The Millionaire Next Door, by Thomas J. Stanley and William D. Danko, started as a study of America’s most wealthy as a tool to inform marketing decisions. What came out of the study was unexpected but enlightening. Although this book is not meant as a ‘how to’, there are some important lessons we can learn from this material.
1) The True Face of Wealth
A central theme of the book is the realization that many millionaires are not the conspicuous spenders we normally imagine. Many of them are frugal blue-collar people. They are often small business owners, like plumbers for example. Stanley and Danko introduce us to the concept of the UAW (Under Accumulator of Wealth), the AAW (Average Accumulator of Wealth) and the PAW (Prodigious Accumulator of Wealthy). The important distinction is one’s ability to live below one’s means. This is the habit that is the foundation for financial success. This is consistent with “The Wealthy Barber” and other personal finance books I’ve talked about. Your net worth is measured relative to your income, but even on a modest income, over time, if you apply the principles, you will accumulate wealth. You will become a PAW.
“Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self -discipline.”
The millionaire next door isn’t necessarily driving the flashiest car or living in a mansion. Real wealth is built through consistent effort, discipline, and a commitment to saving and investing wisely. If you read my blog you’ll recognize that this is a recurring theme. The people who have the nice car, watch, house, is often the one who spends money and isn’t the saver and investor.
2) The Power of Frugality:
Frugal does not equal cheap. Frugality, often misunderstood as deprivation, is a common theme in “The Millionaire Next Door” (It’s also the central theme in “Your Money or Your Life”. The authors describe how the millionaires they interviewed prioritize value over status symbols, choosing used cars, affordable homes, and at all costs avoiding unnecessary debt. Frugal should be seen as a positive character trait. A frugal person will not deprive themselves, but will be deliberate with their money, looking to fill an actual need with a quality product. Finding deals rather than succumbing to an impulse buy. Frugal encapsulates the necessary mindset for a saver and investor and is the key thing for a middle-class person becoming wealthy.
“If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.”
“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.”
The road to F.I., (financial independence), involves making intentional choices about spending. Embrace frugality, you don’t have to sacrifice happiness. It’s a strategic approach to building lasting wealth.
FRUGAL IS NOT CHEAP
3) The Importance of Education:
As the authors conducted their interviews on the habits of millionaires, Stanley and Danko found a correlation between education and financial success. They stress the importance of continuous learning and the pursuit of knowledge in many different areas. This does not mean you need to attend the most prestigious schools, they in fact note that many of these wealthy accumulators went to state schools. I make the case for continuous learning in my blog post HERE.
“Many financially successful individuals are far more concerned about the quality of their children’s education than about the quantity of their estate.”
“Many people who are not wealthy are highly educated. Many people who are financially successful are not highly educated. Wise, disciplined management of one’s resources and continuous, lifelong learning are the keys to financial success.”
Investing in education for yourself and your kids is key to building and keeping wealth. Knowledge is a powerful tool that opens doors, creates opportunities, and focuses your mind on those opportunities.
“The Millionaire Next Door” isn’t just a book, you can use it as a blueprint for achieving financial success. I suggest that you make it part of your continuing education. Please realize that when I speak of education and lifelong learning, I do mean on financial topics only, but you should have an open and curious mind and be aware of and informed on a great variety of topics.