Can one really become the 'Millionaire Next Door'?

[harley]

Disclaimer: I haven't read the book myself. But, my understanding of the basic premise is that an average earner can become a millionaire by living modestly, saving, and investing the savings.

It turns out that we have the perfect tool to test this: Firecalc! Even though I think it's over-optimistic, let's give it a shot. I ran it in reverse, starting with a 0 portfolio and using negative income, and it turns out that saving $15K/year for 30 years, invested in the default FC portfolio gives a 50% chance of saving about $1.2M. Now, the median household income in the US is $51K, and the taxes (SSI/Medicare + Fed) are about $6K, so that leaves about $45K for everything. So that leaves $30K/year for everything if you are going to become a millionaire in 30 years. And that assumes a 50% chance of "winning." If you want, say, a 75% chance it looks like you'd need to save $20K/year, leaving $25K/year.

No doubt there will be some here that say that they could raise a family on $25K/year, but I think most would agree that that would be pretty unpleasant. And, I think that the vast majority of participants here made much more than $50k/year (in 2014 household) dollars during the course of their career. So I have to disagree with most posters here and say that the article was actually right on. Sure, it helps (a lot) to be frugal, but it also helps to be lucky.

Except that's not what the book says, and that's where the author of the article goes astray. Stanley never said anyone can become a millionaire. He was just saying that most millionaires didn't inherit their money, they made it/saved it/invested their way to it. And that can still be done by many. Not everyone, but more than you might think. The article author implies that there's no reason to try, since not everyone can do it. The basic premise of the article is based on a misrepresentation of what the book is about.

 

[Fred123]

Except that's not what the book says, and that's where the author of the article goes astray. Stanley never said anyone can become a millionaire. He was just saying that most millionaires didn't inherit their money, they made it/saved it/invested their way to it. And that can still be done by many. Not everyone, but more than you might think. The article author implies that there's no reason to try, since not everyone can do it. The basic premise of the article is based on a misrepresentation of what the book is about.

So, the "typical" millionaire described in the book (which I downloaded for free; something that Mr. Stanley might or might not have appreciated) had an income of, in inflation adjusted dollars, close to $200K/year. That would put her in the 95% income bracket. So I guess the take home on this would be that you really can be a "millionaire", as long as you make more money than 95% of the people in the US and don't blow it on fancy cars and houses. Fair enough. But hardly sage advice.

 

[daylatedollarshort]

So, the "typical" millionaire described in the book (which I downloaded for free; something that Mr. Stanley might or might not have appreciated) had an income of, in inflation adjusted dollars, close to $200K/year. That would put her in the 95% income bracket. So I guess the take home on this would be that you really can be a "millionaire", as long as you make more money than 95% of the people in the US and don't blow it on fancy cars and houses. Fair enough. But hardly sage advice.

The purpose of the book and follow up books was to research the habits of people who already were millionaires and examine their backgrounds, education levels and spending habits, not to provide a self help manual or how to guide.

The most common professions were, not surprisingly, relatively high paying. But that wasn't enough. People had to have a good income and save money, too. Otherwise they were income but not balance sheet affluent.

 

[Fred123]

The purpose of the book and follow up books was to research the habits of people who already were millionaires and examine their backgrounds, education levels and spending habits, not to provide a self help manual or how to guide.

That's certainly not what the introduction to the book states:

"Why are so many people interested in what we have to say? Because we have discovered who the wealthy really are and who they are not. And, most important, we have determined how ordinary people can become wealthy. "

Also, lots of the book appears anecdotal, the self-employment mantra suffers from confirmation bias, etc. But, I guess I should back off since I'm treading on sacred ground here..

 

[daylatedollarshort]

That's certainly not what the introduction to the book states:

"Why are so many people interested in what we have to say? Because we have discovered who the wealthy really are and who they are not. And, most important, we have determined how ordinary people can become wealthy. "

Also, lots of the book appears anecdotal, the self-employment mantra suffers from confirmation bias, etc. But, I guess I should back off since I'm treading on sacred ground here..

The first and follow up books have lists of occupations and types of dull normal businesses all owned by millionaires. I am not sure what your point is. The books never claimed to be how to books on how retail workers at Walmart and Starbucks could become millionaires just with thrifty habits alone or super smart investing strategies.

The first book was written by authors with PhDs and based on actual research of millionaires. The research part is what made it unique at the time.

 

[Regulator]

The book is one of my all time favorites, and has provided me nothing but value.

Nothing like a reporter that trashes good people after they pass...

 

[Sunset]

Haven't read the book, but in my late 30's I became homeless, I had an old car, clothes on my back, a job meant for students, and facing lots of bills.

Now late 50's I'm one of those M's next door.

I didn't aim for it, but being homeless taught me not to waste $$$. I see lots of folks who feel _entitled_ to X, even if they have to pay with Credit card for it because they cannot afford it.

 

[Fred123]

The first and follow up books have lists of occupations and types of dull normal businesses all owned by millionaires. I am not sure what your point is. The books never claimed to be how to books on how retail workers at Walmart and Starbucks could become millionaires just with thrifty habits alone or super smart investing strategies.

The first book was written by authors with PhDs and based on actual research of millionaires. The research part is what made it unique at the time.

My point is that if you are claiming that if you have "determined how ordinary people can become wealthy," you aren't talking about the segment of the population that makes more money than 95% of all other households (as the book does). You are talking about those at the median, and, at $50K/year, they aren't ever going to be wealthy. Unless they get very lucky.

I'm financially independent. Part of it was hard work, frugality, and good investment choices. But a large part was also luck. And I'm sure that's true for a majority of people on this board. I find, especially in my ER, that the self-congratulatory nature of some people I've met who have retired early makes me very cranky.

 

[harley]

My point is that if you are claiming that if you have "determined how ordinary people can become wealthy," you aren't talking about the segment of the population that makes more money than 95% of all other households (as the book does). You are talking about those at the median, and, at $50K/year, they aren't ever going to be wealthy. Unless they get very lucky.

Or, unless you start a business and become one of the minority that succeeds at it. I've known a number of small business people (and am one, very small), and very few of them started out taking home $200K/year. Most of them weren't taking anything more than grocery money home, plowing it all back into the business. Starting and building a business is very hard work, and is the reason so many of the millionaires in the study lived very normal appearing lives.

Again, the basis of the study, and the reason for the book, isn't to show everyone how to become millionaires. It's to show that most millionaires didn't inherit their money, they made it. And by living below their (later life) means they built it up beyond the millionaire level.

If you are basing your interpretation of the book off of a back page blurb written by someone other than the author, you are missing the point. Here's a quote from Amazon that sounds a lot closer to what I remember of the book than what you've been saying. Pay close attention to the last rule. It pretty much is the opposite of what you are saying the book is about.

Stanley and Danko, who have spent the last 20 years interviewing members of this elite club: you just have to follow seven simple rules. The first rule is, always live well below your means. The last rule is, choose your occupation wisely. You'll have to buy the book to find out the other five. It's only fair. The authors' conclusions are commonsensical. But, as they point out, their prescription often flies in the face of what we think wealthy people should do. There are no pop stars or athletes in this book, but plenty of wall-board manufacturers--particularly ones who take cheap, infrequent vacations! Stanley and Danko mercilessly show how wealth takes sacrifice, discipline, and hard work, qualities that are positively discouraged by our high-consumption society. "You aren't what you drive," admonish the authors. Somewhere, Benjamin Franklin is smiling.

 

[Fred123]

Or, unless you start a business and become one of the minority that succeeds at it. I've known a number of small business people (and am one, very small), and very few of them started out taking home $200K/year. Most of them weren't taking anything more than grocery money home, plowing it all back into the business. Starting and building a business is very hard work, and is the reason so many of the millionaires in the study lived very normal appearing lives.

Again, the basis of the study, and the reason for the book, isn't to show everyone how to become millionaires. It's to show that most millionaires didn't inherit their money, they made it. And by living below their (later life) means they built it up beyond the millionaire level.

If you are basing your interpretation of the book off of a back page blurb written by someone other than the author, you are missing the point. Here's a quote from Amazon that sounds a lot closer to what I remember of the book than what you've been saying. Pay close attention to the last rule. It pretty much is the opposite of what you are saying the book is about.

This book is interesting because, despite what's actually in the book, everyone seems to be selecting passages that fit with their own beliefs, despite other passages that contradict those beliefs. For instance, it really does say (p. 1, Introduction) that they have "determined how ordinary people can be wealthy." Sure sounds like a how-to book to me.

And he actually recommends *against* starting a business unless it's for a self-employed professional:

Many people ask us, "Should I go into business for myself?" Most people have no business ever working for themselves. The average net income for the more than fifteen million sole proprietorships in America is only $6,200! About 25 percent of sale proprietorships do not make one cent of profit during a typical year.

and later says:

So what do these millionaires advise their children to do? They encourage their children to become self-employed professionals, such as physicians, attorneys, engineers, architects, accountants, and dentists.

This hardly seems a route to wealth for "ordinary people", unless you consider ordinary people those who get advanced degrees.

 

[clifp]

Disclaimer: I haven't read the book myself. But, my understanding of the basic premise is that an average earner can become a millionaire by living modestly, saving, and investing the savings.

It turns out that we have the perfect tool to test this: Firecalc! Even though I think it's over-optimistic, let's give it a shot. I ran it in reverse, starting with a 0 portfolio and using negative income, and it turns out that saving $15K/year for 30 years, invested in the default FC portfolio gives a 50% chance of saving about $1.2M. Now, the median household income in the US is $51K, and the taxes (SSI/Medicare + Fed) are about $6K, so that leaves about $45K for everything. So that leaves $30K/year for everything if you are going to become a millionaire in 30 years. And that assumes a 50% chance of "winning." If you want, say, a 75% chance it looks like you'd need to save $20K/year, leaving $25K/year.

No doubt there will be some here that say that they could raise a family on $25K/year, but I think most would agree that that would be pretty unpleasant. And, I think that the vast majority of participants here made much more than $50k/year (in 2014 household) dollars during the course of their career. So I have to disagree with most posters here and say that the article was actually right on. Sure, it helps (a lot) to be frugal, but it also helps to be lucky.

First of all I don't think 30 years is long enough, we are talking the accumulation phase for non early retirees. If you start saving 10K a year, at age 25 and continue saving at 10K adjusted for inflation by age 65, you'll have a portfolio worth 1.7 million (inflation adjusted) on average and 98% chance of ending up with more than $1 million at age 65. Now I made one significant change I started out with 95/5 AA and starting at age 55 moved it gradually to 75/25. (I used ********.com)

One of my IRA is all from contribution which were a few thousand a year from age 22-25 and then between 8-12K (max allowed by company into 401K) from 1985-2000. It is now worth over $1 million. Now I'll be the first to admit that I invested in a very good time for the market, and made some combination of smart and lucky investment but consider I hit the million mark saving less than 1/2 of what suggested and similar time frame, you'll understand why many of us think the LA Times reporter is full of it.

I agree that those in the bottom 20% will have a virtually impossible time becoming millionaires unless they increase their income. But for the median and above workers, saving 20%,10K+ is not impossible and while it may not be enough for an early retirement, a good chance you'll end up a millionaire by regular retirement age.

 

[jim584672]

"I see no special heroism in accumulating money," Taleb wrote, "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."

Wow, this statement shows an incredible amount of stupid, IMHO.
I guess NOT being someone's slave (a worker) has no value.
Having the security of being financially independent has no value either.

Having control over your own time - PRICELESS, but to him it is WORTHLESS.

 

[MichaelB]

"The Millionaire Next Door" heavily influenced my thinking in a positive way. For me the key message was not how to accumulate $1M, or even who could do that. I always viewed the $1M as symbolic.

My most important takeaway, which remains with me today, was that financial independence did not depend on income, it was a function of saving. Most people could become financially independent if they saved first and then spent, and when they spent, they did so based on need, not want.

It was a very simple message, but one I never articulated before reading the book.

 

[Mo Money]

This hardly seems a route to wealth for "ordinary people", unless you consider ordinary people those who get advanced degrees.

I have a law degree. Am I special? No. Slightly above average IQ, INFJ, born to two working-class parents. My mom sold insurance by phone at night to help make ends meet. I borrowed 60K in 1980s dollars to get my BA and JD degrees. I am ordinary, and I worked my a*s off to pick, and learn, a profession that paid well, then I started at $28K a year and lived below my means.

TMND was an inspiration to me, and in my view was a bit of a self-help book by showing what the authors' studies revealed. I then tried to model myself, in part, on the millionaires studied. I think the book says, directly or indirectly, that you can be financially independent if you take the tools you have and use them correctly. Even if you are ordinary.

So I think it is a bit of a self-help book, and certainly a study of millionaire data. But I don't think it requires anything other than ordinary people to engage in the self-help.

The LA Times writer was smug and snarky and self-congratulatory in his "let me say why this book was a lie" put-down of a study that helped a lot of people become prosperous. If that's self-congratulatory on my part to say that, so be it.

 

[marko]

I really reject the premise of the article that it is harder to become a millionaire now than it was in 1996.

Plus, a million dollars isn't what it used to be

I remember when an annual $10K was considered executive pay. So the book has it all wrong; it should be easier than ever to be the M next door.

 

[truenorth418]

Having read TMND several times, I would add that it is not a "how to" book on how to get rich on a coffee shop salary or how anyone could achieve $1MM net worth by forgoing caffe lattes. Nor did it argue that anyone who went into business for themselves would get rich. It was an academic study of the characteristics of million dollar net worth households in the U.S.



They didn't say "Do this and you will become rich".



They said, "Here is a profile of rich households, you might be surprised at what we found."



Big difference.



In my case, I was already interested in becoming financially independent but not making much progress. The book inspired me to create a formal plan to achieve it. I have friends and colleagues who read the book, took nothing away from it and years later are still working at jobs they hate.



It was not "luck" that I chose to take something tangible from the book's findings while others didn't.

 

[truenorth418]

As for Mr Reed, he died at the age of 92. He lived through the Great Depression, WWII, Stagflation, the Tech Bubble, and the 2008-09 market collapse - and apparently invested and lived a low profile lifestyle over his entire lifetime. It wasn't just the impact of the go-go 90s or whatever. He benefited greatly from decades of dollar cost averaging, the magic of compounding, and the time value of money. Ok, lucky he lived so long, but his choice to manage his money this way.

 

[papadad111]

Agree. Snarky article. Agree he missed the point of the book and sounded a bit like sour grapes.

As others have said I contend it is easier today than any other time in American history for an American to become a millionaire.

The book is my all time favorite financial oriented book and validated that the path that I was on would lead to financial freedom.

It would be cool to re-do the research with updates 20-25 years later and see what still holds in terms of the current millionaires "habits". Tech has likely changed the landscape some, But I bet the majority are doctors lawyers corp execs and small - medium sized business owners in the service sector.

 

[travelover]

My take away from the Millionaire Next Door is that when DW says I dress like a bum, I can honestly reply, "no I dress like a millionaire".

 

[sheehs1]

"The Millionaire Next Door" heavily influenced my thinking in a positive way. For me the key message was not how to accumulate $1M, or even who could do that. I always viewed the $1M as symbolic.

My most important takeaway, which remains with me today, was that financial independence did not depend on income, it was a function of saving. Most people could become financially independent if they saved first and then spent, and when they spent, they did so based on need, not want.

It was a very simple message, but one I never articulated before reading the book.

+1
Same for me. It was at this time, after my lightbulb moment, and after reading this book that I realized it was not just about the savings side. It was also about the debt reduction and paying attention to the spending side. Put the two together and the net, cumulative affects allowed for a "fighting chance".

As I recall from the book, his explanation of one particular older couple was that a good portion of their wealth was in the equity in their home and a 2nd piece of real estate that over the course of decades they had paid off. He was shocked that they were millionaires because they did not look the part.

The book wasn't just about "saving" a million dollars, although there certainly was that message. It was also about all those things that factor into one's net worth.

 

[Andre1969]

I can relate to what that article is trying to say, about it not being as easy for today's generation to amass wealth through hard work, saving, and LBYM as it was back in the day.

That doesn't mean you should give up completely, but it's not as easy, with today's stagnant job market, high cost of education, etc. I graduated college completely debt free, and landed a fairly decent job while I was still in school, so I had a pretty good head start. I ran into some obstacles along the way, such as buying a condo before I was truly ready to take on that responsibility, getting into a bad marriage, and so on, but I managed to pull through.

And, for all the talk of a "lost decade" in the 2000's, I've had a pretty good run in the stock market, from 1998 when I started getting serious about investing, until today. So maybe there was a little lucky timing there.

But, at the same time, I'm sure there are plenty of kids today who end up in my same situation...graduate debt free and land a decent job. And, who knows what the stock market may hold for future generations?

I guess you could say that the "millionaire next door" is a bit of a myth, simply because as a portion of the population, there aren't that many. It's not like they're all over the place. Using that net worth percentile calculator that's been referenced in other posts lately, it looks like if you're between the age of 55-65 and have $1M, that puts you in the top 16% of your group.

But, when you consider the timeframe that book was written, there are probably more millionaires next door, thanks simply to inflation. It was written in what? 1996? Adjusting for inflation, $1M then would be like $1.5M today, so I guess you could say it's 33% easier to become a millionaire today than it was back in 1996!

FWIW, if you're 55-65 and have $1.5M saved up, that puts you just shy of the top 10% of your group (89.92%)

 

[Midpack]

I can relate to what that article is trying to say, about it not being as easy for today's generation to amass wealth through hard work, saving, and LBYM as it was back in the day.

That doesn't mean you should give up completely, but it's not as easy, with today's stagnant job market, high cost of education, etc. I graduated college completely debt free, and landed a fairly decent job while I was still in school, so I had a pretty good head start. I ran into some obstacles along the way, such as buying a condo before I was truly ready to take on that responsibility, getting into a bad marriage, and so on, but I managed to pull through.

And, for all the talk of a "lost decade" in the 2000's, I've had a pretty good run in the stock market, from 1998 when I started getting serious about investing, until today. So maybe there was a little lucky timing there.

But, at the same time, I'm sure there are plenty of kids today who end up in my same situation...graduate debt free and land a decent job. And, who knows what the stock market may hold for future generations?

I guess you could say that the "millionaire next door" is a bit of a myth, simply because as a portion of the population, there aren't that many. It's not like they're all over the place. Using that net worth percentile calculator that's been referenced in other posts lately, it looks like if you're between the age of 55-65 and have $1M, that puts you in the top 16% of your group.

But, when you consider the timeframe that book was written, there are probably more millionaires next door, thanks simply to inflation. It was written in what? 1996? Adjusting for inflation, $1M then would be like $1.5M today, so I guess you could say it's 33% easier to become a millionaire today than it was back in 1996!

FWIW, if you're 55-65 and have $1.5M saved up, that puts you just shy of the top 10% of your group (89.92%)

The article is fine. But it simply misrepresents the book and it's author, as if the web article author had never read the book. He should never have forced a connection between the article he wanted to write, and the book. That's all anyone here is taking issue with...

 

[GTFan]

I can relate to what that article is trying to say, about it not being as easy for today's generation to amass wealth through hard work, saving, and LBYM as it was back in the day.

That doesn't mean you should give up completely, but it's not as easy, with today's stagnant job market, high cost of education, etc. I graduated college completely debt free, and landed a fairly decent job while I was still in school, so I had a pretty good head start. I ran into some obstacles along the way, such as buying a condo before I was truly ready to take on that responsibility, getting into a bad marriage, and so on, but I managed to pull through.

But we'll always need good people in the trades and they can easily make enough money to save and invest, there is no reason to spend a lot of money on higher education if you don't want to. Hell you can go in the military and do your 20 while saving as much as you can and still be a millionaire factoring in your pension etc.

I disagree that it's a lot harder now overall, but agree that the traditional white collar approaches may be more expensive than when we went to college 30 years ago. Of course there are a lot of ways to reduce college costs too such as using community colleges and working your way through school. There's no reason to carry debt except for what you think you can get back afterwards (within a relatively short time frame).

 

[mystang52]

It's been years since I read the book. But I had 2 takeaways: these people were hard workers, and were classic LBYM'ers. I don't recall the income levels, but if it was the aforementioned $200,000 or so more power to them - they worked hard, they're "allowed" to make that income. And they didn't let the income go to their heads and overspend.

 

[photoguy]

I enjoyed reading the TMND and the stories about individuals who LBYMd to success. Even though the book is essentially a collection of anecdotes, there's simply no question that with a given income, if you reduce spending you'll be more likely to hit millionaire status. It would have been nice if the author did a broader study that addressed the issue of only looking at the winners (i.e. survivorship bias) but the initial message was important enough.

I really reject the premise of the article that it is harder to become a millionaire now than it was in 1996.

I disagree that it's a lot harder now overall, but agree that the traditional white collar approaches may be more expensive than when we went to college 30 years ago.

I think it's probably far easier to hit millionaire status (inflation adjusted) today than it was in 1996 as there has been substantial real wage growth. While the median wage may not have moved much, the higher deciles (say 80-90 percentile) have definitely increased.

It would be cool to re-do the research with updates 20-25 years later and see what still holds in terms of the current millionaires "habits". Tech has likely changed the landscape some, But I bet the majority are doctors lawyers corp execs and small - medium sized business owners in the service sector.

I'd be surprised if a huge chunk aren't engineers (of all types).