The Millionaire Next Door - Thomas J. Stanley, William D. Danko

The Millionaire Next Door is a book that examines in detail the traits of two groups: Millionaires (and billionaires), and the people the authors term "Big Hat, No Cattle", people who live high and look flash. The book goes on to show how most millionaires are modest and unassuming, whereas the flash folk usually have no wealth to speak of, their habits actually preventing them accruing wealth.


How To Determine if ...
...Net Worth being defined as the current value of your assets less liabilities.

How wealthy should you be? It's obviously dependent on how much you earn and how old you are (you should accrue wealth with age), and they devised the following rule of thumb to calculate your expected net worth:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This less ... more

The Millionaire Next Door is a book that examines in detail the traits of two groups: Millionaires (and billionaires), and the people the authors term "Big Hat, No Cattle", people who live high and look flash. The book goes on to show how most millionaires are modest and unassuming, whereas the flash folk usually have no wealth to speak of, their habits actually preventing them accruing wealth.

How To Determine if You are Wealthy

The authors define wealth as having a Net Worth of at least $1 million (about £560,000); Net Worth being defined as the current value of your assets less liabilities.

How wealthy should you be? It's obviously dependent on how much you earn and how old you are (you should accrue wealth with age), and they devised the following rule of thumb to calculate your expected net worth:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This less inherited wealth, is what your net worth should be.

They term people who have twice the expected wealth as PAWs (Prodigious Accumulators of Wealth), those who meet the standard as AAWs (Average Accumulators of Wealth) and those with half the expected wealth (or less) as UAWs (Under Achievers of Wealth).

The book then goes on to examine the factors that turn people into PAWs or UAWS.

For instance PAWs tend to answer "Yes" to the folloiwng three questions:
1. Were your parents frugal?
2. Are you frugal?
3. Is your spouse more frugal than you are?

The third question is apparently very important. Men with expensive trophy wives tend to be UAWs!

PAWs tend to be impervious to the trappings of status; they'd rather have the money in the bank than spend it on Gucci. Most millionaires also tend to budget, knowing exactly where their money has been spent. They never say, "I don't know where my money went this month". They usually plan for their financial future and have clear goals.

The authors go on to give detailed examples and anecdotes about PAWs and UAWs. Some of the detail is a bit obsessive - they are clearly fascinated by cars and how to buy them, devoting an entire chapter to this! (conclusion: PAWS tend to have inexpensive cars they keep for years).

They also touch on a very interesting subject: the role parents play in determing whether their children end up as PAWs or UAWs. They define something called "Economic Outpatient Care", which is substantial economic gifts and financial "acts of kindness" some parents give their adult children and grandchildren. Contrary to popular expectation, people who receive considerable amounts of Economic Outpatient Care end up as UAWs, as they never learn the habits required to be financially independent, much less how to acquire wealth. Worse, they flounder after the deaths of their parents, typically frittering away their inheritance and ending up poor.

Lots of parents justify subsidising an adult child saying Jane can't cope, whereas John can and I'm just evening things up. But what they actually end up doing is strengthening the strong child and weakening the weak one. Having to pass on wealth during their lifetime to avoid inheritance tax complicates the issue further. The final chapters in the book go into detail on how to do this without damaging your children, how to avoid quarrels between siblings over the help they get from parents during their lifetime, and how to avoid quarrels over the will.

I would recommend this book to people interested in wealth and how it is accrued. The book is a bit heavy going in places, due to the obsessive level of detail in some of the examples, but it's worth reading as you gain valuable insights and advice.

The authors, Thomas J Stanley, PH.D and William D Danko, PH.D are professors ar the University of Albany, State University of New York and lecture in business and marketing.

I bought this book from Waterstones for £10.99 (paperback copy) - it's also available at amazon.co.uk from £6.99 (new) or from £5.53 (used). 

...less