The Millionaire Next Door Summary – 7 Factors Of A Typical Millionaire

The Millionaire Next Door Formula

The Millionaire Next Door summary is something that I’ve been wanting to write for some time now. The first time I read it was in 1996 shortly after it was published. At that time, I was a senior in college and most of the concepts went in one ear and out the next.

Now that I’m a bit more financially savvy, I felt the need to reread it. Also, I plan on comparing it to the statistics in Chris Hogan’s new book, “Everyday Millionaire“.

Here’s my review:

The Millionaire Next Door Summary

As I glance over my shoulder at the bookshelf behind me, I notice many personal finance books such as:

Most of these books and others like it typically promise to show the reader how to become a millionaire.

Back in 1996, both Thomas J. Stanley and William D. Danko set out to write a different book. Instead of teaching how to become wealthy, the book profiles several people who have already become millionaires.

If the first paragraph in the introduction doesn’t grab your attention, I’m not sure what will.

It states, “Twenty years ago we began studying how people become wealthy. Initially, we did it just as you 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.”

Wealthy People

Back in dental school, I also initially agreed with the authors that wealthy people must drive luxury cars and live in big, expensive homes. Now that I’ve been practicing for several years, I realize from being around high-income people, that this is certainly NOT the case.

Most people have it all wrong about wealth in America. Wealth does NOT equal income. I thought it did. Being a doctor equaled being wealthy, at least that’s what I thought. Boy was I wrong!

Many of my doctor colleagues make good incomes but spend it all. So in essence, they’re failing to accumulate wealth. In the book we learn that wealth is what you accumulate, NOT what you spend. That’s why so many high income professionals have little to show for it.

The 7 Factors Of A Typical Millionaire

The book’s authors discovered seven common denominators among those that they interviewed who successfully built 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.

Big hat no cattle – Moooooo

The authors interviewed a 35 year-old Texan who owned a diesel engine business. He lived by the seven factors mainly by driving a 10+ year-old car, wore jeans to work, and lived in a modest lower-middle class neighborhood.

His signature line was that he didn’t own any big hats, but he had lots of cattle. He essentially didn’t have to say much or live a certain way to impress as he had plenty of assets to back it up.

The nominal definition of wealthy

One way the authors determined whether someone was wealthy or not was based on their net worth.

Net worth = Assets – Liabilities

For those labeled as being wealthy in the book (around 1996), they had a net worth of $1 million or more.

How wealthy should you be?

Another way of defining whether or not a person, household, or family is wealthy is based on one’s expected level of net worth. A person’s income and age are strong determinants of how much that person should be worth.

This is what I’ve always been led to believe. The higher one’s income, the higher one’s net worth is expected to be. Also, higher-income people who are older should have accumulated more wealth than lower-income producers who are younger.

Millionaire next door formula

After surveying people, the authors developed a formula or simple rule of thumb to determine if you’re wealthy:

    Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
An example

For example, Dr. A is forty-one years old and makes $155,000 a year.

He would multiply $155,000 x 41 = $6,355,000.

Dividing by ten, his net worth should be $635,500.

PAWs versus UAWs

The authors claim that if you are in the top quartile for wealth accumulation, you are a PAW, or prodigious accumulator of wealth.

If you fall in the bottom, you are labeled as a UAW, or under accumulator of wealth.

PAWs typically have a minimum of 4x the wealth accumulated by UAWs.

Their rule to be in the PAW category – you should be worth twice the level of wealth expected.

Dr. A’s net worth/wealth should be approximately twice the expected value or more for his income/age cohort, or:

$635,500 x 2 = $1,271,000.

If Dr. A’s level of wealth is one-half or less than expected for all those in his income/age category then he would be classified as a UAW.

So if his level of wealth were $317,750 or less (or one-half of $635,500).

Frugal

The three words that profile the affluent are:

FRUGAL * FRUGAL * FRUGAL

Being frugal is the cornerstone of wealth-building. Read that last line again until it really sets in.

Stanley and Danko posed the question, “Why is only such a small percentage of the population considered wealthy?”

You and I both know many households that earn six-figure incomes, but are still not wealthy. Why? Simple. Too many Americans live their life spending tomorrows money.

The authors emphasized just how many households in America are entirely dependent on debt. They couldn’t survive without it. 

“They are debt-prone and are on earn-and-consume treadmills.”

These same people believe that spending money on things that give them a wealthy image end up with more happiness. Whether they realize it or now, they’re on the hedonic treadmill of life.

Too many young people are indoctrinated with the belief that “those who have money spend lavishly” and “if you don’t show it, you don’t have it.”

How many times have you heard your kids say, “Dang, that dude must be rich!” when an expensive sports car passes by?

It’s the lavish lifestyle that sells the time on TV and newspaper stories.

Remember Robin Leach’s “Lifestyles of the Rich and Famous”?

Unfortunately, you’re not going to see too many TV shows that talk about becoming a millionaire means being frugal and working hard.

As a consequence, our youth are told that buying expensive items is normal behavior for affluent people.

They are led to believe that:

  • the wealthy have a high-consumption lifestyle
  • hyperspending is the main reward for becoming affluent
  • if you don’t display abundant material possessions then you’re not successful

Playing Great Defense

The Millionaire Next Door Defense

When most think about becoming wealthy, playing offense or generating a significant income is usually the first thing that comes to mind.

They assume that by focusing their energy on generating high incomes, they will automatically become affluent.

Most of the typical millionaires interviewed in the book also play great defense.

Playing great defense means that they are frugal when it comes to spending for consumer goods and services.

The foundation stone of wealth accumulation is defense, and this should be anchored by budgeting and planning.

I loved this quote in the book which is especially true for doctors: “It matters LESS how much more you make than what you do with what you already have.”

You see, most millionaires measure their success by their net worth, not their income.

Great offense + poor defense = UAW

If you want to really accumulate wealth, think about playing defense as much or more than playing offense.

Financial Independence

I first learned about FI from you guessed it, The Physician on FIRE. There seems to be too many high-income professionals these days that are facing a bleak retirement.

Most of this is due to their high consumption lifestyles that they’ve become accustomed to. Sometimes they realize this too late in life.

How would you like to be a 68 year-old surgeon that has no savings that asks himself, “Will I ever be able to retire?”

Just because somebody is a well-educated, high-income professional, doesn’t automatically translate to FI. It takes planning and sacrificing.

Do you want to become financially independent?

Is your goal someday to become financially independent? I hope so. It’s an unbelievable feeling.

Remember, your plan should be to sacrifice high consumption today for FI tomorrow.

Every dollar you earn to spend is first discounted by the dreaded tax man. This is how the typical millionaire thinks before making purchases.

You have a choice to make. Will you choose a lifetime of high taxes and high-living status (living in expensive neighborhoods and driving pricey vehicles) or will you live in a modest home and drive modest cars?

From personal experience, living in a less costly area has enabled us to spend much less on such things as:

  • property taxes
  • home owner’s insurance
  • furniture
  • vehicles

Why? We’re not constantly trying to keep up with the Joneses because our neighbors aren’t either.

Doctors, PAWs & UAWs

Most doctors are paid well. In fact, a physician’s average salary was $201,840 and dentists made $173,860 in 2016.

On average, doctors earn more than four times the income of the average American household.

The book’s research found that physicians typically aren’t very good at accumulating wealth. For every one doctor in the PAW group, there were two in the UAW category.

Why do they lag so far behind on the wealth scale? One of the reasons is that they get a late start. After four years of college, four years of medical school and several years of residency, they graduate and try to play catch up.

Another reason which ties in to the one above is something that Dave Ramsey calls “Doc-itis.” I admit, I had a touch of this disease after completing my residency. It all has to do with the sacrifice and delay we put on living the good life.

Once we graduate, many of us feel that we are “entitled” to the BIG life. Society expects it, right? And they give us a long list of “expects.”

They “expect” doctors to:

  • live in expensive homes
  • dress in style
  • drive expensive vehicles

If they live in a modest home and drive a four year old Honda Accord, they assume that their practice is mediocre. Too many these days judge a book by its cover and NOT by their net worth criteria.

Getting On The Same Page

Here’s something that most people overlook when it comes to wealth building. The Millionaire Next Door cites that your spouse’s orientation and beliefs toward thrift, consumption, and investing is a significant factor in wealth accumulation.

These couples spend their time, energy, and money on similar things.

It is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.

Want to make it worse? Try accumulating wealth when BOTH husband and wife are big spenders! Not going to happen!

Economic Outpatient Care

In the book, the authors discuss the term, economic outpatient care (EOC). It refers to economic gifts (money) parents give their adult children and grand kids.

They found that the more dollars they receive, the fewer they accumulate, while those who are given less actually accumulate more. This almost sounds like what the government is doing to our society today?

What this means to me is that it’s easier for these recipients to spend other people’s money (OPM) rather than their own.

EOC is widespread in America. More than 46% of the affluent give at least $15,000 worth of EOC annually to their adult children and/or grandchildren.

Some of this extra money goes towards paying for:

  • medical and dental expenses
  • college and graduate school education
  • purchasing a new home

What’s wrong with this picture?

If you constantly give your adult kids money, how productive do you think they’d be? Many of the people portrayed in the book that received financial gifts from their parents tend to have a lower initiative and productivity.

They started to become habit forming and needed them just to keep up their current lifestyle. Receiving these gifts makes them underachievers in life.

In my opinion, giving kids money just to consume teaches nothing.

Here’s a few lessons from the good book about work:

  • Proverbs 14:23 “In all toil there is profit, but mere talk tends only to poverty.”
  • Proverbs 12:24 “The hand of the diligent will rule, while the slothful will be put to forced labor.”
  • Proverbs 18:9 “Whoever is slack in his work is a brother to him who destroys.”

Rules For Affluent Parents And Productive Children

The last thing I want to cover is the author’s list of rules that the affluent interviewed gave regarding how they raised their children.

As a father of two young boys, I feel that teaching them about how to make and handle money is one of the most important gifts we can give them.

I’m not going to list each rule, as this is a review, but here are the ones I felt were most important:

1) Never tell children that their parents are wealthy.

Stanley and Danko noted that the adult children of UAWs tried to emulate their parents high-status/high-consumption lifestyle. On the other hand, most children of PAWs stated that they NEVER knew their parents were wealthy while growing up.

2) No matter how wealthy you are, teach your children discipline & frugality.

I still remember a handful of my friends growing up whose parents were multi-millionaires yet neither them or kids ever acted like it. This, to me, stood out as an awesome trait to pass down.

3) Assure that your children won’t realize you’re affluent until after they have established a mature, discipline, & adult lifestyle and profession.

Mrs. DFD and I had a conversation about this exact rule not that long ago. I told her that in this book there was a doctor that set up a trust for his children in a way that I’d like to do as well.

His plan was to NOT distribute money to his children until they were at least 40 years old. Because in this way, his money would have little effect on their way of life. Smart guy.

4) Emphasize your children’s achievements, no matter how small, not their or your symbols of success.

Many of the people interviewed agreed that we should teach our children to achieve, not just to consume. Teaching our kids that earning to enhance spending should not be the ultimate goal. Unfortunately, that’s what most do whenever they get a raise or bonus. Instead of wisely investing the excess, most typically spend it as fast as they make it.

Summary

One of the rules that I intentionally left out from the list above can basically summarize what’s been written thus far, especially for those of us that have kids or grandchildren.

Most of the interviewees agreed that teaching kids that there are a lot of things MORE valuable than money is one of the best life lessons there is.

Examples include:

  • Good health
  • Longevity
  • Happiness
  • Family/friends
  • Self-reliance
  • Reputation
  • Respect
  • Integrity
  • Honesty

All in all, even though this book was published in 1996, most of the principles taught are still relevant today.

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2 comments

  • This is one of my favorite books. I was a PAW and when I was 50 had 5x the calculated net worth from their formula. It is a book I referred back to many times. Many of the concepts from this book permeate my own books on physician finance in The Doctors Guide series. Live a modest life and enjoy it all along the way and you will do great.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  • You list some great book from your shelf.
    MND is definitely one of the best I ever read. Reading it as a physician is like a punch in the face though. We are the poster child for what not to do with money. All hat, no cattle. That sums us up.
    Fortunately, I read it and similar books early enough to become the exception. I spent well, but not to excess. I steadily grew my net worth. Now I’m teaching others to do the same.
    p.s. Stanley’s daughter just published the New MND. I have it but haven’t dug into it yet. You might check that out too.

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