This book has sold millions of copies for a reason. It is well-written and well-researched. It also counters much of the conventional wisdom around which people are wealthy and how they become wealthy. Stanley and Danko argue that most millionaires are self-made. They were not born into wealth. And these millionaires often do not act how most Americans might expect them to act. Through extensive surveys, the authors put together general characteristics of most millionaires and drew some comparisons in lifestyle choices between those who are “prodigious accumulators of wealth” (PAWs) and those who are “under accumulators of wealth” (UAWs).
Here are a few of the common characteristics of millionaires compiled by the authors:
- “Fifty-seven-year-old male, married with three children”
- “Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires.”
- “About half our wives do not work outside the home. The number one occupation for those wives who do work is teacher.”
- “We have an average household net worth of $3.7 million.”
- “On average, our total annual realized income is less than 7 percent of our wealth. In other words, we live on less than 7 percent of our wealth.”
- “Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000.”
- “About 80 percent of us are first-generation affluent.”
- “We live well below our means...Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.”
- “We have more than six and one-half times the level of wealth of our non millionaire neighbors, but, in our neighborhood, these non millionaires outnumber us better than three to one.”
- “We are fastidious investors. On average, we invest nearly 20 percent of our household realized income each year. Most of us invest at least 15 percent.”
The authors also draw out “seven common denominators among those who successfully build wealth:
- 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 did not provide economic outpatient care.
- Their adult children are economically self-sufficient.
- They are proficient at targeting market opportunities.
- They chose the right occupation.”
Stanley and Danko emphasize the virtue of frugality or thrift throughout the book. At the end of the day, those who become wealthy are people who regularly spend less than they make in income, and invest the savings diligently. The counterintuitive finding of the book is that people who have a lot of wealth are not generally people who spend a lot of wealth. So who are the people who spend a lot of money? Folks who earn large incomes.
Income and wealth are not identical, nor are they as closely correlated as many people think. Many millionaires never earned six figures in any given year. Many, perhaps even most, people who earn six or even seven figures annually are not particularly wealthy - certainly not wealthy in proportion to their income. The authors point out that these folks play good “offense” by earning a lot of money. But if their “defense,” their spending, is atrocious, they can still lose the game of accumulating wealth.
In fact, spending money comes quite easily and naturally to people: new luxury cars, trips to Europe, huge homes, a boat (or two or three), etc. There are almost limitless ways to spend money. The challenge is to spend less than you earn. Many people fail here because they feel entitled to a certain standard of living, or they are careless, or they fall prey to “keeping up with the Jones’s” or “lifestyle inflation.”
Most millionaires, on the other hand, have maintained a similar standard of living for decades. They are happy and content with their way of life, even though after decades of saving and investing they could afford a more expensive lifestyle. From the beginning they have tried to avoid high cost activities:
- New cars, boats, large houses
- Subsidizing adult children
- Status symbols and expensive luxuries
The authors outline a nice rule of thumb for determining what one’s expected level of wealth should be given one’s income and one’s age. They use this rule of thumb to separate prodigious accumulators (PAWs) from under accumulators (UAWs). If someone has twice their expected level of wealth for their age and income, they are a PAW. If they have less than half of their expected level, they are a UAW. Here is the formula:
Expected Net Worth = .1 * one’s age * pretax annual household income
The authors have done a tremendous amount of legwork to survey, talk with, and understand the population of millionaires in the United States. Their work is a bit dated - this book was published in 1996. My guess is that most of the lessons are the same - though they would probably add a chapter about billionaires and the “super-rich” if they were writing the book today. Again, I doubt they would draw different conclusions. They would probably simply highlight this phenomenon and say that it includes only a tiny minority of millionaires.
I like their emphasis on thrift and frugality through “good defense.” It’s easy to get caught up in the hype about income inequality. While it is true that massive disparity in annual earnings exists between those who make the most and those who make the least, earnings are hardly one’s financial future - especially for the vast majority of able-bodied Americans. Self-control is the biggest challenge and where wealth-building begins.
Other than saying that one should save, plan, and invest, the authors do not give many tangible tips or advice for becoming wealthy. Still, you can draw a lot of conclusions from their work about whether you are doing better or worse in accumulating wealth than the average person - and whether you need to reassess some of your spending habits.