5 important Lessons from “The Millionaire next door” book

Our book club book of the month for February was The Millionaire Next Door: The surprising secrets of America’s wealthy. The book was written by Thomas J Stanley and William Danko and is based on a study of ordinary millionaires. ‘Ordinary Millionaire’ in the book refers to self-made Millionaires who have not inherited money.

I listened to a video where someone talked about the book and mentioned that the writer was misogynistic. This colored my perspective a bit before reading. There were a lot of references to women’s roles in the home in the book. For instance, the study of millionaires showed that the majority of their “wives” were housewives. Another observation was that teaching was the top profession of the wives of the millionaires studied.

A possible direct application of this would be to say, for a man to become a Millionaire, marry a teacher or a housewife. This is problematic in so many ways. Asides from removing the possibility of a woman becoming a millionaire or pursuing other passions besides homemaking or teaching, different households have varying circumstances.

In addition, if this were applied in a single-income family where the husband’s income is low, it might be more sensible for the wife to also work and bring in additional income. If childcare costs are managed and kept to a minimum, this could result in an increased net-worth for the family.

Despite the gender stereotypes mentioned in the book, I decided to be open-minded and treat it as a study, which it was. One of the findings of the study of the millionaires was that majority were self-employed business owners or self-employed professionals. I reckon that a person with a wife who was home full-time and took care of the homefront has the freedom to fully concentrate on building a successful business. This might explains some of the successes experienced by the Millionaires.

Regardless of the issues already mentioned, there was a lot to glean from the book. We can still learn from people we don’t totally agree with. I am glad I read the book to the end. Here are 5 important lessons that provoked a lot of thinking when I read The Millionaire Next Door. To get the best of what the book is offering, you need to read it. I am just providing a summary and barely scratching the surface.

Define wealth based on net worth

One of the most important messages of the book was defining wealth based on net worth. Often, people consider themselves wealthy based on their income. Income is not net worth. You can earn so much and consume most of it. Net worth is defined as assets minus liabilities. The distinction between your assets and liabilities is very important and you can read more about this here. The threshold for determining the wealthy in the book was anyone with a net worth of over $1m dollars.

The formula below was given in the book to work out the expected net worth.

You fall in one of the following categories based on the result you get;

• Actual net worth > Expected net worth = Prodigious Accumulator of Wealth (PAW). (A well-established PAW has twice the expected net worth according to the book)
• Actual net worth= Expected net worth = Average Accumulator of Wealth (AAW)
• Actual net worth < Expected Net worth = Under Accumulator of Wealth (UAW)

The result of this gave me so much to think about. I started making up excuses for why I was in the UAW category and how losing time by moving to another country and starting over was a factor. But at the end of the day, the formula provides a good indicator or reference point. I believe the formula is credible because it is based on income and age. The only adjustment I would make to it is to use average income. This is especially important for people who have only improved their income in recent times.

Working out your expected net worth provokes several questions. For example, how much of your income is converted to assets? How are you working at increasing your net worth? How much of your income are you consuming? There were so many examples given of people earning an average salary who were PAWs and higher earners with a high consumption lifestyle who were UAWs.

There was an interesting mention that the PAWs didn’t make all their money from the stock market. This is something I have recently been preaching because a lot of money coaches like myself talk so much about investing as the key to wealth. The study showed that the millionaires had only about 30% of their wealth in the stock market. The majority of the wealth was in the businesses they own. However, if you don’t own a business the next best way to generate passive income and build wealth is by investing in the stock market.

As I often preach and as evident in my tagline, a lot of effort should be given to creating value in order to generate income, before committing that income to work for you through investments. I set myself a challenge to increase my net worth prior to reading this book. Reading The Millionaire Next Door definitely strengthened my resolve.

Discipline, Sacrifices, and hard work

The millionaire next door is frugal. There were a lot of examples given to prove this in the book. The millionaires placed a high emphasis on goal setting, spend reviews, budgeting, and allocated a lot of their time to planning. They shopped around, didn’t buy designers or expensive cars. There was a popular quote in the book, “you are not what you drive” and many others describing the modest lifestyle of the millionaire surveyed. These are all things that I do and advocate so I should be well on my way to becoming a millionaire.

One very important skill that a person on the road to wealth needs to master is how to allocate time, money, and energy, efficiently. To do this, one needs to be disciplined, accept that there will be sacrifices along the way, and put in a lot of hard work. Overall, the millionaire next door values financial independence over displaying high social status.

Taxes

I am really conflicted about what is being advocated here about taxes because there is a moral/ethical element to this. Most millionaires pay very little taxes. There is a quote from the book that sums the ideas around taxation:

To build wealth, minimize your realized (taxable) income and maximize your unrealized income

To avoid a debate about whether it is morally right to avoid taxes, we focus on the principle. Paying more tax means less money to build wealth. If you are a PAYEE, it is difficult to minimize tax. However, if you own a business or work as a self employed professional under a limited company, there are more opportunities to minimize taxation.

Economic Outpatient Care

This was one of the most important lessons I took from the book. The parents of the millionaires studied in the book did not receive economic outpatient care. Studies show that children who receive a lot of subsidies and cash gifts from their parents are less productive and become under accumulators of wealth. There were so many examples given of instances where parents who have gone through the principles of building wealth end up spoiling their children.

I found the chapters in the book that dealt with how to raise financially independent children really useful. The rules for affluent parents and productive children mentioned in the book are ones I will refer to time and time again in my parenting journey. This includes teaching your children discipline and frugality regardless of how wealthy you are and emphasizing their achievements, not their symbol of success. I cannot do justice to the lessons in the book on how to equip children financially. This is one of my main reasons for recommending the book to anyone.

Choosing the right occupation

Another important yet controversial lesson is the importance of choosing the right occupation. The importance of following the money was emphasized. Follow the money by taking advantage of opportunities in the marketplace and strategically choosing lucrative niches. Occupations that service big spenders are likely to be more lucrative. Also certain professions like estate lawyers, medical professionals service the wealthy.

Millionaires are frugal and price-sensitive to consumer goods but not to services like investment services and estate planning. The book makes a good point that to increase your income you need to service clients who have money or are willing to pay for your services. I referred to this point about choosing the right occupation as controversial because what might be the right profession for building wealth might not necessarily be one’s passion. However, it is important as a principle to follow the money regardless of area/niche. If there is a problem being solved there is a higher possibility for monetisation.

What do you think about this review of The Millionaire Next Door? Lots of interesting points and things to think about. Despite my issues with the tone around gender roles, I found the book to be full of gems and will recommend it for anyone looking to discover and learn habits for building wealth.

Have a valuable week!