Thomas Stanley and William Danko didn’t expect The Millionaire Next Door, their case study of America’s millionaires, to become a huge bestseller. Both academics at the University of Georgia, they set out to learn about the habits and lifestyles of the nation’s highest earners, not to write a personal finance bible. Readers were blown away by Stanley and Danko’s findings, though, namely that most millionaires don’t own fancy cars or throw lavish yacht parties.
On the contrary, they live by principles of “thrift, low status, discipline, low consumption, risk, and very hard work.” From this book, many readers realized that the dream of amassing over $1 million was not as out of reach as they had thought. Stanley and Danko’s 1996 bestseller can still teach us a lot about personal finance today, but it also falls short in a few key ways. Read on for a full summary and critique of The Millionaire Next Door.
The Millionaire Next Door: Summary
What do you picture when you hear the word “millionaire”? Sprawling mansions in Beverly Hills? Fancy restaurants, antique cars, and weekend trips to St. Bart’s?
According to Stanley and Danko, real millionaires look nothing like the extravagant stereotypes in our cultural imagination. Instead, they’re more likely than not to be your next-door neighbors who live in their starter home and have been driving the same used Volvo for the past ten years.
Most millionaires, they discovered, gradually amassed their wealth over time. Many of the people surveyed in The Millionaire Next Door owned a so-called “dull-normal” small business. They were “welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors.”
How did these people with a relatively ordinary income become millionaires? They all saved a larger-than-average proportion of their earnings by keeping consumption costs low and making early investments. By the time Stanley and Danko interviewed them to explore the secrets of the millionaire mind, these people had a net worth between $1 million and $10 million.
The authors focused on this bracket, because, at the time of writing, 95% of the country’s millionaires had between $1 million and $10 million. Out of all American households, only 3.5% were classified as millionaires. That means that only 5% of that 3.5% had wealth totaling greater than $10 million. Our images of private jets and shiny yachts, therefore, only apply to a tiny population of people and not to the “average” millionaire.
Because the majority of people in The Millionaire Next Door did not inherit their wealth, the authors concluded that “this level of wealth can be attained in one generation. It can be attained by many Americans.”
This optimistic premise is one reason that so many readers embraced the book when it was published and still do today. Let’s look closer at the book’s driving thesis.
The Millionaire Next Door: Main Premise
The main premise of The Millionaire Next Door can be found right in its title – the average millionaire could be anyone’s next door neighbor. Most of the country’s millionaires don’t look the part, or, at least, they don’t look like we imagine they do. When we think about the lifestyles of millionaires, we have an unrealistic and flawed view.
Most members of the millionaire’s club aren’t flashy spenders working superstar jobs. They’re not lottery winners or movie stars dropping $6k on the regular for table service at nightclubs. In fact, Stanley and Danko consider people who spend a lot on non-essentials to be “UAWs,” or under accumulators of wealth. Their net worth ends up being less than it should be as a result of all their spending.
On the contrary, the vast majority of the country’s millionaires live cautiously and modestly. They have a decent income, but they choose to live well below their means. Because of their careful, intentional budgeting, they become “PAWs,” or prodigious accumulators of wealth. They have a greater net worth than you would expect because they keep their costs so low.
In the end, The Millionaire Next Door shows that most of the country’s millionaires are PAWs with higher than average, but by no means superstar-level, incomes. The book clears away some of the aura around the word, millionaire, and suggests that it’s more attainable than most people realize. Is this is a realistic message for the book to impart to its readers?
The Millionaire Next Door: Full Critique
Stanley and Danko are technically spot on when they reframe our thinking about what it means to be a millionaire. If we define “millionaire” as an individual with a net worth of $1 million or more, then we’ll find that the vast majority of millionaires don’t have stratospheric net worth. Rather, most just make the one million dollar cutoff or go a little beyond, and they got there by saving and investing a higher-than-average percentage of their income.
Because superstar earners are so few and far between, the vast majority of us are not going to become rich that way. We should avoid “get rich quick” schemes and not include “become a movie star” or “get recruited by the NFL” in our personal finance plans.
Instead, we should learn from this book’s realistic assessment about how most millionaires amassed their wealth. Their commitment to hard work and early investments, along with their aversion to excessive consumerism, forged a path to financial independence.
If you’re serious about saving money and working toward financial security, then this steady approach is the most likely path. Of course, not everyone who lives by principles of thrift, hard work, and under consumption will become a millionaire. But most people who have become millionaires abided by those values.
At the same time, these lifestyle choices are not necessarily what most readers have in mind when they say they want to be a millionaire. Read on to learn more about the weak points in The Millionaire Next Door.
Where the Book Falls Short: 2 Major Weaknesses
Stanley and Danko challenge conventional ideas about what it means to be a millionaire, but they have too extreme an emphasis on low consumption. Their conclusions, furthermore, are not as revelatory as they seem at first glance when you consider the statistics behind their work.
Read on to learn more about both of these weak points in The Millionaire Next Door.
1. It Over-Emphasizes Low Consumption
Many readers buy this book because they want to learn about how to become a millionaire. The book offers a potential path: careful savings, long-term investments, and lifestyle choices that include staying in a starter home and driving a used car. But is this what most people mean when they say they want to be a millionaire?
Probably not. A lot of readers want their quality of life to improve along with their net worth, rather than having money invested in assets while their day-to-day lives remain exactly the same. As Felix Dennis, author of How to Get Rich, asks, would you rather have no money in the bank, but a fairy that pays for everything you buy, or have one billion dollars in the bank, but never be allowed to touch it? Most of us would choose the fairy.
Stanley and Danko, however, veer a little too close to the second scenario as they stress the importance of self-denial. Their thrifty definition of being a millionaire is not relevant to the wants and needs of many people.
While their definition can usefully reframe our thinking about what it means to be a millionaire, it also has its limitations. As writer, trader, and risk analyst Nassim Taleb says, “I see no special heroism in accumulating money, particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from the wealth…I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house.”
Part of the reason that the authors focus so much on “next door millionaires” is that they technically represent the “average” millionaire. Most millionaires have something like $1 million and not $10 million, and most saved this sum from hard work and thrift. But when readers say they want to be a millionaire, are they necessarily focusing on the lifestyle of the “average” millionaire?
It’s almost like you said you wanted to get a Ferrari, and the book told you that most Ferrari owners got their car in the Hot Wheels section of Toys R Us. While this might technically be true (the stat includes everyone from age three to age 93), it’s not what you had in mind when you said you wanted a Ferrari. You didn’t want to take an average of all Ferrari owners, six-year-olds included, but rather wanted to use much narrower and more personalized parameters, like adult owners of real cars who have a similar financial profile as you.
Stanley and Danko offer a potentially fruitful path toward becoming a millionaire, but it’s one that may not appeal or apply to all readers. The second weakness in this book has to do with its overall conclusions. From a mathematical standpoint, the book states some rather obvious statistics. Read on to learn why.
2. Its Conclusions Are Not All That Surprising
Part of this book’s popularity has to do with its so-called surprising findings about what it means to be a millionaire. Millionaires aren’t tucked away behind security gates on their own private tropical islands, the book insists. They live right next to you and me!
From a mathematical standpoint, though, the conclusion that most millionaires amassed their wealth through high saving, rather than high earning, is not astonishing. On the contrary, it’s totally predictable.
To understand why, first, consider this representative example involving people and hats of various heights. Let’s say we want to learn more about people who are nine-feet tall. In our scenario, we’ll count hats as part of the height.
In this scatterplot, you have people of various heights along the x-axis and hats of various heights along the y-axis. Hat heights are evenly distributed, but the number of people above six feet drops off rapidly.
Heights and Hats: Diagram 1
Now let’s look at the people who are nine feet or taller, hats included. Above this line, everyone is nine feet or taller, while everyone below it is less than nine feet.
Heights and Hats: Diagram 2
As you can see, there are a lot more people who hit the nine-foot mark because they’re wearing a hat. Only one person is nine feet on his own without a hat, because there are so few nine-foot tall people wandering the earth.
Now, we’re not really talking about heights and hats; we’re talking about income and savings rates. Let’s use this same scatterplot to learn about people who have $1 million or more. Do they make a high income, or do they just have a high savings rate (or, as the analogy goes, wear a tall hat)?
Here, income is represented along the x-axis and the rate of savings is represented along the y-axis.
Income and Savings Rates: Diagram 1
Now let’s estimate a line through the data so that we’re roughly focusing on everyone with a net worth of $1 million or higher.
Income and Savings Rates: Diagram 2
Just as there are only a few 8-foot tall people, there are also only a few people with incomes close to $1 million or higher. The rate that people save their money, rather than how much they earn, is much more evenly distributed across income levels.
When you look at the way income levels rapidly extinguish as you get closer to a million, you can conclude that it’s a lot more common for people to accumulate $1 million or more by significantly raising their savings rate than by boosting their income into the six digits.
This math shows us that most millionaires amassed their fortune through saving a lot. While this is useful to know, it’s not necessarily as revelatory as the marketers of The Millionaire Next Door have made it seem. By simply looking at the numbers, you can figure out on your own that most millionaires became wealthy by spending little and saving a lot.
Given this mixed review of The Millionaire Next Door, what’s the final verdict? Should you read this book?
Reader’s Choice: Should You Read The Millionaire Next Door?
All in all, The Millionaire Next Door has a lot to teach us about the choices and lifestyles of the average millionaire in the US. Whether or not it’s the most enlightening book for you largely depends on what you’re looking for.
Is your main financial goal to save over $1 million in the bank and assets while spending little? If so, then this book will be right up your alley.
Or would you rather spend well on things that you enjoy, but not necessarily go over the tipping point from $900k to $1 million? If this sounds like you, then this book may not apply as well to your financial goals.
It’s also important to remember that this book came from a study of the nation’s millionaires. It’s valuable and interesting for those who want insight into how others accumulate wealth rather than tips for how to do it themselves.
In closing, let’s go over the main takeaways from The Millionaire Next Door.
The Millionaire Next Door: Final Takeaways
The Millionaire Next Door offers several lessons that endure for people today. To responsibly manage your finances, you generally want to save more, spend less, and avoid debt that you can’t afford. You should also take advantage of compound interest growth by making smart investments early in life.
At the same time, you won’t find much discussion of quality of life or increasing your spending in a sustainable way in these pages. After all, it was not originally meant to be a personal finance guide, but rather an in-depth study of the nation’s millionaires.
The book does not promise that anyone who saves and invests will become a millionaire, nor does it discuss social realities of inequity and privilege. You should read with a critical eye, so that you don’t come away with an overly idealized view of economic mobility or forget that some people experience barriers to wealth while others have more doors open.
Ultimately, the book’s lessons about what it means to be a millionaire can be useful for anyone who is trying to set financial goals and find realistic ways to work toward them. Readers will need to strike their own balance between self-denial and consumption as they take control of their personal finances.
