‘Millionaire Next Door’ lessons stand test of time
Adviser reminded of how rich live below their meansDecember 3rd, 2015
In 1996, Dr. Thomas J. Stanley published his New York Times best-selling book, “The Millionaire Next Door.” The book shattered the commonly held beliefs of the wealthy in America.
Stanley used extensive research to reveal the secrets of the wealthy in America. His research concluded that the majority of millionaires in this country got that way through self-discipline, frugality, and hard work. While celebrity and inheritance may explain a portion of the wealth in this country, by far, the majority of the wealthy in America attained their wealthy status by emphasizing the characteristics mentioned above.
I would like to review Stanley’s findings from The Millionaire Next Door for a couple of reasons. First, Stanley was tragically killed in an auto accident earlier this year. As a result of this, I feel it’s important to remind people of his timeless wisdom on how to become wealthy in America.
I also feel as if I have lost a personal mentor. His groundbreaking book, “The Millionaire Next Door,” has been the most helpful book for me with regards to my personal financial life, as well as a resource of knowledge to share with my clients.
On page one of the book, Stanley states the following: “Many people who live in expensive homes and drive luxury cars do not actually have much wealth. Then, we discovered something even odder: Many people who have a great deal of wealth don’t even live in upscale neighborhoods …. That small insight changed our lives.”
From this initial insight, Stanley discovered that there are seven common characteristics of those who are truly wealthy in this country: They live well below their means; they allocate their time, energy, and money efficiently, in ways conducive to building wealth; they believe that financial independence is more important than displaying high social status; their parents didn’t provide economic outpatient care; their adult children are economically self-sufficient; they are proficient in targeting market opportunities; and they chose the right occupations.
According to Stanley, being frugal is “the cornerstone of wealth-building.” His studies reveal that the majority of wealthy individuals in America live below their means. In other words, they exercise self-discipline in their spending, and they minimize debt.
We all can remember a few years ago how the Great Recession hurt many people financially due to their debt. Stanley emphasized that you just don’t see this with most millionaires. They minimize their debt, and they live below their means. In his book, he points out that if your goal is to become financially independent, you must sacrifice high consumption today for financial independence tomorrow.
The second characteristic of most millionaires in this country is that they actually spend time thinking about their net worth.
Stanley wrote that wealthy people spend nearly twice the number of hours per month planning their financial investments as those who are less wealthy. He often refers to doctors and mentions that many times, doctors are working so hard seeing patients that it’s easy for them to neglect their own financial planning, knowing that their substantial income should be sufficient.
However, according to Stanley, “...planning, budgeting, and being frugal are essential parts of building wealth, even for very high-income producers. Even high-income producers must live below their means if they intend to become financially independent.”
In my opinion, characteristic No. 3 may be the most important one. Millionaires, Stanley says, believe that being rich is more important than acting rich. In my experience as a financial adviser, I have seen many people go through unnecessary heartache because that they wanted to “look rich.”
When someone takes on crushing debt in order to appear as if they are wealthy, they are setting themselves up for a fall. Stanley’s research revealed that millionaires “believe that being frugal is the key to achieving independence. They inoculate themselves from heavy spending by constantly reminding themselves that many people who have high-status artifacts, such as expensive clothing, jewelry, cars, and pools, have little wealth.”
Characteristics four and five have some similarities. Stanley pointed out that most millionaires don’t feel as if they’re entitled to anything. Most have been taught to work hard for whatever it is they want to achieve. Furthermore, most millionaires succeeded because they realized that they weren’t going to be bailed out. He doesn’t suggest that millionaire parents love their children any less, but he emphasized that they show their love for their children by preparing them for the real world.
In one excerpt, Stanley wrote, “You can’t hide from adversity. You can’t hide your children from life’s ups and downs. The ones who achieve do so by experiencing and conquering obstacles ... even from their childhood days.”
Characteristics six and seven also have some similarities. Most of the affluent in America are business owners. Stanley pointed out that not all people are cut out for self-employment; however, for those who are self-employed, they are “four times more likely to be millionaires than those who work for others.”
So what type of business would be the best predictor of a millionaire? Stanley wrote that “you can’t predict if someone is a millionaire by the type of business he’s in.”
Personally, the wealthiest individual I’ve ever met in my life was a scrap metal dealer who lived in Moses Lake. He had been a hobo who rode the rails during the Great Depression, and he still dressed like he was riding the rails. However, his net worth was off the charts, and he greeted every person he met with a silver dollar and a piece of candy. Why? He told me that during the Depression, few people were kind to him so he vowed that if he ever was fortunate to have money, he would bless every person he met.
Bottom line, it is the individual and not the specific business that determines success. Stanley stated it well: “After 20 years of studying millionaires across a wide spectrum of industries, we have concluded that the character of the business owner is more important in predicting his level of wealth than the classification of the business.”
Stanley will be missed, but his ideas of what is takes to be a millionaire should always be with us.
Rick Biel is a financial adviser with Biel Investment Management, in Spokane. He can be reached at 509-995-5734 or firstname.lastname@example.org.