This week, The Simple Dollar is conducting a detailed review of the often-lauded personal finance book The Millionaire Next Door. First published in 1996, the book has held a consistently high level of popularity for more than a decade. What valuable insights does this book contain? By the end of the week, perhaps we’ll discover its secrets.
The general premise of the book is that the pop culture concept of a millionaire is quite false and that most actual millionaires live a very simple lifestyle. The authors, Stanley and Danko, did extensive profiling of people whose net worth defined them as millionaires along with those whose salaries and age defined them as likely millionaires and, using this data, created a detailed profile of who exactly a typical millionaire is. From there, extensive interviews with these “typical” millionaires created a much more detailed picture of what it actually means to be a millionaire in today’s society.
What does this have to do with personal finance? Rather than the image that most of us have of millionaires as people who inherited their money or got famous, most of the people that are actually millionaires got there through strong individual financial planning. They’re frugal people with a head on their shoulders and are often indistinguishable on the street from anyone else.
In the introduction to the book, Stanley and Danko break these traits of millionaires down into seven basic factors (quoted from pages 3 and 4):
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.
Most of the rest of the book goes on to outline Stanley and Danko’s findings on each of these factors. A chapter is devoted to each factor, bookended by an opening and a closing chapter.
For me personally, evaluating my life as a snapshot through these factors made it clear how different the old, crazy spending me was different from the newer, financially sound me. The biggest hurdles for me were living well within my means and not worrying about displaying social status; I bought into the psychology that the appearance of affluence was of vital importance, when what really matters is the money in the bank.
In the next part of this five part series reviewing The Millionaire Next Door, we’ll tackle the first three chapters of the book in detail, which provide a profile of the proverbial millionaire next door and carefully looks at the millionaire’s spending habits.
The Millionaire Next Door is the first of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.