One of the most influential books I’ve ever read in terms of shaping my thoughts on personal finance and helping me figure out what to do. This is one of a few books I read at my financial low point, along with Your Money or Your Life and The Total Money Makeover, that really helped me figure out a new direction with my money and my overall life.
The Millionaire Next Door is a book written by Thomas Stanley and William Danko in which the authors did an extensive study of true millionaires in the United States – people with a verifiable net worth of $1 million or more – and used the results of that study to draw some general conclusions on what it truly takes to build financial success.
And what were those general conclusions? Here’s how I summarize them:
First, people who accumulate wealth are usually quite frugal and rarely flaunt their wealth; people who flaunt their wealth rarely have much in the bank. For the most part, people with actual money in the bank are frugal people; people who aren’t frugal are usually scraping bottom.
Second, one of the best ways to accumulate significant wealth is through self-employment and entrepreneurship. In many ways, The Millionaire Next Door was a big initiator of my career shift into self-employment. It really made me think seriously about how I could start working for myself and enjoy a lot of personal flexibility along the way.
Finally, financial success comes not just from money management, but from how you live your life as a whole. Your relationship with your wife and children is vital. Your relationship with friends and coworkers is also vital. Your ability to set personal goals is also vital. The car you drive, the neighborhood you live in … the list goes on and on. All of these things (and many other elements of life) are intimately connected to your ability to accumulate wealth.
Those are really valuable conclusions that line up well with my own experiences over the last decade, in which I’ve changed careers and completely rebooted many aspects of my life.
The question, though, isn’t whether those conclusions happen to line up with someone’s life, but how exactly can you put those ideas into action in your life.
In other words, what action steps can you start taking today to become a “millionaire next door”?
The rest of this article focuses on specific actions you can take on today and new habits you can start working on right now in order to get your life in line to become a prodigious accumulator of wealth as laid out in that book.
Let’s be clear here: frugal does not mean being an ultra-cheapskate. Instead, the word points you to three distinct behaviors.
First, don’t spend your money on things that don’t provide lasting value to you. If something doesn’t provide lasting value to you, don’t spend more than the minimum on it. For example, most meals are completely ordinary and forgettable, so spend the minimum on those meals. Splurge on occasional meals that are meant to be memorable ones. In other words, eat very simple home-prepared meals most of the time and when you do choose to go out for a special occasion, go out somewhere genuinely nice and memorable.
Second, when you decide to buy something, focus on reliability and ease of use. If you’re buying something you’re going to frequently use, spend the time to do homework on that item and find the version of it that’s going to last for a very long time and not need regular replacement. Find the version that meets your needs – extra bells and whistles rarely meet your needs, so disregard them (I actually view lots of extra features as a drawback as they usually mean extra points of failure that I don’t need).
Finally, don’t spend money just because you have it. These strategies don’t go flying out the window just because there happens to be cash in your checking account. Put that money aside for retirement or for other big life goals or for big expenses you know are coming down the road, like a car replacement. This goes back to not spending your money on things that don’t provide lasting value.
Don’t Flaunt Your Wealth
This is actually just a simple way of stating a number of different principles.
For starters, stop worrying about what other people think. The honest truth is that other people don’t think about you nearly as much as you think that they do; this is called the “spotlight effect.” Often, when you are considered, it’s your character or personal habits or skills that are thought about, not the stuff that you own or the way you present yourself. Present yourself in a simple, clean way. Don’t buy anything to impress others.
Similarly, people who flaunt wealth often become a target. Expensive cars often get targeted by thieves. People wearing expensive clothes or jewelry get targeted by robberies. Scammers will target you, too. The people you want to impress with flaunting wealth often don’t notice; the people who you don’t want to attract end up noticing you.
Finally, money spent on flaunting wealth or trying to impress others rarely means anything for you. In the end, it’s you that’s alone in bed at night (or next to your partner). It’s you that’s the only person in your own heart and your own mind. Stuff spent impressing others doesn’t do anything at all to help the quality of your day to day life or the security and happiness and depth of your own thoughts and internal life. In other words, flaunting your wealth brings virtually no lasting joy and generally only brings problems.
Look for Routes to Self-Employment and Entrepreneurship
Most people who end up becoming wealthy pillars of the community often find that route through entrepreneurship and self-employment. They don’t burn the best years of their life making money for others. They seek out ways to make that profit for themselves. Here are three strategies to follow that path.
First, be a lifelong learner. You should make time each and every day to learn something new and truly challenge your mind. It doesn’t necessarily have to be pointing toward your next career step, as part of the advantage of lifelong learning is ensuring that your ability to learn remains razor sharp and that you’re adding to your overall body of knowledge and skills. This should be daily practice.
Second, start some side gigs and see what takes root.. Start a side business that seems interesting, whatever that might be. Everyone’s interests are different. Just make sure that you can identify a path to profitability, and don’t worry about investing a lot of hours in it initially. The best side gigs, in my experience, involve investing a lot of up-front time with little return, but little up-front cost, too. Look for things where you enjoy that up-front time.
Finally, get your financial foundation as strong as possible so you can make the leap sooner rather than later. Make good basic financial moves. Spend less than you earn. Pay down your debts. Save for retirement. Use that surplus you have from living frugally to build a strong financial platform that gives you the freedom to make bold choices with your side gigs and independent professional life.
Build Strong Family Relationships
Many “millionaires next door” rely on strong family bonds to help them in challenging times and to provide constant support and nurturing. Here are some strategies for building that in your own life.
Put aside regular focused time for your family with minimal distractions. If you’re married and especially if you have children, block off uninterruptible times on your calendar to spend with those core people. Turn off distractions (like your cell phone) and focus on those people in the moment. If you’re single, call some of the relatives that you care about and focus on that conversation. Pay lots of visits, too.
Listen to them and participate in what they care about. If you’re not sure what to do, ask questions and listen to the answers. See what you can learn about the person you’re talking with. Don’t just think of the next thing to say about yourself. Even better, if you get a chance, participate in something they care about. Play your son’s favorite computer game, even if he thrashes you at it. Ask your daughter for a tae kwon do lesson. Go to bingo night with your grandma.
Take responsibility when you make a mistake. You’re not perfect. You’re going to mess up. Maybe you’re angry at some time when you shouldn’t be. Don’t blame others. Admit when you messed up and admit it to the people who you hurt with your mistakes. Point to your own failings and don’t throw blame at others. Blaming others is the easy, lazy route. Then, strive to take action to fix that part of you that caused the mistake.
Build Strong Professional Relationships
Much as with families, a strong career is built on the back of good relationships. Strong professional connections can help you even when you switch to self-employment and can help you move back to your older career if new initiatives don’t work out.
Cultivate real connections and give help when you can multiply value. Take the opportunity to meet lots of people in your field, but make those connections real. Don’t just collect business cards. Follow up. Write down social media and other methods of contact along with a good reason to follow up. Then, pay attention to what they’re saying. Touch base regularly. When you see an opportunity to help, do so, especially when it’s as easy as connecting two people together or helping to connect someone to a resource they need. When you help other people increase their value, you become more valuable.
Take responsibility when you make a mistake. Much as with family situations, take responsibility when you mess up. Don’t blame others when you make a mistake. Don’t look for excuses. Step up, admit that you screwed up, and point solely at yourself. Beyond that, come up with a plan to improve yourself so that you don’t repeat the mistake.
Give lots of credit to everyone else for successes. On the other hand, when you’re successful, spread the credit around. When you give a presentation, take plenty of time to give credit to everyone who helped you and helped the project. When talking to supervisors, give positive credit to everyone who is a positive help in the workplace. Giving credit where it’s due never hurts you; it only helps you as it shows that you’re a team-oriented leader.
Another part of becoming “the millionaire next door” comes from building strong community ties and social relationships to boot. Again, these are relationships that support you when you’re down and boost you and bring comfort when times are good.
Take active steps to be involved in community groups. Don’t just sit at home thinking about how you’d like to be more involved. Turn off the television and get more involved. Look for civic groups to join; you can find many of them via your city’s website. Look for other community groups to be involved in via Meetup. Check out the offerings at the local library, too. Get involved in local politics if that’s your jam; check out town meetings and school board meetings and city council meetings. Get involved in a religious organization, too. Get yourself out there.
Step up to leadership roles. When there’s an opportunity to participate in a group that resonates with you, do it. When there’s an opportunity to lead, swallow your fears and do that, too. There is no better opportunity to build tons of great community relationships than when you step up to leadership in a community group.
Give without expectation of receiving. Civic organizations are the best place in the world to give of yourself without expectation of receiving, because you rarely get direct rewards for doing so. There are many rewards, of course, but they’re all indirect and they build slowly over time. So, when you dive in, expect to give without receiving anything in return and do it with your whole heart. Good things will return to you, often in ways you don’t expect.
Identify and Set Goals for Yourself
Another aspect of becoming the “millionaire next door” is in setting and achieving personal and professional goals of all kinds. It’s all about thinking of the future, deciding what you want, concocting a plan to get there, and then putting that plan into action.
Paint a picture of the life you (realistically) want for yourself in a year, five years, and ten years. What do you want for your life a year from now? Five years from now? Paint detailed pictures of those scenarios in your mind. Keep it realistic, but optimistic, especially in terms of achieving things that you control. Don’t rely on what others control.
Pull tangible goals out of those pictures. Figure out what you want most from those pictures, then identify specific clear goals that will bring you from where you are now to where you want to be. For example, if you picture yourself thinner, you may want to define a weight loss goal. If you picture yourself with a happier career, you may want to plot a goal of a different career or self-employment.
Identify and execute daily steps to achieve those goals. You should have a few big goals in mind. Now, what are you going to do today to make those goals happen? Ask yourself that question seriously each morning. Perhaps your weight loss goal is achieved by choosing a reasonable calorie target and counting calories. Maybe you are striving to change careers, so each day might involve self-directed learning and writing business plans.
Make Smart Choices for Your Biggest Purchases
A final but extremely important point that the book makes about the patterns of “millionaires next door” is that they’re careful and smart about their biggest purchases. This goes beyond just doing one’s homework about a purchase and also looks at the broader impact in one’s life. Here are three strategies to maximize that value.
Choose a modest place to live that’s close to a low-cost grocer. Don’t live in an overly large home, as they tend to have high utilities, high maintenance costs, high property taxes, and often involve expensive association fees. Instead, choose a modest home and instead consider location. Is it near a place where you can get inexpensive groceries? Can you easily access mass transit? Both will save you even more money by cutting down on grocery and transportation costs, and both will save you a lot of time as well.
Focus on buying late model used reliable cars and drive them until serious problems arise. The best “bang for the buck” when it comes to a car is to buy a late model used car (meaning one from a model year between two and five years earlier than the current year) from a reliable manufacturer (Honda and Toyota are two prime examples) and then driving it until it begins to show real problems, then replacing it. This strategy also centers around following the maintenance schedule to the letter to maximize the lifespan of the car. These steps will reduce the initial car acquisition cost and spread out the time between car purchases, enabling you to get the most value for your auto dollar.
Encourage getting a modest education and focus on maximizing value from it. The most cost effective way to invest in yourself and in your children is to get a reasonably priced education and then use that educational opportunity to squeeze out as much value as possible. Don’t shoot for a $50,000 a year college; instead, go to a much more modest school and use every second there as an opportunity to build lifelong relationships and jam in as many experiences and as much knowledge as possible.
If you use these principles and strategies as the bedrock of your life, then you’re going a long way toward building yourself into the exact kind of person described in The Millionaire Next Door.
These strategies aren’t a ticket to wealth. Instead, what they do is build your life into a large reservoir into which many great things can flow and be saved. Relationships. Opportunities. Professional income. Ideas. Investment returns.
Build that reservoir. Keep with it and make it strong. Give it time to fill. That’s the recipe for success.