Good book - The Millionaire Next Door

[Telly]

The "Millionaire Next Door" by Thomas Stanley and William Danko is a excellent book. It is from the mid to late 90's, and was updated a bit in the early 2000 time frame.

Its research results and concepts are timeless. I didn't hear of it or read it until AFTER I ER'd. But reading it, it was "uh huh, uh huh,... hey I didn't know that!". I saw myself and my family in it (good), and many many others I know in it (bad!) .

It dispels the common notion of who these "millionaires" really are. Separates the "wealthy" from the "high income". And there really is confusion about that. Case studies of what makes the wealthy wealthy, and keeps them there. And how so many (the far majority) of the people that we think are "wealthy", are really high-income low-wealth people instead.

Great chapter on the concept of "Economic Outpatient Care", and how it can kill wealth. That has nothing to do with health, but rather parenting skills. I have seen some excellent examples (that's bad!) of EOC first-hand. What a disservice people can do to their children.

Even gets down to what type of vehicles/make the wealthy drive. Nope... nope... not one of those either!

I read this book with great interest and excitement. I learned a lot, but it also vindicated my lifestyle. I'm not so weird after all. There just aren't many of us in the population, we are spread thinly.

For the math-averse, there is very little math in this book, and you really can skip the few tables that are shown. The text is where its at. It is an interesting read.

For anyone who dreams of early retiring years in the future, consider this book your #1 must-read!

I assume I'm not the only one here who has read it.
All comments or discussion appreciated!

 

[Mr._johngalt]

I confess (again) that I have not read 'The Millionaire Next Door', and I may not. My number one
"must read" has always been 'Cashing in on the American Dream' by Paul Terhorst. I am sure others have good ideas too, but Paul's book is the "Bible"
for ER as far as I am concerned.

 

[bongo2]

I agree that it was a good book, but like a lot of things needs to be read with a skeptical mind. In one of Ric Edelman's books he gives his profile of the typical millionaire which is in direct contrast to Stanley's (high income professionals making money in the stock market, vs frugal small business owners with big houses).

One thing that was very informative, and surprisingly honest, about Stanley's book is, in the appendix, he actually tells you his methodology. When Stanley concludes that wealthy people are cheapskate's in fancy houses keep in mind that his sample set is people who live in expensive neighborhoods who will fill out an extensive and intrusive survey for $100.

 

[testo]

When Stanley concludes that wealthy people are cheapskate's in fancy houses keep in mind that his sample set is people who live in expensive neighborhoods who will fill out an extensive and intrusive survey for $100.

And I wouldnt even call these people "wealthy" By and large they are much closer to working stiffs who made good, or were careful enough to be frugal. The millionare next door, 1,2, 3, 4 million...? is not in the upper echelons of wealth. Anyone who bought a house in LA 30 yrs ago is likely a millionare today even if they eat cat food. Anyone who works for 30 yrs at any kind of reasonable wage and stuffs it into a 401K or even an annuity and doesnt p*ss it away will likley top 1 million. (or the inflation adjusted equivalent 30 yrs from now) Of course if we all lived like that maybe the economy would collapse and nobody would be "rich" except the "Rockerfeller types" , so it looks like a self limiting process

These might be "the millionaires next door" but they ain't necessarily "the rich people" next door

 

[Mr._johngalt]

Yeah Testo, you are correct. If the economy depended
on ERs to keep it going everything would grind to a halt.
I feel no guilt, as I did my part for many years, spending
and borrowing like there was no tomorrow. Actually,
there may not be, but that's another story..................

 

[RedOscar]

The truth is:

A million dollars ain't what it used to be!

So I suppose, one day the book will be irrelevant.

Red

 

[Telly]

Stanley and Danko DID NOT "conclude that wealthy people are cheapskates in fancy houses".

That is not in the book, and is far off the mark!

The title "The Millionaire Next Door" refers to the fact that a millionaire may be living right next door to you, and you may not know it.

The typical millionaire was not an ostentatious person. The typical car owned was a large American sedan, Buick was mentioned. Not a high priced foreign job. Usually 3 or more years old, often bought USED (so someone else pays the big depreciation bill). House tended to be the same house they had lived in for years, in the same old neighborhood. Tended to be a small business owner, business usually started by them. Made their own $, not inherited. Their Wives shopped at sales, at the same stores that most people shop at, and clipped coupons, and were an integral part of their success.

This is where the largest number of millionaires are at. Not the sports or "actors" jerks that make the media with its palaver for the ignorant masses.

The book also did a great job of showing who these people are who are spending money right and left. They are not the wealthy, but rather the high income, low wealth people that feel a need to "look" rich.

My observations in life track very well with this book.

There should be a song "Looking for millionaires in all the wrong places"...

 

[bongo2]

Telly, I'm not saying it's a bad book -- it's a good book.

One of the exceptions to frugality that Stanley points out is the large house (though you can argue that it's an investment). In his sample the average millionaire house was $320k. In 1995 (when the book was written) in middle america $320k was a big house. That would be a $600-700k house today. May not sound like much if you live in Palo Alto or Boston, but in most of the country that's still a very nice house.

You have to keep in mind the methodology that Stanley uses will lead him to certain types of millionaires. He says that the "trust fund baby" millionaire is rare, but how many trust fund babies will take the time to be interviewed for a hundred bucks? Stanley obliquely admits this failing in his "portrait of a millionaire": "I [the millionaire] am a tightwad. That's one of the main reasons I completed a long questionnaire for a crispy $1 bill." How many lawyers or investment bankers are going to do that?

I also have a serious problem with his expected level of wealth = age * (pre-tax income from all sources) / 10 - inheritances. When my wife quit her job we became suddenly wealthy, but then my income tripled and we're poor again. In addition, no 25 year recently out of college could possibly have 2.5 times their income saved up after only working 3 years.

I know I'm laying nothing but criticism on this book, but I also agree with everything that Telly has said. It's a good book, you just have to keep a few things in mind when you read it.

 

[Telly]

His "expected level of wealth" formula is a simple rule of thumb, as such, it will have start-up problems due to its use of constants and the sudden income of a new worker. But it is a simple approximation that most people can make.

In a different book, another author referenced this book, and said now the most common millionaire vehicle is the F150. Still no Jaguar or Lexus or whatever

 

[Ted]

 Anyone who works for 30 yrs  at any kind of reasonable wage and stuffs it into a 401K or even an annuity and doesnt p*ss it away  will likley top 1 million. (or the inflation adjusted equivalent 30 yrs from now) Of course if we all lived like that maybe the economy would collapse and nobody would be "rich" except the "Rockerfeller types" , so it looks like a self limiting process

This is p*ss poor economic reasoning. The thing that makes capitalism as productive as it is for the vast majority of Americans is reinvestment of wealth in capital -- not spending on consumer goods. Some people do this by directly investing in a business; others do it indirectly by investing in financial assets that make capital available to others to invest.

When people retire, they survive by "cashing in" the credits that they have accumulated as their reward for investing intelligently (or, in the case of social security, for supporting the previous generation of retirees). While, in the short term, their spending is "good for the economy," in the long term their consumption is an economic burden on working people. What is consumed by retirees can't be consumed by workers. If you are retired, however, don't feel too bad about this, because our generation gave them the education and infrastructure that they need to be productive!

 

[Testo]

I wasnt addressing what happens after people retire so I'm not sure exactly what the cascade was about.

As far as the quality of reasoning it is exactly the reasoning of every person and group and agency that calls themselves capitalist today. Even the current government wishes to push the middle class into a "welfare cadilac" mentality because they want people to spend. The those who run the "economy" will always find it preferable that the people spend more and more and more and not save. Spending good. Saving Bad.
I do not necessarily beli6ve this but this is how the wheel is currently turning. Ask Adam Smith. He and Marx both agreed this is what capitalism requires consumption and ever expoanding markets. A visciously frugal population hamstrings that effort and there are many people who want your money now.

If everone got frugalishious yes, that would be bad for business. I will not argue this point any more than I would argue that the sky is blue. I'm not against capitalism I did OK with it. Nothing like making money for nothing. But you can't deny one of its built-in moving parts.

When people retire, they survive by "cashing in" the credits that they have accumulated as their reward for investing intelligently...

And since there is no chrystal ball the inherent admission is they were intelligent and also lucky


This is p*ss poor economic reasoning. The thing that makes capitalism as productive as it is for the vast majority of Americans is reinvestment of wealth in capital -- not spending on consumer goods. Some people do this by directly investing in a business; others do it indirectly by investing in financial assets that make capital available to others to invest.

When people retire, they survive by "cashing in" the credits that they have accumulated as their reward for investing intelligently (or, in the case of social security, for supporting the previous generation of retirees). While, in the short term, their spending is "good for the economy," in the long term their consumption is an economic burden on working people. What is consumed by retirees can't be consumed by workers. If you are retired, however, don't feel too bad about this, because our generation gave them the education and infrastructure that they need to be productive!

 

[Mr._johngalt]

In fact, all consumption is good consumption as
far as propelling the economy forward. It keeps money circulating, provides employment, etc. "Trickle down"
is as certain as death and taxes. Even I, in my own small way, am providing critical fuel for economic activity.
This will always continue. Upon my demise, someone else will put into play whatever is left of my possessions.

 

[Ted]

For an economy to function requires a balance between capital investment, production of consumer goods, and consumption of those goods.

Now, guess which is easier for a nation to do -- have its people consume stuff, or have its people produce stuff, especially capital goods that won't "pay off" until (hopefully) some time in the future.

If you want to see what it is like to have a huge demand for consumer goods, but very little capital investment that allows them to be produced, take a look at most countries in Africa. Do you think that it would be "good for the U.S. economy" if we "created deemand for U.S. products" by shipping massive amounts of consumer goods to Africa (without receiving anything in return)?

(In saying this, I'm not opposed to sending assistance to Africa of a type that will enable the people there to develop human and physical capital.)

 

[Mr._johngalt]

To be clear, my comments about consumption and
"trickle down" were only meant to apply to the U.S.
Alas, I
don't know of any other nation based upon similar
beliefs as those of our founders. Soon the foundation
that was laid for us and sanctified with blood will
disappear, perhaps forever.

 

[Ted]

The need for capital investment and production -- and the difficulty of achieving them -- are common to every economy in the world. The U.S. and others that rely primarily on market forces, supported by public investment in education and infrastructure, have been most successful at achieving high production per capita and therefore a high standard of living.

The most basic concept of "supply side economics" is that goods have to be produced before they can be consumed, and capital has to be invested before goods can be produced. Liberal Democrats don't seem to understand this, although moderate Democrats seem to have caught on to the fact. At least in their rhetoric, conservative Republicans tend to underestimate the contribution that government makes (although there is always room for improvements in its efficiency).

The contribution that retirees make to the economy occurs while they are working (i.e., producing) and saving (i.e., investing). As a matter of personal values, I believe that they deserve to live off of the "credits" that they accumulated while working. But as a matter of economic fact, their consumption necessarily detracts from the current standard of living of people who are currently working.

In case you haven't guessed, I'm a moderate Republican. That's essentially like a Democrat who understands economics 8).

 

[Mr._johngalt]

I have a somewhat different view, but then I am not
at all moderate, nor am I Republican or Democrat.
Rather I am so far to the right as to be off the chart
politically. I often joke that I have more in common with Ted Kaczinski than Ted Kennedy.

 

[Ted]

 I often joke that I have more in common with Ted Kaczinski than Ted Kennedy.

I like to believe that I have more in common with Teddy Roosevelt than with either of those two (other than the fact that they are alive and he's not).

 

[Ed_B]

I read this book several years ago and it is one of my favorite books on personal finance. It doesn't get bogged down in the details, as many books do, but rather shows how many everyday "average" folks worked, saved, and invested their way to becoming millionaires. Technically, my wife and I were in the millionaire club in early 2000 before the stock market imploded. We had about $860k in investments (mostly retirement plans) and about $200k in home equity. If net worth defines millionaire status, we had it. These days, our portfolios have take a pretty good hit but are on the come-back trail now. In another year or two, we could well be back in the fold.

As to Red Oscar's comment that a million isn't what it used to be, I respond... so what? What IS what it used to be? Granted, having a net worth of $1,000,000 is not the end of all personal financial problems but having $1,000,000 is better than NOT having it, eh?


Ed_B

 

[Mr._johngalt]

Ed_B, I don't think you should count on returning to the
$1,000,000 net worth group. We were never close.
The point is that assuming the future will mirror
the past is a fool's game. We were never close to $1,000,000, and yet we can do about anything we
want. Suggest you ignore any particular target and
just make today count. In the long run (if you have one)
you will be better off.