Jared Smith's Reviews > The Millionaire Next Door

The Millionaire Next Door by Thomas J. Stanley
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M_50x66
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Feb 03, 08

Read in December, 2003

Thomas Stanley and William Danko teach the average American about the elusive habits of the wealthy upper-class in The Millionaire Next Door. Although they didn’t tell me anything I felt like I didn’t already know, I appreciated that they conducted research and presented hard data that backup up the intuition about the wealthy.

You should guess that small business owners compose the largest group of millionaires in America. Also, it has always been obvious to me that the people who save and invest their money are far wealthier than those who consume. Stanley and Danko over-simplify that assumption. The perception that big spenders are also rich isn’t wrong, as Stanley and Danko somewhat mildly point out. When anyone understands the difference between income and wealth—not too difficult of a concept—then a clear springboard is that people who spend their money on consumable goods are not consistently wealthy. That is, of course, unless they make ridiculous amounts of income and can still save a significant amount while spending more in one year than I will make in a lifetime. This point shouldn’t be undervalued. There are significant amounts of millionaires that do spend their money – they have high income, high wealth, and high consumption. Stanley and Danko do explain the majority of millionaire’s habits, as an average. But remember that there still are 46% of millionaires who drive a car newer than two years old.

I have been interested in personal finance for years, which is why I appreciated reading a book full of reputable data extracted from university research projects. While working as an intern financial advisor for UBS (the large Swiss bank) I was able to look into a few of the habits of the wealthy (one million or more of net worth excluding real estate). And I found that they were heavy savers and not necessarily big income earners.

The book is insightful, and it has reiterated and confirmed some important concepts that I have thought about in the past. One concept that was new to me was how damaging “economic outpatient care” is to families and the financial independence of rich kids. It seems a good idea for parents to help their kids out, but it usually is damaging. Rich kids need to learn to live within their means before getting economic outpatient care. In addition, I didn’t know what careers wealthy parents push their kids into. It makes sense after Stanley and Danko explain it, but it was still surprising that they tell them to be Accountants, Dentists, Lawyers, Doctors, etc. It seems like wealthy parents would want to encourage their kids to be entrepreneurs instead, which is where the “real money” is. But because the risk of earning real money is high, they want their kids to have consistent streams of income. Especially considering the ability the parents have to pay for expensive graduate education.

I grew up in a wealthy area of Orange County, California. Many of my friends’ parents were big spenders. But I learned important lessons when I found that some of the seemingly more wealthy families turned out to be in financial distress. Big spending doesn’t mean big bank accounts—they are inversely proportional.
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