My review of The Millionaire Next Door by Thomas J Stanley and William D Danko – what this book reveals for financial independence campaigners.
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In a nutshell: what’s The Millionaire Next Door about?
In 1996, Stanley and Danko conducted a targeted study of US millionaires. Their aim was to find out how millionaires became, well, millionaires. How did they get to where they were? What secrets could be learned?
If you’re an experienced financial independence campaigner, well on your way to financial freedom, the secrets won’t surprise you. This book might as well be motivational reading and you’ll devour it in a couple of nights. However, for those of us who are still early on the journey, this book provides great reassurance that financial independence is as easy as it looks.
The big secret revealed up front
I don’t like wasting your time, so I’ll give the game away straight away. The big secret? Spend less than you earn, get into frugal habits, ignore flashy things, treat all purchases like investments.
No, really. That’s the big secret. Shocks: none.
This won’t ruin the book for you, though. In fact, Stanley and Danko give this away quite early on, and rightly so. The bits that still make the book a good read for the financial independence crowd though are just how far US millionaires were willing to go, and what advantages they had to get there.
Frugality is king
Stanley and Danko identify that there’s three possible avenues to being a millionaire. The first one is inheriting wealth; interestingly, The Millionaire Next Door picks this out as an aberration (more below). The second is having a disproportionately high income. Interestingly, though, the most sustainable and time-tested method is simply to live below your means.
Here were some great examples from the book:
- Most millionaires didn’t live in millionaire neighbourhoods. They tended to buy a reasonable home in quite an average neighbourhood early, then just live in it forever.
- Most millionaires drove a General Motors, Japanese or Ford car. Very few Ferraris or other sports cars. Most of those cars were over 4 years old and were kept for a long time.
- Most millionaires were married and had a spouse who was as frugal as they were. A great example that gets repeated in the book is about spouses cutting money-off coupons up before shopping. That’s dated now, but I guess the UK equivalent would be reward card points and shopping at Lidl or Aldi instead of Waitrose.
- Most millionaires were in their 50s. There’s time for me yet!
- Most millionaires owned their own businesses or worked for themselves. I’ll talk about this separately, it’s a really good point and it’s one I’ve taken to heart.
- Most millionaires didn’t own an exotic watch, like a Rolex, and it was common for them never to have paid more than $399 for a suit.
This list cheered me up no end and I hope it cheers you up, too. No big secrets: just be frugal, enjoy what you’ve got and spend less than you earn. I’ll bring out what I thought were some of the punchier points that hit home for me. But first…
My favourite quote from the book!
In what has to be my single favourite part of any finance book ever, the authors describe a scene at their initial interviews. At the time, they were nervous and unsure who to expect, having blind called/written to these millionaires. Thinking that the 1% would live a life of constant luxuries, they put out a platter of foods like caviar and fine hors d’oeurves or whatever. Very few of the millionaires ate them, but a few nibbled the biscuits.
One particular millionaire is quoted in the book, which is my favourite part. They offered him some fine wine or whisky, but he turned them down. Confused, they asked what he normally drinks:
“I like two kinds of beer: free, and Budweiser”
The most badass quote in The Millionaire Next Door
Alright, Budweiser might be the most Johnny Average lager out there, but that’s not really the point. The point was that he knew what he liked, didn’t care about labels, and wasn’t put off about anyone judging him for his tastes. A lesson for us all: be happy with the simple things and don’t give a damn about lifestyle creep.
I, too, like free beer. Feel free to offer me some.
Selecting and maintaining the aim
So, millionaires didn’t seem to be motivated by flashy luxury goods. That begs the question: what are they motivated by, then?
Here’s a cool thing that will stoke the FIRE in your heart: financial independence was the core motivator. Yes, before the Financial Independence Retire Early movement was cool, before Vicky Robin and Joe Dominguez wrote about it, millionaires were already motivated by it.
If that’s not a comforting thought for you financial independence campaigners out there, I don’t know what is.
The Millionaire Next Door and housing
Housing is an interesting topic. I was quite critical in my post about use of net worth, on the grounds that it’s often tied to property and you can’t usually realise the value of your home. The 1996 millionaires thought along the same lines.
Location
Stanley and Danko spot that most millionaires live in reasonably nice neighbourhoods, but very few live in palatial accommodation. The theme was that living in an expensive neighbourhood requires you to also furnish your property with expensive items and live expensive lifestyles to fit in, which millionaires either didn’t value or profited from by avoiding them. This comes up later, and in the follow-up book The Millionaire Mind (I read ahead).
Maintenance
The book is written in the US and they build houses a bit differently over there, but the principles of this part still stand.
The US millionaires deliberately chose to buy solidly-built houses, on the basis that they’re cheaper to maintain in the long haul than a cheaper, less solidly-built equivalents. The basic idea is that they would deliberately consider the through-life costs rather than just the purchase price. This idea applies to other things, too.
A UK equivalent would be choosing a home that’s a bit smaller when you buy, or without a conservatory and lots of windows, to reduce the costs of maintenance throughout your ownership – which would be forever, if you’ve followed the model.
Choosing your partner
I was surprised to read that most millionaires counted “having a supportive spouse” as one of their top tips for success. I’m married, so I’m going to cover this only briefly. My partner might read this blog!
In 1996, it was still very much a man’s world. Some might say it still is, but if you were in your 50s in 1996 then you and your wife had been raised in the 1950s and dealt with all the sexism that was around at the time. Opportunities for women were rare and when Stanley and Danko talk about one spouse being a homemaker, they’re quite obviously referring to the wife.
Effectively, the theory is that having one person maintain the home means that the home could be run more economically than if both parties worked. Having a partner who shared ideas of frugality is critical to success, but so is having a partner who is willing for you to take risks as breadwinner to do things like invest your family savings or become self-employed. More on that below.
In the modern world, there’s no reason that the husband has to be the breadwinner for the dutiful wife. I think a modern way of doing the same thing is to just work as a team to pool your resources, effort and time to maximise your earning/saving potential.
Oh yeah, and most millionaires had been married over 25 years. I don’t know how much that helps, but I guess having your mental capacity unburdened with domestic issues for two decades keeps you clear-headed to work out your money-making game plan.
Most millionaires are business owners?
You’d think that most millionaires would be CEOs or whatever. While some indeed were senior executives employed by companies and other were lawyers or doctors, the biggest percentage of millionaires in The Millionaire Next Door had their own business as their primary investment.
Wait, own businesses instead of index funds?
Yes, you read that right. Most of the interviewed people who were self-employed or business owners considered that they owed their success to the business they owned, rather than stocks and shares. Stanley and Danko attribute this control: you can control a business you own, whereas you simply hand over your money for a publicly-traded company while hoping that the board does the right thing with your cash.
That doesn’t mean that they don’t invest. Most seem to, however a lot of them invest in private companies as business angels. This isn’t too far away from how I invest through Crowdcube, except that business angels generally give advice and connections as well as money.
I suspect that this response might be different if the study was completed today. In 1996, access to the stock market was through a human broker, instead of a convenient web platform. The internet existed… ish… but you wouldn’t have used it to check stock prices: you’d have looked in the newspapers. One of the most awesome things about financial independence campaigns today is that the internet makes participation super quick and available at low cost for everyone.
A quick note on self-employment
Being a self-employed businessman or owner of your own company comes with significant tax advantages in the UK, as well as in the US. Robert Kiyosaki talks about it in Rich Dad, Poor Dad and it came up in Reset. The biggest is that you can spend before paying corporation tax. In The Millionaire Next Door, Stanley and Danko also learned that most millionaires would use their business as a means to travel: for example, a doctor might speak at a conference in Europe and take the opportunity to have a holiday there at the same time but for slightly less cost.
The self-employment angle is pretty undeniable and it’s something that I aspire to do within my own financial independence campaign.
Who is this book for?
All in all, I recommend this book to financial independence campaigners at every stage. For people like me, who are relatively early in the journey, it’s inspirational. For people who are a bit more wizened on their own campaign, it’s a nice bit of reassurance and entertainment.
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How I plan to use this knowledge
Obviously, the cheap beer is a great tip!
I’m glad that this book largely confirms the approach that I’m already taking. It seems like consistent habits of spending less than you earn pay off over time.
The one thing that I’m now looking out for is more opportunities for self-employment. I haven’t been a civilian for very long, so running a business is still something I’m learning to wrap my head around (when you work in the public sector the money is almost a secondary consideration). I’m going to keep my eye out for opportunities though and it may be something that features in subsequent campaign years. We’ll see.
I haven’t read it but I fit the profile you describe rather well: house, location, car, beer, spouse (working and on same page), watch, suit, age achieved. I am not a business owner or self employed, but overall close enough. Maybe that’s the US/UK difference? Achieved before I discovered FIRE and therefore done sub-optimally, attitude and savings rate is what really matters. So yes its easily doable with above average income.
Hi Tony
It might be a US difference, but it’s undeniable that there are significant tax advantages to being a business owner. In the UK, the most obvious one is that dividends are taxed generously (7.5% basic rate, 32.5% higher rate). Then there’s the ability to claim pre-tax expenses. Not that I’m complaining: there has to be a reward for risk.
I suspect that it’s the date of the research that was the biggest factor. In 1996, investing wasn’t as efficient or accessible (I feel like I’m preaching to the choir here, but it’s a public comment). There were fewer options to grow your wealth unless you knew people who could steer you right, and I suspect that skewed the data as a result.
It would be interesting to see a modern UK study, though!
I think that being a business owner or self-employed gives you a leg up on FI or millionairehood, as the inner workings of tax and saving tax is in your face. So I can well believe that they get the understandings necessary for efficient FI earlier and can therefore achieve FI on less income or earlier. Of course if avoiding business failure!