Portrait of a Millionaire

Who is the prototypical American millionaire? What would he tell you about himself?

The Millionaire Next DoorIn the early-to-mid-1990s, Thomas Stanley and William Danko conducted a long series of surveys and interviews with people who had a net worth of $1 million or above. They converted these surveys into a series of papers and, eventually, into a popular book called The Millionaire Next Door, in which they sketched out the picture of the “average millionaire” and illustrated how real millionaires are nothing like the pop culture idea of millionaires.

Early on in the book – specifically on pages 8 through 11 in the current paperback version of the book – the authors discuss a list of traits that millionaires have in common.

It’s worth noting that the authors chose to use gendered terms based on the people they surveyed, as at the time many of the families surveyed were older single-income families of one man and one woman where the man provided the single income (as was validated by the survey data). This doesn’t necessarily reflect the gender split today – marriages come in all varieties and, often, both partners are working today.

Still, most of the conclusions from the survey continue to hit home today. I thought it would be fun to walk through the details of this “average millionaire’s” life and share my thoughts on it.

I am a 57-year-old male, married with three children. About 70% of us earn 80% or more of our household’s income.

While I would imagine that this split between marital partners would be less today, I would also guess that in many wealthy homes, the income results in one partner “hitting it big” in some fashion. Sure, there are power couples in which both partners earn a great income, but they aren’t as common as couples with an income disparity, mostly due to one partner’s career choice. I can think of far more couples with a huge income disparity that I know than couples who are close in income.

This is true even in my own marriage. I have earned substantially more in my career so far than Sarah has, mostly due to career choice. That’s not to say our marriage isn’t equal, however. I “hit it big” in terms of income with several of my side gigs that I worked on over the years (including, yes, The Simple Dollar), while the things Sarah chooses to fill her spare time with were more beneficial to our home economics (such as our lovely garden, which is 90% due to Sarah’s efforts). Those things balance out in my eyes in terms of contributions to our family’s needs and our respective sense of well-being, but that doesn’t match up with the income column on our balance sheet.

I think, if you have a strong and stable marriage, it can make a lot of sense for one partner or another to “hit it big” while the other partner can help support that income or work at a more personally fulfilling career.

About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are self-employed professionals, such as doctors and accountants.

I agree that self-employment/small business ownership is probably the most powerful tool people have for making their income skyrocket. While you can absolutely earn a great living while working for others, there are natural caps on such earnings, even at the executive level. The real money is to be made by sitting at the top of the pyramid, however.

I have experienced all three avenues – owning a small business, self-employment (that’s where I’m at right now), and working for others. Working for others was certainly easier in terms of not having to worry about the big picture, it featured its own stresses and didn’t offer opportunities to multiply my income.

Many of the types of businesses we are in could be classified as dull-normal. We are welding contractors, auctioneers, rice farmers, owners of mobile home parks, pest controllers, coin and stamp dealers, and paving contractors.

Most careers and businesses that earn good money aren’t exciting. Very few people are movie stars or politicians or whatever career you might envision as being glamorous and exciting. I sit in front of a computer writing (mostly) personal finance articles (or spend afternoons at the library doing research). No glamour there.

The path to financial success doesn’t usually involve fame and glamour. It almost always involves a lot of hard work and time invested in what seems like a pretty ordinary field.

About half of our wives do not work outside the home. The number one occupation for those wives who do work is teacher.

It’s worth noting that the word “wives” here is essentially a substitute for “spouse,” as this situation could easily be gender-reversed. At the time, as noted above, the more common situation was for the male member of a typical marriage to be the one who earned a strong financial return on his own. Remember, from the first statistic, about 70% of millionaires at the time of the survey earned 80% or more of the family’s income.

While there are no statistics to guide this, my strong suspicion is that this percentage has dropped significantly over the years between this survey and now, and there are some situations where it is the male member of the partnership that stays at home (in fact, I know one family in that very situation).

Our household’s total annual realized (taxable) income is $131,000 (median, or 50th percentile), while our average income is $247,000. Note that those of us who have incomes in the $500,000 to $999,999 category (8%) and the $1 million or more category (5%) skew the average upward.

I found it very interesting that the people in this survey have enough tax deductions to account for half of their income. It reminds me of many of the family farmers in the community where I grew up who would reinvest almost all of their revenues back into their farm each year, resulting in a pretty low overall income on paper.

We have an average household net worth of $3.7 million. Of course, some of our cohorts have accumulated much more. Nearly 6% have a net worth of over $10 million. Again, these people skew the average upward. The typical (median, or 50th percentile) millionaire household has a net worth of $1.6 million.

At first, I wondered if these numbers would change with inflation over time, with all of them raising by 50%-100% due to inflation since the survey was done in the 1990s. However, I realized that these numbers would probably stay pretty similar for a different reason: Inflation would also raise people who were in the $500,000 range in the 1990s to the low millionaire range today.

Thus, I suspect that this phenomenon remains true: Most millionaires have a net worth between $1 million and $2 million. Even among millionaires, multi-millionaires are not common.

On average, our total annual realized income is less than 7% of our wealth. In other words, we live on less than 7% of our wealth.

Think of it this way: Imagine your net worth – the value of all of your assets – is $1 million. This would mean that, if you stick with this average, you’d live on about $70,000 per year. Compare that to the actual income of the average millionaire from above – $247,000, of which $131,000 is taxable – and you see how most millionaires are socking away a pretty significant portion of their income, no matter how you slice it.

That’s the key of building wealth. You have to spend significantly less than you earn and save the difference. There is no magic formula other than that.

Most of us (97%) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than 20 years. Thus, we have enjoyed significant increases in the value of our homes.

It’s worth noting here that, given that the average net worth of a family in this survey is $1.6 million, those families live in a home that’s valued at an average of $320,000. In other words, their home makes up only 20% of their net worth even after they’ve experienced major increases in the value of their homes.

Home ownership is great, but it is not the road to wealth. These people found wealth in areas substantially beyond their homes.

Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80% of us are first generation affluent.

I do not know anyone who is financially successful who inherited significant money from their parents. I know several people who are millionaires, but their children are not going to inherit millions. Everyone I personally know who was financially successful was largely self-made, though almost all benefited from great childhoods.

The lesson? Build it yourself. Don’t expect your ship to come in.

We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our vehicles.

It’s worth noting that at the time, American-made cars (at least, cars from American manufacturers) were perceived to be the ones that were built to last. Today, that perception has changed – I think, among entry-level cars, Hondas and Toyotas have that perception (though many of those are actually made in America, the companies are Japanese in ownership), and that perception is backed up by Consumer Reports and other publications.

However, the cycle of owning late-model-used cars remains true. Late-model-used cars from a manufacturer that has a strong history of reliability is the best “bang for the buck” one can get in automobiles. If I see someone driving a brand new car, I feel pretty safe in thinking that the driver is either extremely wealthy or is feeling a financial pinch in their life. Rarely have I ever found that not to be true.

Related: The Best Reliable, Fuel-Efficient Used Cars for Simply Getting Around

Most of our wives are meticulous planners and meticulous budgeters. In fact, only 18% of us disagreed with the statement “Charity begins at home.” Most of us will tell you that our wives are a lot more conservative with money than we are.

I think that it is absolutely true that one member of a couple tends to be “in charge” of the finances. That matches up with almost every couple whose finances I’ve learned about in detail. For us, that’s usually me, though Sarah will occasionally pay a bill or two herself. I think that Sarah is more naturally frugal than I am, however, and I find that I am most economical with my money when I budget carefully, whereas Sarah will naturally make better spending choices that I do without budget constraint.

We have a “go-to-hell fund.” In other words, we have accumulated enough wealth to live without working for 10 or more years. Thus, those of us with a net worth of $1.6 million could live comfortably for more than 12 years. Actually, we could live longer than that, since we save at least 15% of our income.

This, to me, is the real reason to seek financial independence. Financial independence is a “go-to-hell fund,” to use the term of Stanley and Danko. It enables you to walk away from abusive or unfair situations. It allows you to control your own destiny in life. It puts the power and control over your own life into your own hands.

We have more than six and one half times the level of wealth of our nonmillionaire neighbors, but, in our neighborhood, these nonmillionaires outnumber us by better than three to one. Could it be that they have chosen to trade wealth for acquiring high-status material possessions?

It took me a bit to realize what the authors were getting at here. They’re making the suggestion that people who live in the same neighborhood have approximately the same home values as everyone else, which is likely true, and that a certain level of income would need to exist to be able to afford those homes.

To be able to afford a $320,000 home, you need to have a decent income, right? If you assume that a mortgage payment is at most 28% of a family’s take-home income, and that a person has a $320,000 mortgage at 4.5%, then they’re spending $19,452 annually on their mortgage, which gives them a take-home income of about $70,000 a year at a minimum. That’s a pre-tax salary of at least $100,000 a year.

In those neighborhoods where $320,000 homes reside, more than three out of four people have a net worth of under one million, but people need to have a six-figure household income. Where is that money going? The authors assume, and rightfully so in my opinion, that much of that money is going to high status material possessions, but things that don’t hold value well.

As a group, we are fairly well educated. Only about one in five are not college graduates. Many of us hold advanced degrees. Eighteen percent have master’s degrees, 8% law degrees, 6% medical degrees, and 6% Ph.D.s.

College education usually results in greater income. That’s not surprising. However, this next bit is…

Only 17% of us or our spouses ever attended a private elementary or private high school. But 55% of our children are currently attending or have attended private schools.

Most millionaires never went to a private school. That, to me, is very interesting, indeed. Private schools often have the impression as being training grounds of the wealthy, but it turns out that most millionaires actually come from public schools.

Yet, most millionaires send their children to private schools. Why is that? Obviously, the goal is to seek the best academic preparation for their children, but is it the best life preparation? To me, that’s actually pretty unclear.

We send our children to public schools, but we live in a state with a very strong public school system. I’m not sure what we would do in a state with a poor public school system, but my suspicion is that we would move elsewhere.

As a group, we believe that education is extremely important for ourselves, our children, and our grandchildren. We spend heavily for the educations of our offspring.

I’m absolutely on board with this. We believe highly in the value of education. Not only are the topics that our children are learning about a regular part of conversation at home, we also include them in our adult conversations about politics and literature and science (things that Sarah and I frequently talk about). We also spend time virtually every weekend doing something educational – just this past weekend, we spent most of a day at the Science Center of Iowa. Education is extremely important to us and we make that a big part of our family time.

About two-thirds of us work between 45 and 55 hours per week.

This is pretty accurate for both myself and Sarah if you average it across the year. Many weeks, we will actually work more hours than this, but there are other weeks where we don’t work at all (during summer vacations, for example). We both enjoy the work that we do, however.

We are fastidious investors. On average, we invest nearly 20% of our household realized income each year. Most of us invest at least 15%. Seventy-nine percent of us have at least one account with a brokerage company. But we make our own investment decisions.

This also seems perfectly accurate. Unless you’re saving a notable portion of your annual income (and not bringing in debt), you’re never going to be able to build significant wealth. It simply doesn’t add up.

If you want to be financially independent, if you want to be a millionaire, it has to start with either making an absurdly high income or else saving a significant portion of your income. Those are the only two routes, and only one of them is actually under your personal control.

If you want to be a millionaire, time to start buckling down and saving.

We hold nearly 20% of our household’s wealth in transaction securities such as publicly traded stocks and mutual funds. But we rarely sell our equity investments. We hold even more in our pension plans. On average, 21% of our household’s wealth is in our private businesses.

Today, I’d assume that these numbers have shifted, with far fewer people holding onto pension plans and people instead having 401(k) and IRA plans instead that hold a significant portion of their wealth.

Still, the principle is the same. People build wealth by socking away their money and not spending it.

As a group, we feel that our daughters are financially handicapped in comparison to our sons. Men seem to make much more money even within the same occupational categories. That is why most of us would not hesitate to share some of our wealth with our daughters. Our sons, and men in general, have the deck of economic cards stacked in their favor. They should not need subsidies from their parents.

This is an interesting perspective, and one that I’ve seen borne out more than a few times. I personally know of families that are much more open to giving money to their daughters than to their sons. I know of many families where some children are blatantly favored with financial gifts over other ones.

Is this really a factor that “evens” things out over the long run? I don’t really know. I also don’t know what our support of our children will be like as they transition into adulthood. I have zero interest in giving them any money as they reach independent adulthood, though.

What would be the ideal occupations for our sons and daughters? There are about 3.5 million households like ours. Our numbers are growing much faster than the general population. Our kids should consider providing affluent people with some valuable service. Overall, our most trusted financial advisors are our accountants. Our attorneys are also very important. So we recommend accounting and law to our children. Tax advisors and estate-planning experts will be in big demand over the next 15 years.

The idea of providing services to wealthy people as a model for building your own income is a smart one and the accounting field at least is a fairly strong one (my understanding is that there is something of a glut in the legal field).

It’s a good perspective to have in terms of choosing a career. What service do you think others will value? How can you build the skills needed to provide that service? I think this is great career guidance for anyone who is lost along that path.

I am a tightwad. That’s one of the main reasons I completed a long questionnaire for a crisp $1 bill. Why else would I spend two or three hours being personally interviewed by these authors? They paid me $100, $200, or $250. Oh, they made me another offer – to donate in my name the money I earned for my interview to my favorite charity. But I told them, “I am my favorite charity.”

You absolutely have to be frugal to become a millionaire unless you’re earning a huge amount per year. Without frugality, your spending is going to expand to fill up your income (and more), which makes it impossible to save for the future. You have to have the self-control and wisdom to not spend money now on wasteful things and instead put money away so that you can have incredible freedom and opportunity in the future.

It’s a hard choice. Most people don’t make that choice. That’s a big part of the reason why most people aren’t millionaires.

If you take no other message away from this article, it’s this: The path to becoming a millionaire almost always involves spending a lot less than you earn and working your tail off. That’s how the vast majority of millionaires made it to that state, and they’re rewarded for it with extensive personal freedom and opportunity. Are you ready to take up that path?

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