Book Synopsis: The Millionaire Next Door

This is the title of a famous book that was a result of multi-year studies and research done by Dr Stanley and Dr Danko to discover the profile, lifestyle and habits of America’s wealthy households and how they became wealthy. The title is intriguing as they say, because initially they started their research by surveying people in upscale neighborhoods across the United States, and in time, discovered something odd. That many people who live in expensive homes and drive luxury cars do not actually have a lot of wealth. And then they discovered something even odder: many people who have a lot of wealth do not even live in upscale neighborhoods.  A lot of people with high incomes who live there actually have a lot less wealth than they should. And a lot of people who are really wealthy – do not look like they are, hence the name – the Millionaire Next Door.

the-millionaire-next-door-book-reviewThe definition of wealthy for the purpose of this research is important to understand. Obviously one criteria is the actual net worth number. The nominal cutoff was households with a minimum wealth of 1 million USD. But their intention was to research not the mega rich, so they dropped the ones with households of wealth greater than 10 million USD. About 95% of millionaire households in the United States had a net worth between 1 and 10 Million USD (in the mid 1990’s when this was published), and that was the focus of this survey. This is typically the level of wealth that, in their view, could be attained by many working class regular Americans at that time. I am sure something like this can be extrapolated to other countries too like India, with the nominal figures a bit different, but broadly similar distribution statistics between the “mega-rich” and the “ordinarily wealthy”, and perhaps, a similar set of findings.

Another way “being wealthy” was defined is one’s expected level of net worth, in comparison to one’s age and income. Multiple your age times your pretax household income from all sources except inheritance. Divide that by ten. This, less any inherited wealth, is what your net worth should be. To be comfortably well positioned as a prodigious accumulator of wealth, you should have twice the level of wealth expected.

So taking both the nominal (absolute) and relative definitions of wealth, this survey was done almost over a period of a decade from the late 80’s to the early 90’s.

So what were the key findings of America’s wealthy households? Is there a typical portrait of a millionaire household? Is there a set of factors that contribute to their being wealthy? The answer is Yes – there is a prototypical wealthy household, and a set of lifestyle patterns they follow that is conducive to building wealth. Here are a few of them:

1. Typically male lead earner of the household (>75% of income), became wealthy in his early fifties (i.e. when he could retire without income), Lived well below means throughout working life, Very frugal towards consumption

2. 65% either self employed professionals or own a small business, <25% from the high income employed group

3. 50% wives do not work (number one occupation of wives who work is a teacher, working wives contributed to 25% of household income), wives are meticulous planners and are prepared to live on a budget

4. Household income is 7-8% of current wealth (so lives on only 7-8% of net worth)

5. 97% are homeowners, and have lived in one or maximum two houses for the past twenty years or more

6. 87% are first generation affluent, their parents did not provide them with anything materially substantial in their adult life till they died (inheritance)

7. Change cars on an average once in 6-7 yrs (79% buy them without lease), Highest spend of income is on children and grand children education

8. Fastidious investors, invest 20% of income for over 10 yrs, 79% have 1 or 2 brokerage accounts, make own investment decisions, 25% of wealth in publicly traded securities and mutual funds, rarely sell (42% did not have any sell transaction in past 18 months, average holding period of 7 years), 21% of household wealth in their business

9. Save 35% of earned income, live in a neighborhood where they have typically 5 times the wealth of their neighbors (non-millionaire neighbors outnumber them three to one)

10. Their adult children are economically self sufficient, and they do not intend to provide any economic support to their adult children till they plan inheritance

11. Are proficient in identifying market opportunities, niches and chose the right profession, that they have been pursuing for long periods of time

In summary, 80% of the millionaire households are ordinary people who have accumulated their wealth over one generation. There is a set of patterns related to their lifestyle and habits that are conducive to wealth building. As they say, while there are a hundred paths to Nirvana, but if one adopts some of these, it is more likely than not, that one will find oneself being a Millionaire Next door – not in a hurry, but slowly and surely!

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