Book Review: The Millionaire Next Door, by Thomas J. Stanley, Ph. D. and William D. Danko, Ph. D.

1996, Longstreet Press, 258 p., ISBN 1-56352-330-2

By the year 2005, Kentucky is expected to be home to more than 56,000 millionaires. Will you know who they are? According to a new book by Thomas Stanley and William Danko, they're probably not who you'd first think.

For the past 20 years, Stanley and Danko have been studying the affluent in America-through interviews, surveys and census data-and they have come to some surprising conclusions, published in their new book, The Millionaire Next Door: The Surprising Secrets of America's Wealthy.

Surprising facts about millionaires:

Many of the millionaires they interviewed do not live the sort of lifestyle most people associate with wealth. The authors found that instead, wealth accumulation and an expensive lifestyle are often mutually exclusive.

Most millionaires (over 75%) do not own new cars, and the typical millionaire has never spent a huge amount on clothing. In fact, according to their surveys "the typical American millionaire reported that he (she) never spent more than $399 for a suit of clothing for himself or anyone else." Only 10% of the millionaires Stanley and Danko talked to had ever spent more than $1,000 for a suit, and an equal number (1 in 10) never paid more than $195!

How they became wealthy: Most (80%) of the interviewed millionaires did not inherit their wealth. In fact, the authors found that wealth does not tend to transfer easily from generation to generation, and almost never lasts for more than three generations. "More than half [of the millionaires in the study] never received as much as $1 in inheritance."

The millionaires in the study also did not necessarily have a high yearly income. The median yearly income in the study was $131,000 (a number that is skewed slightly by a small percentage with very high incomes).

Most of the millionaires are first generation wealthy, building their fortunes carefully through long-term diligence, frugality and investment.

In their research, Stanley and Danko uncovered some common traits that helped millionaires become wealthy, which they term offense and defense. Many people, according to the authors, have a very good offense-generating very high incomes each year. What tended to set the millionaires apart was a good defense-a strategy to make sure that the millionaires kept as much of the money they made as possible.

They "allocate nearly twice the number of hours per month to planning their financial investments." They tend to know to the penny just how much their family spends each year on food, clothing, and other expenses, and they tended to have spouses who focused on the same goals. They live well below their means.

The typical millionaire also works to minimize taxable income. As the authors point out, "income tax is the single largest annual expenditure for most households." Millionaires work hard to keep this expenditure low. They accumulating wealth through capital appreciation of investments (without cash flow).

What do millionaires do for a living? A percentage of the millionaires interviewed by Stanley and Danko were doctors, lawyers and high-ranking executives, but many were truck drivers, teachers, wholesalers, auctioneers and farmers.

Twenty percent of the millionaires are retired, but of the rest, nearly two-thirds are self-employed. Of those, 3 out of 4 are entrepreneurs.

"Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires." Keep in mind, however, that most entrepreneurs are not millionaires. And the authors are quick to point out that it's impossible to predict wealth by the business someone is in. Instead, they say, "the character of the business owner is more important in predicting his level of wealth than the classification of his business."

They found dry cleaners and house painters who were millionaires, but also found many stock brokers, doctors and professional athletes who-despite considerable income-had almost no accumulated wealth.

Does Wealth Equal Happiness? The authors argue that it does. Despite the extra time spent budgeting and planning investments, and despite their frugal lifestyles, the millionaires worry far less about financial matters than the non-millionaires that the authors interviewed.

They also have more flexibility. The millionaires they interviewed all have what the authors termed a "go-to-hell fund." They can live for many years without making another cent. Consequently, they feel far less work-related pressure than their non-millionaire counterparts, and tend to feel more in-control of their destinies.

Should you read the book? Stanley and Danko went to great lengths tracking the wealthy in America. In The Millionaire Next Door they catalog their spending habits, their savings habits, and their strategies for wealth accumulation. They also include substantial information on their car-buying strategies, and on their families and how wealth affects parent-child relations. The research alone makes The Millionaire Next Door worthwhile reading material. However, Stanley and Danko also offer advice on how you can capitalize on this information to shape your own wealth building strategies, which makes the book a useful tool for anyone interested in planning his or her financial future.

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How wealthy should you be?

On average: "multiply your age times your realized pretax annual household income from all sources except inheritance. Divide by ten. This, less any inherited wealth, is what your net worth should be," according to The Millionaire Next Door.

To accumulate wealth like the millionaires in the book, according to the authors, you probably need to be at double that number.