Book Review: The Millionaire Next Door

by Mark on April 8, 2010 · 2 comments

When I first read The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas Stanley and William Danko many years ago, it forever changed my beliefs about what it takes to be wealthy. I used to think that the only way that I could become wealthy was to work my butt off by either starting my own company or by working my way up the corporate ladder of someone else’s company. The Millionaire Next Door taught me that this might give us a high income, but it won’t necessarily make us wealthy.

Too often people make the mistake of equating having a high income with being wealthy, and I think that I was unconsciously making this same connection. It finally began to dawn on me that it isn’t how much you make, but rather how much you keep. In retrospect, this seems like a flash of the blindingly obvious. I think that it took me a while to really understand this point because society has a tendency to program us with the flawed “high income equals wealth” paradigm, and I bought into it without really thinking about it. As Stanley and Danko explained:

“Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”

Who is the millionaire next door?

Stanley and Danko began to study how people become wealthy, and they made an unusual discovery. Many people that appear to be wealthy are not wealthy at all, and many people who don’t appear to be wealthy are in fact very wealthy. People with big houses, nice cars, and tons of possessions often have little net worth (assets minus debt), or worse, they have a negative net worth. If their incomes were interrupted for whatever reason, they wouldn’t be able to survive very long on what they had saved. On the other hand, people with modest houses, cars, and possessions often have a high net worth. They could survive without an income quite comfortably for years. These are the “millionaires next door.” Your neighbor with the average size house and a Toyota Camry in his driveway could very well be a millionaire, and you wouldn’t know it. They made one other discovery that really piqued my interest:

“Eighty percent of America’s millionaires are first-generation rich.”

This tells me that the old expression that “it takes money to make money” is just plain wrong. America is truly the land of opportunity if you are willing to do what it takes to become wealthy. Unfortunately, most people either don’t believe this is true or they are just unwilling to do what it takes.

The Seven Factors of Wealth

Stanley and Danko identified seven common denominators among those who successfully build wealth. They are:

1) They live well below their means.

2) They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

3) They believe that financial independence is more important than displaying high social status.

4) Their parents did not provide economic outpatient care.

5) Their adult children are economically self-sufficient.

6) They are proficient in targeting market opportunities.

7) They chose the right occupation.

The book goes into detail on these 7 factors, so I won’t do it here.

How Wealthy Should You Be?

Your level of wealth is obviously going to depend on several factors such as your age and your income. Other things equal, you would generally expect a 50-year old person to be wealthier than a 25-year old, and you would expect a 50-year old earning $100,000 to be wealthier than a 50-year old making $25,000 per year. Stanley and Danko try to answer the question: “Whatever your age, whatever your income, how much should you be worth right now?” I don’t like this question, because it assumes that there is one right answer to how much wealth we each should have. I think the amount of wealth that we have should be dependent on our values, and these are going to vary widely from person to person.

In any case, Stanley and Danko came up with a formula to compute a person’s expected net worth:

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

I think this is an incredibly stupid formula, and it has been widely criticized by readers of the book. As an example of the formula’s shortcomings, let’s say you are 25 years old and are fortunate enough to earn $100,000 per year. Your expected net worth according to the formula would be $250,000 (25 X $100,000 / 10). Assuming you graduated when you were 21 and assuming that you didn’t start out making $100,000 per year, you would probably need to save more than 75% of your pre-tax income when you were 22, 23, and 24 to be worth $250,000 by the time you are 25. This would be pretty challenging considering that you would pretty much have to live on nothing after you paid your taxes.

The Difference between PAW’s and UAW’s

You can forget about the formula, but it is worthwhile to pay attention to the distinctions that they make between the prodigious accumulator of wealth (PAW) and the under accumulator of wealth (UAW). PAW’s build significantly more wealth relative to others in their income/age category. Stanley and Danko do an excellent job of describing the characteristics that distinguish PAW’s from UAW’s. The most critical point is that PAW’s live significantly below their means. UAW’s don’t accumulate much wealth because they overspend. This is the dominant theme throughout the book, and rightly so. Living below your means is simply much more important in accumulating wealth than having a high income.


For me, The Millionaire Next Door was one of the most important books on becoming wealthy that I have ever read. It doesn’t provide specific approaches on how to invest or build a business or any number of things that you will find in other books about getting rich, but it provides an essential philosophy to work from. It had a significant impact on me in terms of convincing me of the relative importance of “playing good defense” (i.e. keeping my spending low) versus the importance of “playing good offense” (having a good income). While good offense will obviously help you win the game, always make sure that a strong defense remains a priority. As Stanley and Danko wrote:

“Millionaires play both quality offense and quality defense. And quite often their great defense helps them outscore/outaccumulate those who outearn/have superior offenses. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.”

I found parts of the book somewhat dull, especially in the second half of the book, but I highly recommend reading this book to anyone who is serious about becoming wealthy.


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