Lessons from the Millionaire Next Door
In 1996, two researchers published The Millionaire Next Door: The Surprising Secrets of America's Wealthy.
Unlike most personal finance books that pitch a particular model for "becoming rich", this book was the summary of a scientific profiling of people who had successfully amassed wealth. Rather than push an ideology, it simply reveals: These are, statistically, the factors wealth-accumulators have in common.
The book is a worthwhile read and contains a large number of surprising facts about the wealthy. Remember, when the research was conducted nearly 20 years ago, $1 million in net worth meant substantially more than it does now:
- A frugal lifestyle is the #1 reason people become millionaires
- Despite the popular caricature, most millionaires don't buy new-model cars, McMansions, expensive clothes, or luxury goods
- Most millionaires are self-made (80%), vs. having inherited their wealth
- Most are self-employed businesspeople or professionals
- Less than 20% of the workers in America are self-employed, compared to 2/3 of millionaires
- Most of these self-owned businesses are not "sexy" (welding contractors, auctioneers, rice farmers, mobile-home park owners, pest controllers, etc.)
- Most don't have outlier income - but they save more of it than most
- The average annual realized taxable income (different from gross income) for most millionaires is near the 50% median
- They manage to invest 20%+ of this income each year
- 97% are homeowners – but they remain in the same home for decades vs. trading up or 'flipping'
- Most are married and consider their spouse to be even more frugal than they are
- A minority attended private schools growing up
- They value work/life balance and are not "slaves" to their businesses
- 2/3 work less than 55 hours per week
Much of the specific mindsets and behaviors of these Prodigious Accumulators of Wealth (PAWs) will likely resonate well with Peak Prosperity readers. Pragmatism, practicality, and discipline are big hallmarks of their success.
One observation that was very interesting to me was how self-made fortunes are often quickly lost after being passed on, usually within one generation. It's for an interesting reason.
Most wealthy parents want their children to be well-off, too. But they don't want their kids to have to suffer through the years of uncertainty, anxiety-ridden toil, and risk that they had to endure. So they guide their children into more elite professions (doctors, lawyers, accountants, etc).
But perversly, this insulates their children from the very stimuli that made these self-made millionaires successful. Overcoming adversity, developing iron discipline, learning to get by without enough, facing fears, turning failures into successes because there is no other option, etc.
Without this Masters in Grit from the University of Hard Knocks, their children are more professionally cautious and less likely to make sacrifices in their household spending when they can't afford it. By protectively insulating their children from the more Darwinian forces of capitalism, they often unwittingly make them less likely to become PAWs. Their children just don't develop the musculature for it that their parents did.
One of the things I appreciate about this book is that it summarizes its insights into practical, bulleted summaries that help make them actionable to the interested reader. The advice is relevant to anyone looking to build towards financial security; being a millionaire isn't required to be the end objective.
For certain, the environment we live in has changed from when the book was first issued (several asset bubbles have since transpired; crony capitalism has worsened; QE-liquidity is creating a growing wealth gap between classes) -- but I think, in many ways, that makes the pull-yourself-up-by-your-own-bootstaps guidance feel more timeless.
I certainly recommend it to the Frugal Living community here, and would love to hear the reactions of any folks here that read it.
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