“The Millionaire Next Door” by Thomas J. Stanley and William D. Danko was first released in 1996, and just re-released in 2010. The information is just as timely now as it was originally published. This edition is a reprint of the 1996 edition with a new forward by Thomas. I wish they would update the statistics for today, and do an update on some of the profiles mentioned in the book. Inquiring minds want to know, where are the millionaires profiled now in today’s economic environment? Though Thomas Stanley did also release in 2010 “Stop Acting Rich and Start Living Like a Real Millionaire“. The latest book builds upon the first book and goes into other topics not discussed in the first book. If you haven’t read either book I still suggest you do so. I recommend both these books as some of the best finance books to read.
The book is based upon years of research and statistical analysis of the data from millionaires. The authors then make some conclusions based upon the data. While it’s possible some of the data could be interpreted differently (correlation does not imply causation), most of the conclusions logically make sense. Although the book isn’t perfect, it is a good book to help understand the mind of a millionaire.
Keep in mind it really isn’t a how-to book, and you must derive how you personally can become the “Millionaire Next Door”. For this review instead of giving away all details of the book, I will summarize things I found interesting after first reading it 10 years ago, compared to today when I just re-read the book. In my 10 years I have modeled many of the items mentioned in the book. In my case, especially the fact that many millionaires own their own business.
What’s Real Wealth?
The book discusses what it means to be wealthy, and as I’ve aged I’ve found it interesting that most of the general public still does not understand what this means. It’s interesting to see many people in society, our tax code, senators and friends think high income equals wealth. Nothing can be further from the truth. A high net worth is what makes you wealthy (assuming you generate income from your investments).
How many public tails have we seen – from movie stars to sport heroes lose it all once their source of income has dried up? I came from parents who where what’s the book calls UAW (Under Accumulators of Wealth), but for the time reasonability high incomes. I can see the mistakes my parents made, and hopefully I’ve learned from their hyperconsumption ways.
Minimizing Taxes
Despite the recent political rhetoric, the rich are experts at minimizing taxes no matter what is the current tax rate. Re-reading this section of the book speaks volumes to me today, more than it did previously. Studies have shown more than 1/3 of your income during your lifetime goes towards taxes. It’s akin to having another mouth to feed in the family. Unfortunately this family member has a never ending appetite for more money.
It’s important to become an expert in taxes. I now completely understand this, and taken it to task. With applications like Quicken, it’s just a few mouse clicks to figure out how much in taxes you are paying annually. It’s astounding how much my family payes coming when living in a high taxed state. I’ve setup my strategy for tax efficient investing, and with my business legally minimize the amount of taxes we pay. As I just mentioned, our progressive tax code is designed to tax more high income earners, than wealthy individuals who make most of their income from passive investments.
Economic Outpatient Care
It’s especially interesting to note the chapter economic outpatient care. It is more relevant to me now than ever. As I have written on my blog, I had some family matters with my brother. It’s interesting to re-read this book, and see discussed the financial aid my mother has given to my brother and his wife. My wife and I have received very little financial support from my mother over the years. I’m not complaining nor am I jealous. Personally I would rather get more emotional and general help, but is a topic for another time.
My wife and I are financially independent, but interesting to note the differences in my family’s finances compared to my brother’s. My brother seems to be following in the footsteps of my parents, while I’ve tried to go down a more frugal path. The book outlines this in great detail and matches perfectly with what I observe in my family. The child with less economic support is more self supportive, and unfortunately the opposite of what’s the parent intent.
Summary
The book is an interesting read into the daily life of a millionaire. Although the book isn’t perfect, it is a good book to help dive into the mind of a millionaire. The book isn’t a specific how-to. It’s not do these steps you’ll become a millionaire, but rather from statistics shows a summary of the typical millionaire. How you get there specifically is unique to you, just like your fingerprint.
Rating: 3.5 out of 5 stars
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Of course I’ll be the millionaire next door! I’m already starting an online business, and working on getting my finances together. I have a 5 year plan to have a net worth of $250K. Grinding and hustling are my hobbies.
Subscribed, subscribed, and tweeted! Enter me in that awesome drawing!
I will be a millionaire next door, and I’m already taking severe action! We will have all of our debts paid off by March, and we really only need half of our income to survive on. Most of the money will go towards our 401(k)s and our business ventures.
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Sounds like an interesting read. I’m good at saving but bad at investing so I wonder if this book would be useful.
I really like this bok as well as all of the subsequent titles. It is a “must read” for those who think the can tell by looking who is wealthy. Trust me, it’s not that easy.
Yes I have family members like this. I think they would be surprised.
I read this book for the first time last summer and it was a very eye-opening experience for me. The statistics that Stanley and Danko uncovered made me realize that it really is our own behaviors that determine if we will end up PAWs or UAWs.
I also enjoyed reading the chapter on Economic Outpatient Care. I have a brother whom I’m pretty sure will never be able to leave home (in this case it’s an extreme Economic Inpatient Care!) and that chapter really described how parents unknowingly make their adult children dependent on them for life.
I think this is a must read too and give it 4.5* out of 5*. It would be really nice if they do an update edition because all the topics still apply today.
This is one of my all time favorite books. It is worth every penny and then some. Live by its words and you will certainly be a PAW (prodigious accumulator of wealth).
Love this book. I (along with my co-authors) re-used the concept of creating an environment of artificial scarcity in our book, Power Spending. This book is great – I refer to its concepts often.
tweeted and already subscribe to the 2 feeds!
Payroll Taxes: You say a lot of families pay 1/3 of their gross income to income taxes? For me, my average total payroll taxes net of tax refunds for federal, state, local and FICA all combined prior to 2011 was hoovering around 2.5%. You bet, that’s even lower than the 7.65% for FICA alone. Other than for the 2% FICA holiday for this year, assuming all else is the same, I will be hoovering around 0.5% this year for my total average payroll taxes.
As for networth, I have all pre-tax items converted to after-tax basis prior to calculating Networth Value. The year of 2010 was the first year I saw the early stages of the snowball effect on our stuff. I still have another 30 years or so left to work, but even for my age, I am already well ahead of others within my own age group. Last year alone, Long-Term Networth went up by a value of $26,600 with $4,900 net of income tax effect of that made up via contributions into retirement funds (Actual contributions into retirement funds was $7,000, but $5,000 of that $7,000 was put into tax deferred retirement account, so that $5,000 has to be reduced by it’s equivalent assumed income tax amount (I assume pretty high to be on the conservative side as I would rather be caught with more than enough to pay for the income taxes than with too little for income taxes). Another $9,500 of it is made up of net earnings net of income tax effect. The rest of the difference goes to the Short-Term Networth Value increase such as the biggest element of that is via the debt reduction (more than $12,000).
With those kinds of results and with gross earned income being about $59,000 for 2010 with an average total payroll tax rate of 2.5%, certainly can’t complain, and you know I must know my tax stuff to be able to do that, as I am doing all of this tax stuff legally.
Even when the IRS or site coordinators via the VITA program tell others they don’t need to file with the IRS if they meet those income requirements to not file with the IRS, I still will highly suggest them to file the return with the IRS anyhow, just so as to start that 3 year and 7 year time clock, which then limits the IRS from going back to them otherwise that could be 30 years further down the road for those same years those individuals didn’t files with the IRS as a result of meeting those income restrictions. In 1997, I was getting audited for returns that went from 1987 through 1995 cause of me meeting those income restrictions. I knew about that statute from when I had Accounting in high school at Genesee Area Skill Center in Flint, MI, but I figured as long as I met the other requirements, it wouldn’t hit me. Boy was I wrong. On the other hand, it was a good thing I saved those W-2s (Yes, that even went back to when I was in between my 8th and 9th grade years). By having done that, made copies of it, I sent the copies to the IRS along with an explanation, and I never heard a word from them since on the issue. Based on that experience, I highly suggest others to file, even if they aren’t required to by law, it would be in their own best interest to do so anyhow, just so as the IRS can’t come back making a such claim otherwise some decades down the road, all cause the clock wasn’t started with no file returned with the IRS for those years the individuals meet such income requirements to not have to file otherwise.
For this year, I would like to see the long-term networth value to finally break the $100,000 mark. On the other hand, this may be a stretch given the wife has not been working this year like she did last year. Last year, she earned $10k of the total income, and about $5k of it went to help the family. Per our agreement, she kept $2k of it herself (20% for her given this was no easy thing for her to do with having to work night shift and having 2 kids home still), and the other $3k was to either help with the family’s budget issue (Things were looking might rough early on for us as my hours were majorly cut back to 32 hours from 40 hours for the first 5 months of the year), or pay for her additional employment expenses with her working. This year, I have so far been back on the 40 hour work weeks, so that’s bringing the sustainability back up to par, though nothing like what I was doing in the 2000’s up to 2007, working about 55 hours a week on the average, but then during that time, I about had to work those extra hours just to be able to make ends meet while also staying committed to the retirement saving goal. Part of that was due to the significant debt, but part of that was also due to a growing family.
Now days, even though the family is still growing, cash flow been gradually getting better over time, but not without having taken on some risks going the rate route instead of the principle route to work on snowballing the debt issue.Currently, the total debt payment is about $955 per month, which is about to drop down to about $910 if what I plan on doing this Winter/Spring works out to be the case, get rid of the MIP (Government version of the PMI) on the mortgage.
You see, I am always looking for way to free up cash flow, but I also don’t want to hurt our “Daily Residual Income/(Expense) Improvement” goal. Last year, I caused the mortgage to move it’s maturity date 35 months earlier. This year, I’m looking at causing the mortgage to move it’s maturity date another 26 months sooner. Once the mortgage payment not counting escrow, but counting all costs tied directly to the mortgage such as the MIP, though the MIP will be gone after this drop, that will drop total debt payments down to just 26% of Actual Gross Earned Income based on 40 hours weeks for 52 weeks (Including Holiday and Vacation pay). At one point of time, monthly debt payments were well over 50% under this pay assumption. Little by little, I kept pecking away at the debt freeing up cash flow as the rate method would allow. Little by little as pay rate kept going up, that would help lower the percentage, even though in those same years, much of the pay raises didn’t even cover the increased costs of our employment benefits, which caused me to have dropped such benefits as the level of benefits were not worth as much as they were costing.
It is a great read. I read it a long time ago to learn the habits of the wealthy.
Understanding taxes and having a trustworthy account is so important, especially for people with a lot of money or complex situations. There are always stories of famous celebrities who are under investigation for hundreds of thousands in tax evasions or whose accountants ran away with their money or were leeching funds.
I read the book when it came out, and it’s been an eye opening experience from me!
For me the book gave me hope… Prior to reading the book, I didn’t think that it was possible from someone in my income range or background to ever become rich. It just seemed impossible.
After reading it, I learned that if I followed the principles of the book, I had a chance!
I would recommend this book to anybody interested in learing about the normal rich and the misconception about their lifestyles instead of just the way the uber-rich live!
Oh the books has some great stats too!
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I’m afraid their wealth metric is off. They divide networth by annual income in order to compute wealth in time units. The time units part is right, but they should be dividing networth by annual expenses, not income. Otherwise we end up with weird comparisons like “my boss just gave me a raise, does that mean I’m poorer?”. Or even worse– “frugality has no effect on wealth”.
Just tweeted
I think I’ll become a millionaire next door.. eventually!
I want to read this book- I have heard really good reviews on it. :)
Already subscribe to both feeds and tweeted! :)
I would love to win that book, I love to read,
I’m totally going to become a millionaire next door … I’m planning via a municipal real estate coup, and publishing a bestseller. Alright, so those goals are a little far fetched, but in all seriousness I am planning on buying an investment property, freelancing, investing regularly, and hustling. I’m going to tweet about this, please consider me entered! :)
My plan is to sneak to a million and not have anyone be able to tell. This is great book. I linked to my thoughts on the book.
I’m learning that many self-made millionaires just aren’t ostentatious about it. As a parent, how can you teach your kids to value money? I don’t know if having things a little tougher helps you out. I think parents that are a little tough are much better than parents that don’t care what you do so long as you don’t bother them, and therefore let their kids do whatever they want. That’s how they end up on Teen Mom…
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The Millionaire Next Door changed my spending habits because I now understand that financial independence > social status/material possessions.