I recently read through The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas Stanley and William Danko, and I’m outlining the book here both to help myself learn and remember its principles, and to help others in their studies:

One Paragraph Summary:
Contrary to media portrayal, many millionaires in the US neither inherit their wealth nor earn eye-popping salaries. Instead, they are often entrepreneurs and self-employed persons who slowly accumulate wealth by living with their means, and investing their time and energy into financial planning.

There are seven common factors among the wealthy:
1) Living below one’s means
2) Allocating one’s time, energy, and money towards processes that build wealth
3) Putting more weight on financial independence than showing social status
4) Not relying on financial help from parents
5) Not giving excessive financial help to children
6) Being proficient in targeting market opportunities
7) Choosing the right occupation

The wealth formula: expected net worth = age * annual pre-tax income / 10

The average millionaire:
– Has a median annual household taxable income of $131,000
– Is fairly well educated, with the vast majority at least having a college degree
– Is self-made, receiving little or no financial help from parents or other family.

Trend: an entrepreneurs accumulates a lot of wealth from striking it out on his own in a low-status job, but then encourages his children to not follow his example – instead living a life with higher “status” but less wealth.

Part 1: Frugality
– Most millionaires surveyed don’t care to spend on conspicuous consumption, and spend very little on cars / clothing / accessories / houses in high-status neighborhoods
– Most answer yes to the following four questions:
– Does your household operate on an annual budget?
– Do you know how much your family spends each year for food, clothing, and shelter?
– Do you have a clearly defined set of daily, weekly, monthly, annual, and lifetime goals?
– Do you spend a lot of time planning your financial future?
– Many millionaires are very frugal – because they were frugal before becoming wealthy, and the habit stuck – like how most joggers are in excellent shape. Often, it is a spouse who is tremendously frugal.
– For most millionaires, taxable income / salary is a small fraction of total wealth (4%) – it’s less about earning a lot per year, and more about taking what you do earn and saving / investing it.

Part 2: Time, Energy, and Money
– The wealthy spend more time learning about financial investments, choosing financial advisors, and planning their finances
– It can be quite hard to accumulate money in a high-status career – you’re expected to follow certain social conventions (clothing, neighborhood, cars), forcing you to spend money
– High earning / low wealth folks often save pennies but spend dollars trying to be thrifty – spending days to get an expensive car at ‘below dealer cost’ instead of spending time on investments
– Everyone wants financial freedom, but only the wealthy actually spend time planning finances and handling investments
– Almost all wealthy people are passive investors – invest and forget, instead of actively trading.

Part 3: You Aren’t what you Drive
– The wealthy believe money shouldn’t change how you live your life – money is only a report card, to show how you’re doing

Part 4: Economic Outpatient Care
– Helping support adult children – via cash gifts, mortgage payments – to ‘help them get on their feet’ often backfires. It often causes adult children to live beyond their means, and requires spending even more money to keep up appearances.
– The one exception is paying for education – i.e. the proverb about teaching a man to fish

Part 5: Family-Style Affirmative Action
– Instead, wealthy parents who have raised independent adult children recommend raising children without telling them that you’re wealthy, teaching them discipline and frugality, and only distributing cash / estate only after they have established their own lifestyle and profession.
– Similarly, never talk about who will be getting what as an inheritance, and never use inheritance as a bargaining chip

Part 6: Find your Niche
– One of the best ways to make money is to find a niche, selling products and services to the affluent – even though they are frugal, they recognize the value of quality service in investment advice, accounting services, tax advice, legal services, and medical care – amongst other categories. Additionally, the affluent often enjoy spending money on their children – who are often spendthrifts.
– In the coming years, as millionaires distribute wealth to heirs, they will need high quality estate attorneys – not only for tax advice, but also as mentors and family advisors
– Tax attorneys will be needed as the government increasingly seeks to raise taxes, and immigration attorneys will be needed as people increasingly want to come to the US
– Medical professionals specializing in elective care will also be in demand

Part 7: Millionaires vs. Heirs
– There is no magic bullet, a profession that guarantees you become a millionaire – millionaires can be found in just about any profession, it’s all about choosing something you are good at, and persevering
– At the same time, market conditions are always changing