Most Americans have many misconceptions about wealth. They don’t know how to define it or what it takes to become wealthy. They have a misleading image of millionaires and how they live.
In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko counter the myths and sketch a surprising portrait of the average millionaire, who could be living in your own neighborhood. They assert that many more Americans could become millionaires by adopting the habits and traits common among them.
For decades, the authors studied and profiled America’s millionaires—the 3% of the population with a net worth of more than $1 million, who account for more than half the country’s personal wealth. Although this book was first published in 1996, the principles the authors identify for how to accumulate wealth and ultimately achieve financial independence are still applicable.
The popular image of a wealthy person in the U.S. is someone who has a high-income occupation, or who benefited from an inheritance or windfall—for instance, an athlete with a multimillion-dollar contract. He displays all the status symbols of wealth, including a big house, expensive vehicles, expensive clothing, and private schools for his children. But that image describes a big spender rather than an accumulator of wealth.
Wealth is different from income. Your income is what you earn; your wealth is what you accumulate. If you make a lot of money and spend it all, you’re not wealthy—you’re living a high-consumption lifestyle.
When it comes to wealth, appearances can be deceiving. High-income people can work hard, yet live paycheck to paycheck, not accumulating any wealth—and hard-working people with modest incomes can accumulate great wealth.
Many higher-income people wonder why they aren’t rich—they feel they can barely keep up with expenses. Many lower-income people feel the same way. Neither type of household could survive more than a few months without a paycheck.
But if you start young and embrace the right habits, you have a better chance of accumulating enough wealth to become a millionaire than you do of winning the lottery.
The millionaires in this book could maintain their lifestyles for years without a paycheck—they’re financially independent. They didn’t inherit their wealth from their families. More than 80% of them accumulated it over their own lifetime. They’re self-made businesspeople who have lived in the same town most of their adult lives. They own a business and live in a modest neighborhood. The key to their success is living a lifestyle that makes it possible for them to build wealth.
The authors’ research found average millionaires share these characteristics:
In addition:
The bottom line is that building wealth and becoming financially independent takes hard work, frugality, and discipline.
A way to assess your own wealth is by calculating what your net worth should be based on your income and age.
The greater your income, the greater your net worth should be. Also, the older you are—that is, the longer you’ve been earning income—the greater your net worth should be. For people your age, earning the same income as you, there’s an expected level of net worth. If your net worth is significantly below that level, you're probably living a consumption-oriented lifestyle; if your net worth is significantly above the level for your age/income category, then you’re wealthy.
Here’s how to calculate how much you should be worth:
For example, for a 61-year-old with an annual income of $235,000, her net worth should be $1,433,500 ($235,000 X 61 divided by 10).
Similarly, for a 41-year-old with an earned income of $143,000 plus $12,000 investment income, his net worth should be $635,500 ($155,000 X 41 divided by 10).
To be solidly in the prodigious accumulator category, you should be worth two times your expected level of wealth. Often, prodigious accumulators have four times the wealth of under-accumulators in their category. If you’re at half or less than the expected level for your category, you’re an under-accumulator. Here’s an example of each (both people are in the same income/age category):
The typical millionaire’s frugal lifestyle could be described as nondescript middle class. Many millionaires don’t stand out in their neighborhoods. Their watchwords are hard work, discipline, frugality, and smart investment.
In football terms, they play both great offense and great defense. They move the ball by generating income and by smart planning and budgeting, and they and their families hold the defensive line by controlling their spending. Both mindsets help them build wealth for the future.
Many millionaires budget their expenses. While you might think millionaires don’t need to budget, the fact is, they become wealthy and remain that way in large part by budgeting and controlling expenses.
For instance, millionaires don’t drive high-status vehicles. They often buy quality vehicles that are several years old, and they never lease or finance them. In contrast, most car buyers spend 30% of their net worth on a vehicle, while millionaires spend only 1%. Millionaires are also bargain-conscious in other ways: they buy items on sale or at discount or factory outlets.
Millionaires spend less and invest more to lower their taxable income. A rule they live by is that to build wealth, you need to minimize your taxable (realized) income and maximize your nontaxable income (assets that grow without generating taxable income).
The typical millionaire in the survey had an annual realized income of less than 7% of his wealth, meaning that less than 7% of his wealth was taxable.
Paying income tax is the biggest expenditure for many households. High-income under-accumulators pay the most in taxes because they focus on increasing their earned (taxable) income to support a consumption-oriented lifestyle. They can’t accumulate wealth because their taxable income is too high. In contrast, the typical millionaire or prodigious accumulator may be cash poor due to investing 20% of her annual income in financial assets that appreciate without generating taxable income. (Shortform note: Examples of such appreciating assets include 401(k) plans and IRAs.)
Smart planning is essential to wealth accumulation. Wealthy people spend a significant, but not overwhelming, amount of time—8.4 hours a month or 1.2% of their time—planning their financial future. They do regular planning each month and prioritize managing their financial assets over other activities.
High-income under-accumulators—many busy doctors are a prime example—feel they don’t have adequate time to plan their financial future. Compared to millionaires, they spend half as much time—4.6 hours a month—on financial planning.
Fully 95% of millionaires own stocks. However, very few millionaires—less than one in 10—are active traders. It’s expensive and time-consuming to trade constantly. Active traders or brokers often spend more time trading than thinking about and planning investments. They don’t accumulate much wealth because they don’t give investments enough time to grow. Further, any short-term gains are taxed.
In contrast, millionaires spend more time managing a small number of stocks. They’re focused investors, often investing in industries they’re knowledgeable about.
As previously noted, 80% of millionaires are self-employed, compared to 15% of the general population. The types of businesses owned by many millionaires are considered dull and unexciting by most people. They provide a product or service that’s needed in an industry that isn’t usually susceptible to downturns. These businesses also don’t face much competition, and they’re consistently profitable.
Businesses owned by the millionaires surveyed for this book included: building materials manufacturers, prefab housing, auto parts, auctioneer/appraiser, apparel manufacturer, janitorial services contractor, human resources consultant, real estate developer, beer distributor, construction equipment dealer, and restaurant chain owner.
These types of businesses aren’t typically associated with high status or lavish lifestyles. They don’t interest under-accumulators, whose primary needs are consumption and showing off their status. However, they meet the self-employed millionaire's needs to create wealth and become financially independent.
The experience of the self-made millionaires in this book shows that to become wealthy and stay wealthy you must:
1) Create and live by monthly and annual budgets. More than half of all millionaires budget their expenses. They’re motivated by visualizing the long-term rewards of achieving financial independence and being able to retire.
2) Know what your family spends annually for basic needs (food, clothing, and shelter). Fully 62% of the millionaires surveyed knew their monthly expenses, compared to 35% of high-income non-millionaires.
3) Set specific daily, monthly, yearly, and life goals. Most millionaires are goal-oriented and take a long-term view. Their goals are not spending and acquiring material possessions, but being able to retire, be financially secure, and enjoy life. People who are financially secure are happier than those in their age/income category who aren’t. Unlike those living paycheck to paycheck, they don’t worry about the next economic slump.
4) Spend time planning your financial future. The number of millionaires who spend time planning investments is more than double the number who don’t plan. Many of those who don’t plan are high-income under-accumulators.
5) Beware of giving ongoing subsidies to adult children and grandchildren, who may become dependent on them instead of self-reliant. Millionaire parents who provide ongoing gifts and subsidies have significantly less wealth than others in their category whose children are independent.
The bottom line is that many more Americans can become millionaires if they’re willing to consume less, control their spending, and focus on steadily building their wealth. The trade-off for spending less of your income today is financial independence tomorrow.
Most Americans don’t understand wealth.
In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko counter the myths and sketch a surprising portrait of the average millionaire that could resemble someone living in your neighborhood. They assert that many more Americans could become millionaires by adopting habits and characteristics common among millionaires.
For decades, the authors studied and profiled America’s millionaires—the 3% of the population with a net worth of more than $1 million, who account for more than half the country’s personal wealth. Although this book was first published in 1996, the principles the authors identify for how to accumulate wealth and ultimately achieve financial independence are applicable today.
The popular image of a wealthy person in the U.S. is someone in a high-income occupation, or someone who benefited from an inheritance or windfall—for instance, an athlete with a multimillion-dollar contract. He displays all the status symbols of wealth, including a big house, expensive vehicles, expensive clothing, and private schools for his children. But that image is of a big spender rather than someone building wealth.
Wealth and income aren’t the same thing. Your income is what you earn; your wealth is what you accumulate. If you make a lot of money and spend it all, you’re not wealthy—you’re living a high-consumption lifestyle.
When it comes to wealth, appearances can be deceiving. High-income people can work hard, yet live paycheck to paycheck, not accumulating any wealth—and hard-working people with lower incomes can accumulate great wealth.
Many higher-income people wonder why they aren’t rich—they feel they can barely keep up with expenses. Many lower-income people feel the same way. Neither type of household could survive more than a few months without a paycheck. Both believe that financial independence is out of reach; it seems to be a matter of luck or inheritance.
But if you start young and embrace the right habits, you have a better chance of accumulating enough wealth to become a millionaire than you do of winning the lottery. You have a 1 in 4,000 probability of becoming wealthy in your lifetime due to a windfall. But the proportion of households with a net worth of over $1 million is 3.5 in 100.
The millionaires in this book could maintain their lifestyles for years without a paycheck—they’re financially independent. But they didn’t inherit their wealth from their families. More than 80% of them accumulated it over their own lifetime.
The typical millionaires in this book defy stereotypes of the wealthy. They’re self-made businesspeople who have lived in the same town most of their adult lives. They own a business, are married, and live in a modest neighborhood. The key to their success is they live a lifestyle that makes it possible for them to build wealth.
The authors’ research found that average millionaires share these common characteristics:
These findings stem from years of research, including interviews with over 500 millionaires and surveys of 11,000 high-net-worth or high-income people in the 1990s. The bottom line is that building wealth and becoming financially independent take hard work and discipline.
Many more Americans can become millionaires if they’re willing to consume less, control their spending, and focus on steadily building their wealth. The trade-off for spending less of your income today is financial independence tomorrow.
High-income people who spend freely and ostentatiously fit the Texas description, “big hat, no cattle.” In other words, they put on a show, but lack substance—they have very little accumulated wealth.
In contrast, those who are truly wealthy typically don’t flaunt it—for instance, they don’t wear expensive clothing or jewelry, or drive luxury or even late-model cars. They aren’t interested in status symbols.
The authors’ research paints the following picture of the average millionaire:
Most people would say someone with a lot of expensive material possessions is wealthy. But most people living high-consumption lifestyles have little accumulated wealth; they spend all they earn. Instead of acquiring material possessions, especially status symbols, the truly wealthy focus on building financial assets that appreciate or increase in value.
Net worth—the current value of your assets minus liabilities—is one way of defining wealth.
In this book, being wealthy is defined in two ways: 1) having a net worth of at least $1 million, and 2) having a high net worth for someone of your age and income.
(Shortform note: at the time this book was published, 3.5% of U.S. households had a net worth of at least $1 million. In 2018, the figure was 3%, or 11.8 million U.S. households.) About 95% of millionaires have a net worth of $1 million to $10 million. They are the focus of this book because their level of wealth is attainable by many Americans.
A way to assess your own wealth is by calculating what your net worth should be based on your income and age.
The greater your income, the greater your net worth should be. Also, the older you are—that is, the longer you’ve been earning income—the greater your net worth should be. For people your age who earn what you earn, there’s an expected level of net worth. If your net worth is significantly below that level, you're probably living a consumption-oriented lifestyle; if your net worth is significantly above the level for your age/income category, then you’re wealthy.
We’ll explain how to calculate that in a moment. First, consider two examples—the first is a lower-income household that’s wealthy because they spend less, and the second is a high-income household with a less-than-expected net worth because they spend much of their income:
1) A 41-year-old firefighter and his wife, a secretary, make $55,000 a year. They spend modestly, save, and invest, resulting in a net worth of $460,000. The expected net worth for this age/income group is $255,000—so for their category, this couple is wealthy.
2) A 56-year-old doctor makes $560,000 a year. His net worth is $1.1 million, but it should be more than $3 million. He lives a consumption-oriented lifestyle and isn’t wealthy for his category.
Here’s how to calculate how much you should be worth:
For example, for a 61-year-old with an annual income of $235,000, her net worth should be $1,433,500 ($235,000 X 61 divided by 10).
Similarly, for a 41-year-old with an earned income of $143,000 plus $12,000 investment income, his net worth should be $635,500 ($155,000 X 41 divided by 10).
To be solidly in the PAW category, you should be worth two times your expected level of wealth. Often, PAWs have four times the wealth of UAWs in their category. If you’re at half or less than the expected level for your category, you’re an under-accumulator. Here’s an example of each (both people are in the same income/age category):
People often think it takes inheriting wealth to become rich. However, the authors’ research on millionaires shows inheritance plays a minimal role:
People of average backgrounds who become millionaires have confidence in their own ability to achieve wealth. There is opportunity in the U.S. for anyone wanting to become wealthy because social and economic status aren’t predestined. This dates as far back as 1892, when a study of more than 4,000 U.S. millionaires found that 84% had achieved their wealth rather than inheriting it.
Achievement matters more than inheritance or ethnic origin. Many first-generation Americans become wealthy through hard work, frugality, and discipline—the same traits shared by millionaires as a whole.
Also like millionaires as a whole, first-generation Americans tend to be self-employed. However, their children and grandchildren tend to be less successful economically and often consume the family fortune entirely.
This is because their parents want them to have a better life, so they encourage them to spend years in college to become professionals with a higher status, rather than entrepreneurs. They enter the labor market late and start earning later. They reject their parents’ austere lifestyle in favor of American-style consumerism. Thus the second- and third-generation Americans with wealthy parents typically become UAWs.
So while some people work, plan, and invest to become wealthy, many of those who inherited affluence spend it away.
Contrary to popular belief, many millionaires live below their means, spend frugally and budget their expenses, invest 20% of their income, and are self-employed in unexciting fields such as paving contracting and accounting.
Does this description match your picture of a millionaire? Why or why not?
How many and which traits and habits of millionaires do you share?
Which habit would be the most difficult for you to practice and why?
Your expected net worth is what you should be worth, given your income and age. It gives you an idea of whether you’re a spender or an accumulator of wealth. Calculate your expected net worth as follows:
Calculate your expected net worth. Does the result surprise you, or is it about what you expected? How does it compare to where you are now?
What factors (for instance, your lifestyle) contributed to your current level of accumulated wealth, and how?
What habits/traits would you have to change to accumulate or significantly increase your expected level of wealth?
The word that best describes many millionaires is “frugal,” which means using your resources economically and not being wasteful.
However, frugality has a bad name in our consumption-oriented society, which celebrates lavish lifestyles. For instance, we often admire celebrities and millionaire athletes for their gaudy mansions and expensive tastes. But while they’re millionaires in terms of income, most highly paid athletes are UAWs.
For example, a ballplayer might make $5 million a year but only have a net worth of $1 million—he should actually be worth $15 million or more. He shows off his wealth instead of building it. His millionaire status is probably temporary.
If such an under-accumulator of wealth gets an increase in income, he spends it. UAWs opt for immediate gratification. They view life as a game show where winners enjoy quick cash and showy gifts such as large boats. (Game shows are about instant gratification—they don’t offer anything of long-term value like tuition money.)
In contrast, not spending—being frugal—is the foundation of wealth-building.
The typical millionaire’s frugal lifestyle wouldn’t make a popular TV show: it could be described as nondescript middle class, which wouldn’t be interesting to most people. Many millionaires don’t stand out in their neighborhoods. Their watchwords are hard work, discipline, frugality, and smart investment.
In football terms, they play both great offense and great defense. They move the ball by generating income and by smart planning and budgeting, and they and their families hold the defensive line by controlling their spending. Both mindsets help them build wealth for the future.
It’s important that everyone in the household have a frugal mindset—a family can’t accumulate wealth if anyone is a compulsive spender. Wealth-building habits can’t coexist with wasteful habits.
Controlling spending and building wealth require budgeting and planning. Under-accumulators allow their income to determine their budget. If they want more, they use credit, thereby spending tomorrow’s money today.
In contrast, many millionaires budget their expenses. While you might think millionaires don’t need to budget, the fact is, they become wealthy and remain that way in large part by budgeting and controlling expenses. It’s like jogging: most joggers don’t look like people who need to jog—they’re physically fit because disciplining themselves to jog regularly is how they got fit and stay fit.
To become wealthy and stay wealthy requires the following financial fitness steps:
1) Create and live by monthly and annual budgets. More than half of all millionaires say they budget. They’re motivated by visualizing the long-term rewards of achieving financial independence and being able to retire.
2) Know what your family spends annually for basic needs (food, clothing, and shelter). Fully 62% of the millionaires surveyed knew their monthly expenses, compared to 35% of high-income non-millionaires. A majority of the non-millionaires had no idea how much their consumer-oriented lifestyles cost them.
Credit cards are often a factor contributing to overspending. Most wealthy households have only a few credit cards, such as MasterCard and Visa, and a card for a department store chain like Sears or JCPenney. Millionaire households in the survey were four times more likely to have a Sears card than a Brooks Brothers card; only 6% of millionaires have an American Express Platinum card. Some high-income under-accumulators have a dozen or more credit cards, especially of status retailers.
3) Set specific daily, monthly, yearly, and life goals. Most millionaires are goal-oriented and take a long-term view. Their goals are not spending and acquiring material possessions, but being able to retire, be financially secure, and enjoy life. People who are financially secure are happier than those in their age/income category who aren’t. Unlike those living paycheck to paycheck, they don’t worry about the next economic slump.
4) Spend time planning your financial future. The number of millionaires who spend time planning investments is more than double the number who don’t plan. Many of those who said they don’t plan are high-income under-accumulators. PAWs spend significant time planning and managing investments. They leverage their knowledge by investing in areas where they have expertise—for instance, an auctioneer who specializes in commercial real estate might invest in that area. They hire qualified financial advisors, but they also do their own research.
The goal of many high-income under-accumulators is to be “better off” than their parents. This means having a larger home, driving luxury cars, acquiring all the status symbols, and sending the children to private schools.
Their focus is spending and appearing to be wealthy in the present, not accumulating wealth for the future. They work hard and spend what they earn to prove themselves and combat feelings of social inferiority, but they’re more stressed than happy.
Despite striving to be better off than their parents, these under-accumulators share their parents’ view of money: spend it when you have it. Their parents spent it on momentary pleasures such as unhealthy food, alcohol, and smoking. They believed that the purpose of earning money was to spend it—never to save or invest it. If they wanted more, they found a way to earn more.
UAWs (even those with high incomes) and their parents often believe they don’t have enough money to invest. Yet many people spend vast amounts of money over a lifetime on wasteful habits, such as smoking several packs of cigarettes a day.
When you add up what seem like small daily expenses, they become huge expenses.
Similarly, small amounts of money invested over time grow into significant financial assets.
Smokers would be better off kicking the habit and investing the cost of three packs a day in tobacco company stock. Investing the amount spent on a 40-year smoking habit would eventually create a portfolio worth millions.
If they changed their behavior, many high-income under-accumulators of wealth who never learned from their parents to be frugal and invest could become millionaires. Like kicking the smoking habit, they have to be serious about changing their spending habits. In addition, they need the assistance of a professional accountant or financial planner who can help them create a budget and follow it.
One important way the wealthy benefit from spending less and investing more is that this lowers their taxable income. Indeed, a rule that millionaires live by is that to build wealth, you need to minimize your taxable (realized) income and maximize your nontaxable income (assets that grow without generating taxable income).
The typical millionaire in the survey had an annual realized income of less than 7% of his wealth, meaning that less than 7% of his wealth was taxable.
Paying income tax is the biggest expenditure for many households. High-income spenders pay the most in taxes because they focus on increasing their earned (taxable) income to support a consumption-oriented lifestyle. They can’t accumulate wealth because their taxable income is too high. In contrast, the typical millionaire may be cash poor due to investing 20% of her annual income in financial assets that appreciate without generating taxable income.
For example, at the time this book was written, a 51-year-old woman with an annual income of $220,000 paid $69,440 in federal income tax—18.8% of her total wealth of $370,000. Her net worth should have been much higher—$1,122,000—but she couldn’t accumulate wealth because most of her financial assets were equivalent to cash and taxable.
Yet there are prodigious accumulators worth $2-3 million, who have annual realized incomes of $80,000; they’re living on 6.7% of their wealth.
Remember that every dollar you spend is taxed. For example, you need $100,000 to buy a $68,000 boat, which is why few millionaires buy boats—they prefer to invest their money rather than allowing it to be taxed. They forgo spending to build wealth and ultimately achieve financial independence.
Along with minimizing taxable income, many millionaires avoid buying expensive homes. A sensible rule for everyone is don’t assume a mortgage that’s more than twice your annual realized income. Living in a less expensive home enables you to spend less of your income and invest more to build wealth and minimize taxes.
Millionaires are typically very frugal: they live below their means, budget their expenses, know what they’re spending on basic needs, and minimize income taxes by investing 20% in assets that appreciate without generating taxable income.
How would you describe your lifestyle and spending habits?
How closely do they fit the definition of frugal (using your resources economically, not wasting them)?
What are some specific things you could do to live more frugally? (For instance, track and reduce your weekly spending on groceries.)
If you lived more frugally, what long term benefits can you envision as a result?
To build wealth, you must use time and money efficiently. Prodigious accumulators and under-accumulators take vastly different approaches.
Smart planning is essential to wealth accumulation. Wealthy people spend a significant amount of time—8.4 hours a month or 1.2% of their time—planning their financial future. They do regular planning each month and prioritize managing their financial assets over other activities.
High-income under-accumulators—many busy doctors are a prime example—feel they don’t have adequate time to plan their financial future. Compared to millionaires, they spend half as much time—4.6 hours a month—on financial planning.
Of course, simply increasing the amount of time you spend planning doesn’t automatically translate into building wealth. You need to focus on the right kind of investments, educate yourself, get quality financial advice, and follow that advice.
Prodigious accumulators and under-accumulators have different ideas on investments. One reason UAWs spend less time on financial planning is that they consider assets that are easily convertible to cash to be investments—for instance, saving accounts, money market funds, and short-term Treasury bills. In fact, under-accumulators are two times more likely than prodigious accumulators to keep at least 20% of their wealth in cash or near-cash, which they can easily access and spend. These types of assets take less time to plan than those pursued by PAWs. High-income under-accumulators also have more of their wealth tied up in vehicles and other assets that depreciate.
Millionaires are more likely to invest in assets that appreciate in value without producing taxable income, such as 401(k)s and IRAs. Also, they have more of their wealth invested in businesses, real estate, stocks, and other tax-deferred assets.
Fully 95% of millionaires own stocks. Most keep 20% or more of their wealth in publicly traded stocks.
However, very few millionaires—less than one in 10—are active traders. Most don’t closely track the daily ups and downs of the markets or trade stocks in response to current events—32% keep their investments for more than six years; only 9% hold them for less than a year.
It’s expensive and time-consuming to trade constantly. Active traders or brokers often spend more time trading than thinking about and planning investments. They don’t accumulate much wealth because they don’t give investments enough time to grow. Further, any short-term gains are taxed.
In contrast, millionaires spend more time managing a small number of stocks. They’re focused investors, often investing in industries they’re knowledgeable about. Millionaires prefer to deal with brokers who study the markets and don’t act precipitously.
To more efficiently plan their investments, many millionaires consult competent financial advisors. But before hiring anyone, they do their homework.
They research and interview potential advisors and seek referrals from other professionals they trust—for instance, their accountants and attorneys, as well as other business associates. They request references, a credit check, and documents showing training and experience.
Cold-callers who target high-income people aren’t good prospects and are unlikely to help anyone accumulate wealth. One wealthy man who was interviewed for this book got rid of cold-callers by asking for their personal income and wealth appreciation data so he could evaluate them. None ever called back.
In contrast, under-accumulators who invest in stock often do so on the advice of multiple advisors, including cold-callers touting a stock of the week. They often get poor advice because they don’t take the time to find quality financial advisors.
More than half of millionaires (59%) are self-employed, compared to 25% of high-income under-accumulators. Self-employed PAWs typically spend more time planning investments than do those employed by others.
A self-employed PAW’s goal is to become financially independent, and so they devote more of their work time to planning investments to build wealth. They also tend to be self-reliant—they have to be resourceful to manage a business through economic ups and downs. They counter the effects of down cycles with financial planning and investment.
Under-accumulators who are employees are dependent on their employers and less inclined to focus on planning their futures.
As previously noted, controlling your household spending and lifestyle is critical to having enough money and time to invest wisely. In prodigious accumulator households, all members follow a frugal lifestyle and budget.
Under-accumulators not only fail to control their own spending—they don’t control spending by other members of their household either. The adults also spend independently of each other, so that neither knows the total being spent.
Further, high-income UAWs’ children tend to emulate them. The children become addicted to overspending, and to maintain their lifestyle in adulthood, their parents often continue to support them. The adult children are unlikely to become self-sufficient because they’ve never learned to live within their means. In addition, supporting adult children makes it even more difficult for under-accumulator parents to build wealth for their own future.
Sometimes, high-income under-accumulators turn to CPAs or other professional planners to help them save money to invest. Their CPAs put them on a budget, but like people who suddenly go on a diet, their willpower soon fails and they resume their high-consumption lifestyle.
Because they don’t prioritize planning or investing, under-accumulators worry more about the future than prodigious accumulators. The latter have fewer concerns and fears because they focus on planning and acting in the present to build the future they want.
Both prodigious accumulators and high-income under-accumulators are concerned about what the federal government might do, but they respond differently.
In a nutshell, millionaires view money as a resource that shouldn’t be wasted. Because they devote time to budgeting, controlling spending, and investing for the future, they have fewer worries and look forward to a comfortable retirement.
Building wealth is similar to playing football. You have to play both great offense and great defense—move the ball by generating income and by smart planning and budgeting, and hold the defensive line by controlling your spending.
In terms of accumulating wealth, are you better at offense or defense? In what way?
How can you strengthen your weaker game—either offense or defense (for instance, increasing and investing your income or stopping a practice that’s financially draining)?
What steps can you take to budget your expenses and devote regular time to planning your financial future?
Millionaires believe financial independence is more important than displaying social status. Consequently, millionaires don’t drive high-status vehicles. They often buy quality vehicles that are several years old, and they never lease or finance them.
In addition,
Millionaires understand that new cars are overpriced. Buying a two- or three-year-old car is a bargain because the original owner has paid for the steepest depreciation. Many millionaires sell these vehicles in a few years and get nearly what they paid for them.
In the 1990s, when this book was written, most millionaires favored full-sized American-made vehicles, which were less expensive and less trendy. In order, the most popular brands among millionaires were: Ford, Cadillac, Lincoln, Jeep/Lexus/Mercedes (a three-way tie), Oldsmobile, Chevrolet, Nissan/Volvo, and Chrysler/Jaguar.
Most car buyers spend 30% of their net worth on a vehicle, while millionaires spend only 1%. In contrast, high-income under-accumulators Ws spend many times more on cars than prodigious accumulators do. They own multiple vehicles, usually the latest luxury models, and often lease them. Because they’re so status-conscious, high-income UAWs erroneously believe people always drive the most expensive car they can afford.
Buying used cars is part of the frugal lifestyle that enables many millionaires to build wealth. They’re also bargain-conscious in other ways: they buy items on sale or at discount or factory outlets. One frugal habit leads to another: spending less on cars gives them money to invest; they invest a larger proportion of their income than UAWs.
One millionaire who always bought used cars claimed he saved enough by doing this over the years to fund his child’s college and graduate school education.
The key to becoming wealthy is acting defensively to protect and grow your money. That means rejecting a high-consumption lifestyle. A used-car-buying millionaire’s high-income UAW neighbors live paycheck to paycheck to maintain this kind of lifestyle.
The problem is that once you buy one status object, you feel compelled to buy more—one thing always leads to another. Fancy homes require decorators and housekeepers, amenities for entertaining, and expensive cars in the driveway. In contrast, building wealth doesn’t require constantly upgrading your lifestyle.
As part of being frugal, many millionaires buy quality used cars that are several years old, rather than new cars or luxury vehicles that convey status. That way, they don’t pay as much for depreciation, and they don’t pay thousands of dollars simply for the pride or status of having a flashy vehicle. They tend to keep their vehicles for four more years.
What does a car mean to you? Do you judge yourself and others by what you or they drive? Why or why not?
Do you buy new or used vehicles? How often do you buy a car?
How do your car buying practices affect your ability to accumulate wealth?
Many millionaires give their adult children and grandchildren gifts—for instance, tuition or home purchases—as well as ongoing subsidies throughout their lives. This chapter looks at how the gifts affect both the givers and recipients.
While most millionaires accumulated their wealth over a lifetime by working hard, being frugal, and investing, they aren’t necessarily frugal in providing gifts and subsidies to their adult children and grandchildren. Nor do they always instill in their children the virtues that made them successful accumulators of wealth.
Research for this book shows that:
Among the purposes:
Many wealthy parents think that giving adult children and grandchildren gifts and regular subsidies will help them get on their feet, after which further help won’t be needed. But the gifts tend to be ongoing for decades. As a result, millionaire parents who provide gifts and subsidies to children and grandchildren have significantly less wealth than others in their category whose children are independent.
Gifts and subsidies enable children who are under-accumulators to live beyond their means and maintain a high-consumption lifestyle in which displaying status is the goal. UAWs’ children typically become UAWs as well because they grow up accustomed to this lifestyle.
Generally, the more cash gifts adult children receive, the less wealth they accumulate because they immediately spend rather than invest it. Cash gifts are habit-forming and discourage adult children from becoming independent. They find it easier to spend their parents’ money than to earn and accumulate their own.
Gift recipients are less likely to accumulate wealth for several reasons:
1) Gifts lead to further consumption rather than saving and investing—for instance, a gift of a down payment on a house in an expensive neighborhood can trigger more spending to keep up with neighbors’ lifestyles and further dependence on parents.
2) Recipients feel entitled to spend their parents’ wealth (they don’t distinguish between their parents’ wealth and their own), yet see themselves as independent. Two-thirds of adult children who receive gifts or subsidies from wealthy parents believe they succeeded on their own.
3) Adult children who receive gifts run up significantly more credit than adult children who don’t get parental gifts. They use credit to fill cash flow gaps while waiting for gifts or an inheritance.
4) Gift recipients invest much less money than those who don’t receive gifts. Most gift recipients are spenders, so they have little to invest. Exceptions are adult children who are teachers and professors—they tend to live more modest lifestyles, and if they receive gifts, they’re more likely to invest them.
When millionaires have several children, the most financially successful child usually gets less of the parents’ wealth than the non-working or least productive sibling.
As children grow, wealthy parents tend to support the less capable child, while letting the independent sibling take care of herself. While this encourages the independent sibling, it increases the other’s dependency. It’s like when a child doesn’t learn because a parent does his homework.
When these indulged and underachieving children become adults, they’re UAWs who need subsidies to maintain an expensive lifestyle. The parents hope their gifts will turn these children into financially stable adults, but it doesn’t happen because they never learned discipline and resourcefulness as children.
Some children of wealthy parents are quite successful. They differ from those who become UAWs in several ways:
Instead of giving cash gifts, wealthy parents can nurture productivity in their children by paying for their education, or providing modest help in starting a business, such as co-signing a small loan. They can also give adult children stock or other financial assets that can’t be easily converted to cash.
When children are young, wealthy parents can build their confidence and initiative encouraging their involvement in sales—for instance, selling Girl Scout cookies or working in a retail store. Reward independence, responsibility, accomplishment, and leadership. Rather than trying to make children’s lives easier, more wealthy parents should teach them to stand on their own feet.
Most wealthy parents try to reduce their estate before they die to minimize the estate tax their heirs must pay. This requires deciding how to distribute their wealth among multiple children.
When children are young, parents usually plan to divide the estate among them equally. But differences develop as children get older: some seem to need more financial help than others, and so parents treat them differently when distributing wealth.
Research shows that:
There are several reasons wealthy parents typically give more gifts and a greater inheritance to daughters.
First, they believe that due to social inequality, women have fewer income-building opportunities than men—they earn less for doing the same work—so wealthy parents compensate. They feel an obligation to provide for daughters and assure them they’ll always have money. That may be part of the reason most daughters of wealthy parents don’t have careers.
Besides feeling an obligation to provide money of their own to non-working adult daughters, wealthy parents often don’t fully trust sons-in-law to sustain the lifestyles their daughters are accustomed to. So they provide daughters with cash gifts, subsidies such as clothing allowances, and a large inheritance.
Like some daughters, unemployed adult sons tend to receive larger and more frequent gifts from wealthy parents than do their financially independent brothers. They’re more than twice as likely to get large inheritances, including property.
This may be because they can’t hold a steady job or they’re professional students. They may live with their parents and serve as a handyman or assistant, or they live nearby. Their parents view them as needing more help than working siblings.
Here are some things wealthy parents can do to encourage independence and smooth the process of wealth distribution:
1) Don’t tell children the family is wealthy. High-income UAW parents emphasize income and consumption—and their children become spenders rather than wealth accumulators. In contrast, some PAWs preach frugality and discipline, to the point that their children often don’t realize their parents are wealthy until they’ve become PAWs themselves.
2) Ensure your children don’t realize you’re wealthy until they’ve learned a profession and established financial stability. Children shouldn’t be thinking about getting your money until they’ve proven they can earn and handle their own money responsibly. Some wealthy parents set up trust funds their adult children can’t access until age 40, after they’ve achieved their own career and financial success.
3) Teach children frugality and discipline by example—make them live by the same rules as their parents do. When parents live frugally but indulge their children, the children learn to feel entitled.
4) Never talk about gifts or anything your children or grandchildren will inherit. Also, don’t make verbal promises—you may forget them, but your children won’t, and they’ll feel resentful or shortchanged later if they don’t get what they expected.
5) Don’t use cash or gifts to negotiate with adult children. If they feel you’re pressuring them to do what you want them to do, they’ll feel resentful or lose respect for you. Only give gifts out of love or obligation.
6) Don’t get involved in adult children’s family issues—or you’ll create friction and show a lack of confidence in their capability. Seek permission before giving advice or gifts.
7) Don’t compare your achievements with your children’s—for instance, by stating, “When I was your age…” They have their own goals, which are likely different from yours. Appreciate what they’ve accomplished.
8) Honor adult children’s achievements rather than their status symbols. Working should be about achievement, not sustaining a consumption-oriented lifestyle.
9) Treat children as individuals who differ from each other in interests and accomplishments. Don’t try to create income equality by supporting underachievers with gifts and subsidies—this accentuates differences in wealth and creates resentment among siblings.
10) Demonstrate by your example that there are more important things in life than money, such as health, happiness, family, reputation, and accomplishment. Money is a bonus.
While they’re frugal in lifestyle, millionaires spend considerable money on things important to them. This creates opportunities for others to make money by catering to those needs. The wealthy need quality advice and services—for instance, accounting, tax advice, legal services, medical and dental care, education, and home services.
If you’re in a business or profession in demand among the wealthy, you can boost your income by targeting wealthy clients. The opportunities are increasing as the number of millionaires continues to grow. (Shortform note: There are about 11.8 million millionaire households in the U.S. There were big jumps in the number in 2013 and 2017. The bull market has been a major factor.)
Besides needing personal services, millionaires who are self-employed also buy business and industrial supplies and services, office space, and technology.
Also, remember that the wealthy often aren’t frugal when spending on children and grandchildren. Nor are their children frugal in spending the subsidies they get from their wealthy parents. Each parent can give a child and grandchild up to $15,000 a year tax-free. This means a couple with three children and six grandchildren can give away $270,000 a year tax-free, in addition to tuition and medical care, which usually aren’t taxable.
Professions and services in demand among the wealthy include:
While there may be too many law school graduates, there’s strong demand for high-powered attorneys in the following areas:
1) Estates: The wealthy need expert legal advice in handling their estates to minimize taxes and in distributing their wealth. In addition, they need attorneys who will settle their estates, act as executors or administrators, and advise their surviving spouse.
2) Taxes: Income taxes are the largest income-consuming category for the wealthy. (Shortform note: The top 1% paid about 39% of all income taxes in 2017.) With income inequality growing, a concern of the wealthy is that the federal government may look for ways to tax wealth and raise income taxes. Tax attorneys are critical for building and maintaining their wealth.
3) Immigration: Increasing numbers of wealthy foreigners are looking to become U.S. citizens because of threats to their wealth in other countries as a result of lagging economies and government restrictions.
In countries such as China, many wealthy people also want to move their wealth out of the country to protect it. U.S. law allows foreign nationals to get visas and become U.S. citizens if they invest $1.8 million in a U.S. business and create at least 10 jobs. (Shortform note: this law was passed by Congress in 1990 and extended by President Trump in December 2019.)
As it becomes more difficult to immigrate to the U.S., more wealthy foreigners and entrepreneurs need the help of immigration attorneys. In addition, U.S. corporations need legal advice to recruit foreign professionals and scientists.
A growing number of the wealthy pay for the health care of their children and grandchildren, creating a lucrative market for providers. Many elective services and specialists are in demand, including cosmetic dentists, plastic surgeons, dermatologists, allergists, psychologists and psychiatrists, and chiropractors. Often, these expenses aren’t covered by health insurance.
In fact, an increasing number of specialists are focusing on the wealthy, self-paying market. It’s easier for them to deal directly with individual payers than with third-party bureaucrats. Further, medical specialists with the greatest reputations can charge high fees, while the wealthy avoid taxes by paying for their children’s and grandchildren’s health care directly.
Millionaires often need appraisers and advisers to determine the value of assets—for example, family businesses; collections; guns; jewelry, gold, silver, and diamonds; and timber, farmland, and oil/gas rights.
They may seek advice from:
About 40% of the affluent pay for private schools, and the number is growing. So these schools are seeing enrollment growth, and the demand for counselors, teachers, and tutors is increasing. Demand may push up tuition costs and fees as well.
Along with attorneys, accountants play a role in the transfer of wealth. Accountants can be key advisors on how to distribute financial assets and other gifts, as well as how to minimize taxes. They can provide estate, trust, and gift tax advice; fiduciary services; asset valuation; and retirement planning. Accountants also may serve as co-executors (and receive a percentage of the estate).
In addition to the above, growth in the wealthy population means a bigger market for the following:
People interested in developing wealthy clients need to study the data on millionaire households, including states or regions with the highest concentrations of wealthy households. (Shortform note: The state with most millionaires per capita in 2018 was New Jersey, followed in order by the District of Columbia, Connecticut, Massachusetts, Hawaii, New Hampshire, California, Alaska, and Virginia. Source: MarketWatch)
As previously noted, 80% of millionaires are self-employed, compared to 15% of the general population. Put another way, self-employed people are four times more likely to be millionaires than those who work for others. (Of course, most business owners aren’t wealthy; many don’t make a profit.)
Those who own businesses in more profitable industries by definition make more money, although once-profitable industries can go into decline (for instance, the coal industry) as a result of external factors. Even having a profitable business isn’t a guarantee of wealth—regardless of your income, you won’t accumulate wealth if you’re an undisciplined spender.
That said, if you’re frugal, invest, and own a profitable business, you have a good chance of becoming wealthy.
Self-employed millionaires understand the challenges and risks of running your own business. For that reason, fewer than one in five millionaire entrepreneurs hand their business over to their children to operate.
Instead, they urge their adult children to take a less risky path and become self-employed professionals, such as doctors, attorneys, engineers, accountants, and architects. Millionaires are five times more likely than other parents to send children to medical school and four times more likely to send them to law school (few people in these fields fail to make a profit, and the professions are a lot more profitable than most small businesses).
Other benefits of being a self-employed professional include:
A downside is that adult children who are self-employed professionals may seek subsidies from their parents if they get caught up in the consumer lifestyle often associated with these professions instead of living frugally and investing their income.
The types of businesses owned by many millionaires are considered dull by most people. They represent a wide variety of fields; they provide a product or service that’s needed, and isn’t usually susceptible to downturns. These businesses also don’t face much competition. They’re consistently profitable.
Following are some businesses owned by the millionaires surveyed for this book:
These types of businesses aren’t exciting and aren’t typically associated with high status or lavish lifestyles. They don’t interest under-accumulators, whose primary needs are consumption and showing off their status.
In contrast, self-employed millionaires’ primary needs are to create wealth and become financially independent by building a business. Operating their businesses profitably despite risks and challenges brings them a lot of satisfaction. In addition:
In the end, however, it’s the character and habits of the individual more than the type of his or her business that predict wealth.