As part of the Boost My Budget project I’m challenging myself to read one personal finance book every month! See my previous reviews here.
This month’s book is The Millionaire Next Door by Thomas J. Stanley and William D. Danko.
Think of a millionaire. What sort of person comes to mind?
Designer clothes, luxury sports car, gigantic house?
According to The Millionaire Next Door, truly wealthy people are often not who you expect.
The majority of millionaires in the US (the authors are American, and their research only covers the US – but I imagine similar patterns exist in other parts of the world) live in modest houses in average working-class or middle-class neighbourhoods. They wear inexpensive clothes, drive middle-of-the-range cars (which they keep for years) and don’t have flashy hobbies or tastes.
The Millionaire Next Door is a deep dive into the money habits of millionaires. The implication is that anyone can become a millionaire – but you will need to adjust your way of living, and maybe some of your underlying beliefs about money.
It might not be the glamourous lifestyle most people think of when they imagine being rich, but this book shows that the easiest way to build wealth is to live on less than you earn, and invest the rest.
The authors are researchers who have studied wealthy people on behalf of banks and financial services companies since 1980. This book is the result of all those years of research. According to the preface, the authors’ knowledge is based on over $1 million worth of research and resources! So you can trust that these guys know what they’re talking about.
The Millionaire Next Door is based around seven key factors which the authors found most truly wealthy people have in common. In short, these are:
- Living well below their means
- Allocating time, money and energy efficiently
- Caring more about financial independence than social status
- Not receiving ‘economic outpatient care’ from their parents
- Teaching their children to be self-sufficient
- Targeting market opportunities
- Choosing the right occupation
I would say the first three are probably the most important, and they all represent things that any person can work on now, no matter where you’re starting from.
Learning the difference between being rich and being wealthy will be a real wake up call for a lot of people. As the authors put it:
Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.
This is why so many sports stars and lottery winners end up going bankrupt within a few years after their source of money dries up. On the other hand, even people on a modest income can eventually reach a high net worth if they live below their means and invest the remainder.
One of the biggest takeaways from this book for me is the dangers of ‘keeping up with the Joneses’ and lifestyle creep:
If you start earning more and decide to ‘upgrade’ to a large house in an upmarket area, not only will the actual house cost you more, but so will things like property taxes and insurance. Less obviously, you are also likely to spend more on renovations, decorating and upkeep of the property. You will probably want (or may feel pressured into) having fancier cars, so that your driveway matches all the others on the street.
This is why around half of the millionaires surveyed had lived in the same house for over 20 years.
In the same way, the average lawyer (for example) may earn a lot more than the average blue-collar worker, but think of all the extra money they are likely to spend on career-related status symbols to impress colleagues and clients: expensive clothes and accessories, new cars, sending their children to higher-status schools and universities, eating out and entertainment, and so on. This is how some people can earn hundreds of thousands every year, but still live paycheck to paycheck.
Wealthy people got that way because they prefer saving over acquiring status symbols.
This book is packed full of examples and case studies. It is truly fascinating to see real-life examples of how people with similar incomes but different values can end up with completely different net worths.
The Millionaire Next Door is not a light read. This book is the culmination of years of research and is packed with charts, tables and statistics. There is loads of really specific data: things like lists of which cars are most popular with millionaires, and tables of how much people in different income brackets have spent on a wristwatch or pair of shoes.
If you love geeking out over statistics and you really want to drill down into how the wealthy live, you will love this book. I enjoyed some of the charts to start with, but I have to admit I was skipping over a few by the end.
But if you are seriously interested in how some people get wealthy and how you can do the same, you will not want to miss this book.
Boost My Budget rating
4/5
Heavy going in places, but essential reading for anyone trying to change their money mindset and understand how to build wealth realistically.
Here are some of the other titles on my reading list.
Have you read any of these? Any more recommendations for me? Come back soon for more reviews!
- The Millionaire Next Door by Thomas J. Stanley and William D. Danko
- It’s Not About The Money by Brent Kessel
- The Millionaire Mind by Thomas J. Stanley
- The Richest Man in Babylon by George S. Clason
- I Will Teach You To Be Rich by Ramit Sethi
- A Random Walk Down Wall Street by Burton G. Malkiel
- Rich Bitch by Nicole Lapin
- The $100 Startup by Chris Guillebeau
- Money, A Love Story by Kate Northrup
