuals through focus groups. Their surprising findings were that the typical idea of what a millionaire looks like – living in an affluent neighborhood, driving a luxury car, and exhibiting other similar indicators of wealth – does not accurately describe much of the affluent market.
Instead they found that almost half of all millionaires don’t live in upscale neighborhoods. Nor did they typically inherit their money. Their study showed that 80% of America’s millionaires are first-generation “rich”. They found that a wealthy individual was simply someone who was able to earn a solid income, and exhibited certain “wealth-building” behavioral characteristics that made them more likely to convert their income into long-term wealth.
7 Core Traits of Prodigious Accumulators of Wealth
Specifically, the researchers found that “Prodigious Accumulators of Wealth” tended to have 7 core traits:
They lived well below their means
They allocated their time, energy, and money efficiently, in ways conducive to building wealth
They believed that financial independence is more important than displaying high social status
Their parents did not provide economic outpatient care
Their adult children were economically self-sufficient
They were proficient in targeting market opportunities (i.e., finding/creating wealth-building business opportunities)
They chose the “right” occupation (one with good income-earning potential)
The first three points had the biggest impact: that wealth builders tended to be frugal (live well below their means, and save 20%+ of their income every year), tended not to pursue social status symbols (more likely to wear inexpensive suits and jewelry and drive non-luxury cars), and that to the extent they did spend they tended to allocate their dollars differently (buying cars for the long-run instead of leasing them, owning homes instead of renting them). They found that being a millionaire wasn’t about inheriting wealth or just earning a big salary. Many millionaires were also quietly frugal, living in modest homes in non-affluent neighborhoods. This flew in the face of conventional thought at the time.
The research also found that millionaires were more likely to proactively create opportunities for themselves – at the time, self-employed people made up less than 20% of workers in the US, but accounted for two thirds of millionaires (either by being entrepreneurs, or self-employed professionals like doctors or accountants). Affluent accumulators pursued above-average-income job opportunities in the first place, including the high-visibility variety, such as doctors and lawyers, but also welding contractors, paving contractors, and even owners of mobile-home parks.
It's not overly surprising that those who manage to find above-average job opportunities ended up creating above-average wealth. But the key recognition of the Millionaire Next Door was that above-average income alone does not necessarily lead to above-average wealth. Not everyone translates their income to wealth in the same way (or even at all). Instead, it’s the other behaviors, living below your means, even or especially when their income could afford a much higher standard of living, investing in things that appreciate rather than depreciate, and their “social indifference” to keeping up with the Joneses, that resulted in accumulating wealth and reaching millionaire status.
You can have a high salary and pick great investments choices, but if you aren't saving a significant portion of your income, you are unlikely to build substantial wealth. The lesson of the book is as relevant today as it was in 1996. There's no magic bullet, and while the advice is simple, it's far from easy. Still, with a workable plan and clearly defined goals, true wealth-building is within reach for most families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alyssa Lum, and all rights are reserved. Read the full Disclaimer.