The Millionaire Next Door

Buy book online
Buy book online Buy book online Buy book online

The Millionaire Next Door By Thomas J. Stanley, By William D. DankoSome time ago, I recall reading a magazine article in which a journalist was touring the house of a self-made millionaire for an insight into the lifestyles of the rich and famous. All went as you might expect until she reached the bathroom, where she noticed a tube of toothpaste on the sink had been cut in two; puzzled, she asked the millionaire why that was so. To allow me to get the last bit of toothpaste out of the tube, replied the millionaire. The journalist laughed at this and asked “why do you do things like that if you are rich?” to which the millionaire replied “I am rich because I do things like that”.

This story neatly sums up what “The Millionaire Next Door” is about. Written by Thomas Stanley and William Danko, two professors of marketing at the State University of New York, this text has become something of a classic in personal finance literature. Unlike many books that claim to be able to make you rich, this one is not full of hollow promises. Instead, it offers a distillation of twenty years of research into the affluent in America, offering bountiful facts, figures and case studies to seek to explain how these people became wealthy while others did not. The answer is one that I have seen many reviewers describe as surprising or even shocking, but having been raised by parents that make frugality into an art form, it came as no real shock to me. Almost straight away, Stanley and Danko get to the heart of the matter: “[early in our research] we discovered something odd. Many people who live in expensive homes and drive luxury cars do not actually have much wealth. Then, we discovered something odder: many people who have a great deal of wealth do not even live in upscale neighbourhoods”.

The basic premise of this book is therefore that the popular view of millionaires as people who live a flashy, no-expense-spared existence is largely incorrect; likewise, those people who do live such lives are likely to have a low net worth rather than accumulated wealth, because their incomes are spent as soon as they are earned (and sometimes sooner). The wealthy people studied for this book also challenge another stereotype, that of millionaires largely being people who are lucky enough to inherit their money. On the contrary, 80% of American millionaires at the time this book was written (1996) were first generation affluent. Interesting as this is, what does it have to do with personal finance? Well, as this data suggests that the majority of wealthy Americans are wealthy through their own actions rather than through passively receiving money, it suggests there are things for us mere mortals to learn from them about improving our own wealth accumulation.

A good starting point is working out how effective our wealth accumulation actually is. Stanley and Danko suggest a simple rule of thumb for calculating if you are currently wealthy, based on your age and earned income; they stress that only earned income should be taken into account here, because it tests how well you can actively collect and store wealth, rather than how lucky you were in passively receiving it. If you want to try this yourself, multiply your age by your pre-tax income from all sources except inheritance – divide the result by 10, and the result (less any inherited wealth) is how much your net worth should be. For example, a 20 year old earning £15,000 a year with no other sources of income and no inheritance has the following equation: 20 x 15000 / 10 = £30,000. Therefore, if this person has accumulated at least £30,000, they are a “prodigious accumulator of wealth” or PAW – in other words, they are wealthy for their age and income cohort. The opposite of this is a UAW or “under-accumulator of wealth”; someone who is older and earns more than my example could easily have £30,000 in the bank but not be considered wealthy because their anticipated net worth based on this equation would be higher.

“…the writing is accessible, and you shouldn’t let the academic nature of its origins and authors put you off giving it a go.”

This is an interesting exercise to undertake, but straight away you will notice that there is an age bias built into it. Although your anticipated net worth increases with age, I would argue that it would be easier to reach this worth target if you are aged over forty, as by this time you have the advantage of having earned money for many years, investments will have had time to grow, you will have had more chance to have paid off your mortgage, and you generally won’t have student loans weighing you down any more. An age bias is inherent throughout this book, though – while the authors talk at length about financial support for adult offspring, nowhere is the issue of how to help younger children learn financial independence considered. While you could use this point to argue that the book is less relevant for the younger reader, I would instead say that if your goal is financial independence (or even the more modest target of being able to retire at some point) then the sooner you learn to manage your money well the better. I also think the PAW/UAW difference runs more on a sliding scale than the absolutes (you are either wealthy or broke) that this book suggests; I personally think I am more PAW-like, but am not yet wealthy because I am young and have been in the full-time workforce for under five years. However, one point I found particularly interesting was that the median household in the US had a net worth of $15,000 (about £8,000), excluding home equity, when this book was written (and data I have found from academic sources puts UK households in a very similar position at this time). Given the wealth equation above, it seems clear to me that there are a lot more people towards the UAW end of the scale than there are towards the PAW end, and therefore an awful lot of people could benefit from this book’s advice.

Other than this, I have one further criticism of “The Millionaire Next Door“, although it is nothing major. I think the book might be guilty of survivorship bias, in that it expects the wealthy to have accumulated assets as part of their wealth, but it makes no mention of those people who would have been wealthy but have accumulated the wrong sorts of assets (underperforming funds perhaps, or stocks of companies that have gone bust). That the book was also written on the back of a bull market in the US probably also over-inflates the net worth of a lot of the case studies quoted. I suspect if the same data was collected in the current market conditions, things might turn out quite differently!

Having recovered from the shock of how decidedly un-wealthy you are, it is time to start learning how to improve things. Unlike many sources I have read, “The Millionaire Next Door” deals with both side of the wealth equation – in order to accumulate wealth, it is acknowledged that you must both earn more (or “play good offence” as the authors put it) as well as spending less (“good defence”). Many UAWs, they note, show the characteristic of playing excellent offence, but never become wealthy because their defence is so poor.

This all seems eminently sensible to me, but can a book that was written fourteen years ago in America be applicable to the UK in the current day? This was something I did wonder when I first started reading it, and my conclusion was that while some of the specifics (such as commentary on offsetting tax liabilities) were of no direct use, that the general thesis of the book still stands, despite everything that has changed since it was written. It remains the case that if you want to build financial independence, you need to earn as much as you can, spend less than you earn, have discipline in saving your money, and be prepared to invest some of those savings when you see a good opportunity to do so.

The Millionaire Next Door” is therefore something of a flawed classic. It contains some fascinating nuggets of information and guidance that we can all benefit from, but it is often buried beneath detritus (did we really need an entire forty-page chapter devoted to the sorts of cars wealthy people chose?) and repetitive statements (just how many times do I need to be told that hyper-consumerism damages wealth?). Despite this, the writing is accessible, and you shouldn’t let the academic nature of its origins and authors put you off giving it a go. The patient reader will be rewarded with both a glimpse of what it is like to be wealthy and some good guidance on how to start on that road. For me, one of the strongest points was the correlation between time spent planning and considering your money, and the accumulation of wealth, and I certainly intend to spend some more time on my budget as a result of reading this. Most of us will never be millionaires, but there are certainly plenty of common-sense practical tips on how you can improve your financial discipline, and why it is a good idea to do so. I would certainly say that this is a book worth investing some of your time in.


The Millionaire Next Door – The Surprising Secrets of America’s Wealthy
Thomas J Stanley and William D Danko
Paperback, 232pp
RRP £9.99 (or start behaving like a PAW and get it from the library!)


Buy book online
Buy book online Buy book online Buy book online
Millionaire Next Door, The
by Thomas Stanley and William Danko

No Comments on "The Millionaire Next Door"

Hi guest, please leave a comment:

Subscribe to Comments
Written by collingwood21

Collingwood21 is a 32 year old university administrator and ex-pat northerner living down south. Married. Over-educated. Loves books, history, archaeology and writing.

Read more from