Word
Gems
What is a
man but the sum of his thoughts?
Wealth
& Economics
- Stanley &
Danko's
- The
Millionaire Next Door:
- The
Surprising Secrets of America's Wealthy
INTRODUCTION
Twenty years ago we began studying how people become wealthy. Initially, we did it just as
you might imagine, by surveying people in so-called upscale neighborhoods across the
country. In time, 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 even
odder: Many people who have a great deal of wealth do not even live in upscale
neighborhoods.
That small insight changed our lives. It led one of us, Tom Stanley, out of an academic
career, inspired him to write three books on marketing to the affluent in America, and
made him an advisor to corporations that provide products and services to the affluent. In
addition, he conducted research about the affluent for seven of the top ten financial
service corporations in America. Between us, we have conducted hundreds of seminars on the
topic of targeting the wealthy.
Why are so many people interested in what we have to say? Because we have discovered who
the wealthy really are and who they are not. And, most important, we have determined how
ordinary people can become wealthy.
What is so profound about these discoveries? Just this: Most people have it all wrong
about wealth in America.
How do you become wealthy? Here, too, most people have it
wrong. It is seldom luck or inheritance or advanced degrees or even intelligence that
enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard
work, perseverance, planning, and, most of all, self-discipline.
How come I am not wealthy?
Many people ask this question of themselves all the time. Often they are hard-working,
well-educated, high-income people. Why, then, are so few affluent?
MILLIONAIRES AND YOU
There has never been more personal wealth in America than there is today (over $22
trillion in 1996). Yet most Americans are not wealthy. Nearly one-half of our wealth is
owned by 3.5 percent of our households. Most of the other households don't even come
close. By "other households," we are not referring to economic dropouts. Most of
these millions of households are composed of people who earn moderate, even high, incomes.
More than twenty-five million households in the United States have annual incomes in
excess of $50,000; more than seven million have annual incomes over $100,000. But in spite
of being "good income" earners, too many of these people have small levels of
accumulated wealth. Many live from paycheck to paycheck. These are the people who will
benefit most from this book.
The median (typical) household in America has a net worth of less than $15,000, excluding
home equity. Factor out equity in motor vehicles, furniture, and such, and guess what?
More often than not the household has zero financial assets, such as stocks and bonds. How
long could the average American household survive economically without a monthly check
from an employer? Perhaps a month or two in most cases. Even those in the top quintile are
not really wealthy. Their median household net worth is less than $150,000. Excluding home
equity, the median net worth for this group falls to less than $60,000. And what about our
senior citizens? Without Social Security benefits, almost one-half of Americans over
sixty-five would live in poverty.
Only a minority of Americans have even the most conventional types of financial assets.
Only about 15 percent of American households have a money market deposit account; 22
percent, a certificate of deposit; 4.2 percent, a money market fund; 3.4 percent,
corporate or municipal bonds; fewer than 25 percent, stocks and mutual funds; 8.4 percent,
rental property; 18.1 percent, U.S. Savings Bonds; and 23 percent, IRA or KEOGH accounts.
But 65 percent of the households have equity in their own home, and more than 85 percent
own one or more motor vehicles. Cars tend to depreciate rapidly. Financial assets tend to
appreciate.
The millionaires we discuss in this book are financially independent.
The large majority of these millionaires are not the
descendants of the Rockefellers or Vanderbilts. More than 80 percent are ordinary people
who have accumulated their wealth in one generation. They did it slowly, steadily, without
signing a multimillion-dollar contract with the Yankees, without winning the lottery,
without becoming the next Mick Jagger. Windfalls make great headlines, but such
occurrences are rare. In the course of an adult's lifetime, the probability of becoming
wealthy via such paths is lower than one in four thousand. Contrast these odds with the
proportion of American households (3.5 per one hundred) in the $1 million and over net
worth category.
THE SEVEN FACTORS
Who becomes wealthy?
Usually the wealthy individual is a
businessman who has lived in the same town for all of his adult life. This person owns a
small factory, a chain of stores, or a service company. He has married once and remains
married. He lives next door to people with a fraction of his wealth. He is a compulsive
saver and investor. And he has made his money on his own. Eighty percent of America's
millionaires are first-generation rich.
Affluent people typically follow a lifestyle conducive to
accumulating money. In the course of our investigations, we discovered seven common
denominators among those who successfully build wealth.
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.
In The Millionaire Next Door, you will study these seven characteristics of the
wealthy. We hope you will learn how to develop them in yourself.
THE RESEARCH
The research for The Millionaire Next Door is the most comprehensive ever
conducted on who the wealthy are in America--and how they got that way. Much of this
research was developed from the most recent survey we conducted that, in turn, was
developed from studies we had conducted over the previous twenty years. These studies
included personal and focus group interviews with more than five hundred millionaires and
surveys of more than eleven thousand high-net worth and/or high-income respondents.
More than one thousand people responded to our latest survey, which was conducted from May
1995 through January 1996. It asked each respondent about his or her attitudes and
behaviors regarding a wide variety of wealth-related issues. Each participant in our study
answered 249 questions. These questions addressed topics ranging from household budget
planning or lack of it to financial fears and worries, and from methods of bargaining when
purchasing automobiles to the categories of financial gifts, or "acts of
kindness," wealthy people give to their adult children. Several sections of the
questionnaire asked respondents to indicate the most they ever spent for motor vehicles,
wristwatches, suits, shoes, vacations, and the like. This study was the most ambitious and
thorough we have ever undertaken. No other study has focused on the key factors that
explain how people become wealthy in one generation. Nor has a study revealed why many
people, even most of those with high incomes, never accumulate even a modest amount of
wealth.
In addition to our survey, we gained considerable insight into the millionaire next door
from other research. We spent hundreds of hours conducting and analyzing in-depth
interviews with self-made millionaires. We also interviewed many of their advisors, such
as CPAs and other professional experts. These experts were very helpful in our exploration
of the issues underlying the accumulation of wealth.
What have we discovered in all of our research? Mainly, that building wealth takes
discipline, sacrifice, and hard work. Do you really want to become financially
independent? Are you and your family willing to reorient your lifestyle to achieve this
goal? Many will likely conclude they are not. If you are willing to make the necessary
trade-offs of your time, energy, and consumption habits, however, you can begin building
wealth and achieving financial independence. The Millionaire Next Door will start
you on this journey.
MEET THE MILLIONAIRE NEXT DOOR
These people cannot be millionaires! They don't look like millionaires, they don't dress
like millionaires, they don't eat like millionaires, they don't act like millionaires-they
don't even have millionaire names. Where are the millionaires who look like millionaires?
The person who said this was a vice president of a trust department. He made these
comments following a focus group interview and dinner that we hosted for ten
first-generation millionaires. His view of millionaires is shared by most people who are
not wealthy. They think millionaires own expensive clothes, watches, and other status
artifacts. We have found this is not the case.
As a matter of fact, our trust officer friend spends significantly more for his suits than
the typical American millionaire. He also wears a $5,000 watch. We know from our surveys
that the majority of millionaires never spent even one-tenth of $5,000 for a watch. Our
friend also drives a current-model imported luxury car. Most millionaires are not driving
this year's model. Only a minority drive a foreign motor vehicle. An even smaller minority
drive foreign luxury cars. Our trust officer leases, while only a minority of millionaires
ever lease their motor vehicles.
But ask the typical American adult this question: Who looks more like a millionaire? Would
it be our friend, the trust officer, or one of the people who participated in our
interview? We would wager that most people by a wide margin would pick the trust officer.
But looks can be deceiving. This concept is perhaps best expressed by those wise and
wealthy Texans who refer to our trust officer's type as
Big Hat No Cattle
We first heard this expression from a thirty-five-year-old Texan. He owned a very
successful business that rebuilt large diesel engines. But he drove a ten-year-old car and
wore jeans and a buckskin shirt. He lived in a modest house in a lower-middle-class area.
His neighbors were postal clerks, firemen, and mechanics.
After he substantiated his financial success with actual numbers, this Texan told us:
[My] business does not look pretty. I don't play the part . . . don't act it.... When my
British partners first met me, they thought I was one of our truck drivers .... They
looked all over my office, looked at everyone but me. Then the senior guy of the group
said, "Oh, we forgot we were in Texas!" I don't own big hats, but I have a lot
of cattle.
PORTRAIT OF A MILLIONAIRE
Who is the prototypical American millionaire? What would he tell you about himself?
* I am a fifty-seven-year-old male, married with three children. About 70 percent of us
earn 80 percent or more of our household's income.
* About one in five of us is retired. About two-thirds of us who are working are
self-employed. Interestingly, self-employed people make up less than 20 percent of the
workers in America but account for two-thirds of the millionaires. Also, three out of four
of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are
self-employed professionals, such as doctors and accountants.
(Our profile of the typical millionaire is based on studies of millionaire households, not
individuals. It is, therefore, impossible in most cases to say with certainty whether our
typical millionaire is a he or a she. Nevertheless, because 95 percent of millionaire
households are composed of married couples, and because in 70 percent of these cases the
male head of the household contributes at least 80 percent of the income, we will usually
refer to the typical American millionaire as "he" in this book.)
* Many of the types of businesses we are in could be classified as dull-normal. We are
welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest
controllers, coin and stamp dealers, and paving contractors.
* About half of our wives do not work outside the home. The number one occupation for
those wives who do work is teacher.
* Our household's total annual realized (taxable) income is $131,000 (median, or 50th
percentile), while our average income is $247,000. Note that those of us who have incomes
in the $500,000 to $999,999 category (8 percent) and the $1 million or more category (5
percent) skew the average upward.
* We have an average household net worth of $3.7 million. Of course, some of our cohorts
have accumulated much more. Nearly 6 percent have a net worth of over $10 million. Again,
these people skew our average upward. The typical (median, or 50th percentile) millionaire
household has a net worth of $1.6 million.
* On average, our total annual realized income is less than 7 percent of our wealth. In
other words, we live on less than 7 percent of our wealth.
* Most of us (97 percent) are homeowners. We live in homes currently valued at an average
of $320,000. About half of us have occupied the same home for more than twenty years.
Thus, we have enjoyed significant increases in the value of our homes.
* Most of us have never felt at a disadvantage because we did not receive any inheritance.
About 80 percent of us are first-generation affluent.
* We live well below our means. We wear inexpensive suits and drive
American-made cars. Only a minority of us drive the current-model year automobile. Only a
minority ever lease our motor vehicles.
* Most of our wives are planners and meticulous budgeters.
In fact, only 18 percent of us disagreed with the statement "Charity begins at
home." Most of us will tell you that our wives are a lot more conservative with money
than we are.
* We have a "go-to-hell fund." In other words, we have accumulated enough wealth
to live without working for ten or more years. Thus, those of us with a net worth of $1.6
million could live comfortably for more than twelve years. Actually, we could live longer
than that, since we save at least 15 percent of our earned income.
* We have more than six and one-half times the level of wealth of our non-millionaire
neighbors, but, in our neighborhood, these non-millionaires outnumber us better than three
to one. Could it be that they have chosen to trade wealth for acquiring high-status
material possessions?
* As a group, we are fairly well educated. Only about one in
five are not college graduates. Many of us hold advanced degrees. Eighteen percent have
master's degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.
* Only 17 percent of us or our spouses ever attended a private elementary or private high
school. But 55 percent of our children are currently attending or have attended private
schools.
* As a group, we believe that education is extremely important for ourselves, our
children, and our grandchildren. We spend heavily for the educations of our offspring.
* About two-thirds of us work between forty-five and fifty-five hours per week.
* We are fastidious investors. On average, we invest nearly 20 percent of our household
realized income each year. Most of us invest at least 15 percent. Seventy-nine percent of
us have at least one account with a brokerage company. But we make our own investment
decisions.
* We hold nearly 20 percent of our
household's wealth in transaction securities such as publicly traded stocks and mutual
funds. But we rarely sell our equity investments. We hold even more in our pension
plans. On average, 21 percent of our household's wealth is in our private businesses.
* As a group, we feel that our daughters are financially handicapped in comparison to our
sons. Men seem to make much more money even within the same occupational categories. That
is why most of us would not hesitate to share some of our wealth with our daughters. Our
sons, and men in general, have the deck of economic cards stacked in their favor. They
should not need subsidies from their parents.
* What would be the ideal occupations for our sons and daughters? There are about 3.5
millionaire households like ours. Our numbers are growing much faster than the general
population. Our kids should consider providing affluent people with some valuable service.
Overall, our most trusted financial advisors are our accountants. Our attorneys are also
very important. So we recommend accounting and law to our children.
Tax advisors and estate-planning experts will be in big demand over the next fifteen
years.
* I am a tightwad. That's one of the main reasons I completed a long questionnaire for a
crispy $1 bill. Why else would I spend two or three hours being personally interviewed by
these authors? They paid me $100, $200, or $250...
(read the entire book)
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