The Millionaire Next Door is an insightful study of millionaires in America and the characteristics they share in common.  The book is based on a set of research surveys conducted by the authors combined with interviews and other research.  The findings of the studies, and the book, are counter-intuitive insofar as they point out that most millionaires do not live in the fashion that we would normally associate with great wealth – indeed, the point of the book is that living below your means is the essential ingredient in amassing great wealth.

The authors distill the findings of the book in the introduction, identifying seven common denominators among people who successfully build wealth:

• They live well below their means.  The authors advocate frugality as the cornerstone of building wealth, pointing out that most millionaires don’t spend on depreciating assets like clothes, cars, watches, and that in fact most of them live in homes that are less expensive than they can afford.  The authors present a rule of thumb that if you are not yet wealthy you should purchase a home that requires a mortgage note that is less than twice your total annual realized income (that is, if you make $100,000 a year, you should never take out more than a $200,000 loan to buy a house).
• They allocate their time, energy, and money efficiently, in ways conducive to building wealth. The authors note a strong correlation between investment planning and wealth accumulation: people that plan their financial future are going to do a better job of accumulating wealth, particularly if they start early.
• They believe that financial independence is more important than displaying high social status.  They don’t spend money to show off, and indeed might seem to make far less than they actually do.
• Their parents did not support them financially in their adulthood, so they became self-reliant.  People who get gifts from their parents tend to spend them, rather than save them, and get locked into a spiral of consumption.
• Their adult children are economically self-sufficient.  The section on raising financially independent children is a great primer for wealthy parents, with the following guidelines: never tell children that their parents are wealthy, always teach children discipline and frugality, minimize discussions about inheritance, never give cash or other gifts as part of a negotiation/coercion, etc.
• They are proficient in targeting market opportunities.  In this section, the authors discuss industries and occupations that are likely to be profitable in the next century.
• They chose the right occupation.  The authors note that a disproportionate number of millionaires are small business owners, although they counsel that this fact can be deceiving: in fact, most small businesses fail, and few small business owners become wealthy. That is, a disproportionate number of millionaires are small business owners, but that doesn’t mean that owning a small business is a guarantee of wealth-building.  (Part of the reason, the authors point out, is that small business owners start accumulating wealth at an earlier age than graduate school professionals.)  The authors also point out the value of going into a “dull” industry that elicits little strong competition.

The author’s also present an interesting insight about how you calculate your net worth, and how much of your net worth you pay each year in taxes.  The key point: once you’re in a high-income bracket, it matters less how much more you make than what you do with what you already have; try to limit your realized income, and allow your wealth to grow without incurring taxes.

Takeaway

This book is not a terribly easy read, but it is a terrific eye-opener for most people in a consumpionist culture.  The book presents the irresistible premise that you can incorporate its principles into your life, and act more like a real millionaire than a perceived one.