The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
was published in 1996 and collects research by authors Thomas J. Stanley and William D. Danko that profiles millionaire's in the United States, that is, households in the nation that have a net worth of more than one million dollars. For comparison, the authors look at two groups and the behavior of each. UAWs are Under Accumulators of Wealth, while PAWs are Prodigious Accumulators of Wealth. Their data indicates that millionaires are disproportionately found in middle-class and blue collar areas, rather than in the more affluent and white collar neighborhoods. A conclusion drawn by the authors from this unexpected finding is that higher income families are more likely to use income for luxury items and status symbols, which diverts money from savings and investments.
The book is presented in eight chapters, which include, “Meet the Millionaire Next Door,” “You Aren’t What You Drive,” “Economic Outpatient Care,” and “Jobs: Millionaire vs. Heirs.” One of the key points made by the authors is that in order to increase one’s net worth it is important not to spend more than is earned. Coupled with this is the need to avoid purchasing items that represent a high style of living such as status symbols. Purchasing branded consumer items becomes a cycle that leads to a dependence on assets that will always depreciate. Even in situations where such goods are acquired at good prices, the desire to replace them frequently to maintain the same status as one’s neighbors continues the cycle. Luxury purchases, the authors add, are more tied to inflation and income tax which adds to the negative effect on net worth.
The authors found that PAWs do not necessarily hoard their money, but rather they are willing to invest their funds if the investments, even if somewhat risky, are worth the potential reward. They do not gamble or invest in stocks with long odds, but will use the stock market, private businesses, and consider venture capital opportunities. There is a generational component that influences the formation of the different wealth-acquiring groups. The children of UAWs need parental money to support the lifestyle they desire and are less likely to have learned about budgeting and investing money than their PAW counterparts.
UAWs tend to follow a mindset that involves “spending tomorrow’s cash today.” This habit leads to debt and thus an absence of net worth. PAWs, in contrast, believe in saving cash for tomorrow. UAWs tend to put off investing until they reach some randomly selected income level, but when they reach that point, the investments do not actually take place. They often fail to invest when they had promised themselves they would because by the time their income increases, so does their desire to keep up with the lifestyles of their neighbors and relatives. In addition, there is a desire among UAWs who were raised in a low income family to show that they are better off than their parents, which often involves a bigger house, a fancier car, and other luxuries. UAWs view money as an “easily renewable resource” and they become consumers rather than investors.
Also considered by the authors are the car buying habits of the two groups. UAWs tend to drive a current model car that is purchased new and which is frequently bought on credit. PAWs do not generally buy new cars and do not tend to own luxury or foreign models. The status attached to owning a luxury vehicle costs UAWs thousands of extra dollars. Career choices and education level are other factors that the authors consider. While they recognize that UAWs exist in all fields and educational backgrounds, there are professions that have high concentrations of UAWs. These include lawyers, doctors, and dentists, where members of the profession are twice as likely to be UAWs than PAWs. Two main reasons are cited for this. First, because of the advanced degrees required in these fields, they start accumulating wealth at a later stage. The second factor is the lifestyle that society expects for such professionals and which they feel obligated to maintain.
There is an indirect correlation between the income one earns and the net wealth that an individual accumulates. Professionals like doctors have high income levels and it is likely that they will have a somewhat low net worth. Low income earners are more likely to accumulate more in relation to their income. Income, according to the authors, is not a good indication of financial well-being. Wealth, though, is a good indicator of the financial independence of individuals. The difficulty is that society has myriad ways to consume income, but not nearly as many ways to save income. This makes it much easier for people to spend than to save.