Well, what an excellent book! I could end the review there, but I thought I'd start off on the right foot! The Millionaire Next Door is a study into the behaviour of American millionaires, and though it is twenty years old now, the lessons it teaches are as powerful now as they were back then.
The Millionaire Next Door
The premise of the book is that your average American millionaire doesn't really act as you would expect them to.
There are some clear lessons drawn from authors Thomas Stanley and William Danko‘s comprehensive study of the habits and action of millionaires. The book focuses on the accumulation of wealth, or the lack of accumulation, and draws clear distinctions between what the authors call Prodigious Accumulators of Wealth (PAWs) and Under-Accumulators of Wealth (UAWs).
It is clear that there are patterns of behaviour which make a person far more likely to become a PAW and possibly a millionaire. The most striking of these are the key lessons from my reading of the book.
1. Millionaires are frugal
That's a lesson no-one want to hear, right? we all want a magic bullet, a quick fix, a fool-proof method for wealth creation. Ah, drat!
The book finds that millionaires don't, as a rule, wear $5,000 watches or drive expensive German cars. They often don't live in upscale neighbourhoods, just ordinary areas of town, often next door to blue-collar workers and state school teachers.
Obviously, it makes sense that part of the reason millionaires are millionaires is that they have kept enough of their money to amass a nice pot in order to be financially free.
2. Millionaires value more than money
A striking story in the book discussed a UAW who spent a total of 60 hours getting a deal on his new Porsche. He shopped around all the dealers, playing one off against the other, biding his time. Eventually he wore one dealer down to selling him the Porsche for barely more than dealer cost price.
Millionaires, in contrast, value their own time more highly, and also value dealer loyalty and service more highly than a short term dollar gain. They would often return to the same dealer over and over again. Often this was because the dealer also reciprocated by using the millionaire's business or referring clients back. This was deemed a far more valuable arrangement than a few thousand dollars in the short term.
3. Millionaires are often independent minded
A decent chunk of the book spoke of the story of two sisters, both from a wealthy household. The father was very domineering and believed that women should be in the home. The elder daughter rebelled against this and was cut off from her father's largesse, but the younger daughter stayed within the fold.
In time, the younger daughter married and her husband went to work for his father-in-law. He was afforded no respect from his wife's parents and was treated almost like a handyman. Mum and Dad helped with the purchase of the couple's first home, and paid for private schooling for the grandkids, but the younger daughter and her husband were trapped by the overbearing parenting.
The elder daughter by contrast forged her own path, becoming independently wealthy by saving a percentage of her income from day one. In the end she was a source of what the authors call Economic Outpatient Care, after the overbearing parents had died. The younger daughter never learned to be independent.
4. Millionaires often hamstring their own children by offering them ‘a better life'
It might seem like a lucky break, to be born into a wealthy family, but the authors found that this often is not the case. The millionaire's desire to give their children ‘a better life than we ever had' can lead to lifelong financial dependency, as the case of the two daughters above demonstrates.
The authors conclude that millionaires can better serve their children by teaching them the principles of prodigious accumulation of wealth, rather than extending the Economic Outpatient Care which leads to dependency.
Conclusion
I found it heartening to read that the way to great wealth is the same as I have always preached here on MeaningfulMoney. Budgeting (yes, most millionaires were shown to have a meaningful annual budget), careful saving and investing and frugality is the only way to guarantee future wealth.
Sure, you might die tomorrow, but the odds are you won't, and you'll need something to live on when you're too old to work.
I recommend this book most highly. Rather than depressing me about the long-term nature of wealth-creation, it encouraged me that I was on the right path. It challenged my thinking regarding how I relate to my children and their financial future. And it reinforced my belief system most satisfactorily!
You can get the book on Amazon here (affiliate link)
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