Sept 28,2024. The Millionaire Next Door, by Thomas J. Stanley PhD and William D Danko, PhD, is one of the two books which revealed to me the path to building wealth. The other was of course, Rich Dad Poor Dad by Robert T. Kiyosaki.

The authors spent decades researching the socioeconomic characteristics of the affluent in the United States.  The lessons they pass on, defy popular conceptions of the lifestyle of “the rich”. They show evidence that individuals and families who are asset wealthy, do not behave the way people who are not wealthy, think rich people behave.  They summarize their discovery of this truth, in the Introduction.

“Twenty years ago we began studying how people become wealthy.  Initially, we did it just as you might imagine, by surveying people in so-called upscale neighborhoods across the country.  In time, we discovered something odd.  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 do not even live in upscale neighborhoods. “

Continuing…

“What have we discovered in all of our research?  Mainly, that building wealth takes discipline, Sacrifice, and hard work.  Do you really want to become financially independent? Are you and your family willing to reorient your lifestyle to achieve this goal?  Many will likely conclude they are not.  If you are willing to make the necessary trade-offs of your time, energy, and consumption habits, however, you can begin building wealth and Achieving financial independence. ” The Millionaire Next Door will start you on this journey.

Following are some of my notes, to give you a taste of the wisdom contained in the book.  The book was published initially in 1996, and it is based on research done in the immediately preceding years.  $1 million in 1996 is worth approximately $2 million today $1,000,000 in 1996 → 2024 | Inflation Calculator (in2013dollars.com).  I will use the term “millionaire” as used in the book, to denote a person who is wealthy in assets, even though $1million is not what it used to be. 

Some themes emerge in the book…

Stanley and Danko found that eighty percent of America’s millionaires are first -generation rich.  They follow a lifestyle conducive to accumulating money, and possess 7 characteristics in common:

1. They live below their means

2. they allocate their time, energy and money efficiently, in ways conducive to building wealth.

3. they believe that financial independence is more important than displaying high social status.

4. their parents did not provide economic outpatient care (financial gifts from relatives, which grant free access to a purchase of interest). More on this later...

5. their adult children are economically self sufficient

6. they are proficient in targeting market opportunities

7. they chose the right occupation

The hope of the authors, is that the reader can learn to develop these characteristics in himself.  They illustrate their findings with numerous case studies and anecdotes.

Saving money with which to invest and build assets, is an important route to wealth.  Earning a high income by itself will not lead to lasting wealth.

The wealth of Millionaires is not necessarily proportional to their income.  According to the authors’ research data: “More than 70% of their neighbors earn as much or more than they earn.  But fewer than 50 % of their neighbors have a net worth of $1m or more.  Most of these millionaires’ high-income, low-net worth neighbors make the wrong assumption.  They assume that by focusing their energy on generating high incomes, they will automatically become affluent.  They play excellent offense in this regard.  Most are positioned in the top 3 or 4% or higher of the income distribution for all US households.  Most look the part of millionaires. Yet they are not wealthy.  They play lousy defense.  We have stated many times the belief of countless millionaires who have told us

“It is much easier in America to earn a lot than it is to accumulate wealth. Why is this the case?  Because we are a consumption oriented society.  The high income producing non millionaires are among the most consumption oriented people in America.

Those wealthy people who do not have an extraordinarily high income, become wealthy by living within their means.  This ability is not simply a matter of accounting.  They successfully inoculated themselves from contracting the high-consumption lifestyle that many of their neighbors adopted (see Rich Dad, Poor Dad).   Of note, it is not essential to be an entrepreneur in order to be a millionaire.  This is important, as not everyone is prepared to bear the time commitments required by entrepreneurship, that is extremely taxing on personal and family life.  The authors suggest that an income of twice the median income (the median income in the U.S. was about $75,000 in 2022) can be stewarded to achieve millionaire status.

On of the most powerful themes of the book, relates to the concept of “Economic Outpatient Care”:

Stanley and Danko use the term “Economic Outpatient Care” to denote gifts of money to family members. The gifted money may be targeted to pay for things which promote the capability of the recipient to fulfil their potential, and build assets.  On the other hand, Economic Outpointed Care may enable the recipient to avoid making the transition from consumer to investor, which I outlined in my review for Kiyosabi’s “Rich Dad Poor Dad”.  Recurrent gifts of this type, earmarked to finance a lifestyle as a family entitlement, in effect starve the recipient of the experience of personal growth, including hardship, required to become a millionaire.

The authors recount:

“America’s millionaires are more than 5 times more likely than the average household to have a son or daughter graduate from medical school, 4 times more likely to have a child who is a law school graduate. Paying for an education is the equivalent to teaching your children how to fish.  …..Some gifts have a strong positive influence on the productivity of the recipient. These include subsidizing your children’s education and, more important, earmarking gifts so they can start or enhance a business.  Many self-made millionaires/entrepreneurs know this intuitively.  “

“Conversely, what is the effect of cash gifts that are knowingly earmarked for consumption and the propping up of a certain lifestyle?  We find that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.  All too often such “temporary” gifts affect the recipient’s psyche.  Cash gifts earmarked for consumption dampen one’s initiative and productivity.  They become habit forming.  These gifts then must be extended throughout most of the recipient’s life. “

“Why do gift receivers have a lower propensity to accumulate wealth than do nonreceivers:

Giving precipitates more consumption than saving and investing. …

Remember, expensive homes are typically located in what we call high consumption neighborhoods.  Living in such neighborhoods requires more than just being able to pay the mortgage.  To fit in, One needs to “look the part” in terms of one’s clothing, landscaping, home maintenance, automobiles, furnishings, and so on.  And don’t forget to add high property taxes to all the other items.  Thus,  gift of a down payment, whether full or partial, can place a recipient on a treadmill of consumption and continued dependence on the gift giver.  …..

Many gift receivers in such situations become sensitive to the need for continued Economic Out Patient care.  Their orientation may even dramatically change from a focus on self-generated economic achievement to one of hoping for and contemplating the arrival of additional gifts.  Underachieving income producers in such cases find it nearly impossible to accumulate wealth.”

“What can you give your children to enhance the probability that they will become economically productive adults? In addition to an education, create an environment that honors independent thoughts and deeds, cherishes individual achievements, and rewards responsibility and leadership. Yes, the best things in life are often free. Teach your own to live on their own. It’s much less costly financially, and, in the long run, it is in the best interests of both the children and their parents. “

“There are countless examples of the inverse relationship between economic productivity and the presence of substantial economic gifts. Our own data, collected over the past twenty years, repeatedly support this conclusion. Independent of college tuition, more than two thirds of American millionaires received no economic gifts from their parents. And this includes most of those whose parents were affluent.”

“Weakening the Weak:

Here’s some food for thought: Most affluent people have at least two children.  Typically, the most economically productive one receives the smaller share of his or her parent’s wealth, while the least productive receives the lion’s share of both economic outpatient care and inheritance.” 

Perpetuating dependence by chronically doling out Economic Outpatient Care, keeps the dependent relatives weak and leads to chronic anxiety about their economic future.

Chronic recipients of Economic Outpatient Care have more fear about their economic future than do persons who independently built their own capability to build wealth.

“Typical affluent business owner shave only three major concerns (see table 3-4 in Chapter 3)

All of these are related to the federal government.  They fear policies and regulations that are unfavorable to business owners and the affluent population in general.  “

“This is because these affluent business owners have overcome most of their fears.  They have inoculate themselves from many fears by becoming completely self-sufficient.  And it was the very struggle to become economically self -sufficient that helped these business owners overcome them. “

The self-made wealthy persons possess courage to take reasonable financial risk.

“Webster’s defines courage as “mental or moral strength to resist opposition, danger, or hardship.”  It implies firmness of mind and will in the face of danger or extreme difficulty.  Courage can be developed.  But it cannot be nurtured in an environment that eliminates all risks, all difficulty, all dangers,” which is characteristically the environment in which chronic recipients of Economic Outpatient Care are raised.

“Affirmative Action, Family style

P 269. 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.  These are the ones who were never denied their right to face some struggle, some adversity.  Others were, in reality, cheated.  Those who attempted to shelter their children from every conceivable germ in our society, never really inoculated them from fear, worry, and the feeling of dependency.  Not at all. “

“Jobs: Millionaires Versus Heirs

“P 290. What types of businesses do millionaires own? Our answer was the same one we give everyone:  You can’t predict if someone is a millionaire by the type of business he is in.  After twenty 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 his business. “

In conclusion, Stanley and Danko’s research show that lasting asset wealth is achieved by persons who build courage and ability to invest in a business or other wealth building assets. Their voyage must begin in the absence of external aid which might enable them to escape the need to build their own abilities. The decision to habitually direct funds to investment goals rather than financing a stereotypical rich lifestyle, is the determining key to building wealth.

The detailed data and case studies enable the reader to find a way of being “the millionaire next door” in their own particular way.  This book, along with Kiyosabi’s Rich Dad, Poor Dad, was seminal in revealing to me the path to relative wealth and freedom.

I hope that if more people can learn about how wealth is created, more people will realize that the path to feeling one has “enough”, satisfaction with one’s wealth, is not envy, or attempting to appropriate the wealth that other people created, as encouraged by the US Democratic Party. Rather, you can create your own wealth. And to do this, you must build or invest in something that people actually want to buy. That is, you must create value.  And value is good.