The Timeless Lessons from 'The Millionaire Next Door'
It’s been over 20 years since authors Tom Stanley and William Danko published the concept of The Millionaire Next Door in their groundbreaking book on the characteristics of America’s millionaires. While some of the formulas and figures from their book have grown outdated due to inflation over the past two decades, their key findings and overall theme remain incredibly relevant in 2017.
A quick recap for those unfamiliar with the book: Stanley and Danko spent years investigating how people get wealthy and the common characteristics of America’s millionaires. During their research, they found something surprising – true wealth is not what it seems. According to their findings, most millionaires in this country are quiet, unassuming households living relatively modest lifestyles. On the other hand, the flashy individuals from the upscale neighborhoods driving fancy cars do not actually possess the type of wealth they seem to exhibit. Hence the title of the book, revealing that the low-key couple living down the block who drives the 10-year old Honda Accord are representative of America’s secret ‘millionaires next door.’
Throughout the book, the authors identify 7 common characteristics among the people who become wealthy:
- They live below their means
- They allocate their time, energy and money efficiently in ways conducive to building wealth (i.e. good, intentional planning from an early age)
- They believe that financial independence is more important than high social status
- They did not receive much financial assistance from their parents
- Their adult children are economically self-sufficient
- They are proficient in targeting market opportunities (i.e. they find occupations that serve or associate with the wealthy)
- They choose the right occupation, noting that self-employed people are 4 times more likely to be millionaires than those that work for others
From a financial planning perspective, the first three characteristics listed above are the most important. And they can be summarized in three simple bullet points:
- Spend less than you earn
- Be intentional with your planning and follow a process
- Establish priorities and goals that are consistent with your values and allocate resources towards them
We are often led to believe that the keys to financial success are complex investing schemes, rubbing elbows with high society and a need to constantly project a polished image of success. Most of the book is spent debunking these common perceptions. A simpler, more disciplined approach to your lifestyle is far more likely to build wealth over time.
The lessons of this book are as important today as they were 20 years ago.
We live in an age where we are constantly plugged into other people’s lives. Multiple times each day we pull out our phones and see photos of other people’s new houses, new cars and vacation destinations. Social media has made society obsess with making life look perfect. Other media platforms draw this same attention to status, excess and image. As The Millionaire Next Door highlights, our perceptions of life are not always what they seem.
High income does not translate to wealth without a disciplined savings plan. Clothes, cars and vacations are not indicative of wealth if they are purchased at the expense of retirement savings. Buying nice stuff on credit cards doesn’t add value to your personal balance sheet. Most financial advisors can tell you about clients they’ve come across who make a lot of money, live in a very expensive house and are living close to the edge of financial distress because of some of their lifestyle and spending decisions. Image is nothing, after all, especially when it comes to wealth.
Comedian Kevin Hart has a great routine about staying in your financial lane. His point is essentially don’t try to be someone you’re not when it comes to spending money. It’s especially true because we don’t always know what’s underneath the extravagant lifestyles of those we seemingly identify as wealthy and successful.
A lot has changed in the world since The Millionaire Next Door was written over 20 years ago. The Internet, technology, how we invest and our access to news and information. But the lessons of the book are timeless. The definitions of wealth and happiness are unique to each individual and true wealth is not always what it seems to be.