Nonfiction – print. Longstreet Press, 2001. Originally published 1996. 258 pgs. Borrowed from my dad.
I grew up with the term “millionaire next door” in my vernacular. My mom (and, to a lesser extent, my dad) pontificated on the value of becoming an under-the-radar millionaire throughout my childhood. (Why buy new books when you can get them from the library from free?!?)
Now that I’m an adult, I see how their understanding of this term has shaped how I approach money. Yet, I’d never read the seminal work that brought this term into their lives until I discovered a copy of Stanley and Danko’s book on a shelf in my dad’s office. Curiosity got the best of me, and I spent much of my reading time over the holidays on this book.
First published in 1996, Stanley and Danko discovered the existence of the “millionaire next door” during their effort to conduct an academic study as to why some marketing campaigns worked and others didn’t. The individuals living in the most expensive homes and driving luxury cars weren’t buying financial services and products being marketed to them.
Through interviews and surveys, these two professors came to learn that these seemingly wealthy individuals were actually under accumulators of wealth (UAWs). Yes, they worked in professions known to be well-compensated (i.e. doctor, lawyer), but they were maxed out on credit and spent every dollar they brought in. They didn’t have stocks or retirement funds to be managed because they weren’t contributing to those funds.
Only the prodigious accumulators of wealth (PAWs) were contributing to their retirement funds and employing wealth managers. But PAWs weren’t living in the most expensive homes or driving new, foreign cars.
Instead, they were of the blue-collar class, working in jobs that people didn’t associate with wealth. They drove used cars for a decade, lived in the same house for 20+ years, and set their strict budgets well below their income level. They received no financial assistance from their parents, and the large number of them were entrepreneurs and business owners in sectors like cleaning, manufacturing, truck, and auto repair.
Because of their career choices and their unflashy lifestyles, the neighbors and friends of PAWs had no idea that they were living next door to people with great wealth. Hence the term “millionaire next door”.
Stanley and Danko’s book is part anthropological and part self-help for personal finance questions. The copy I read was published in 2001 and, therefore, some of the advice they offer on career planning is out of sync with today’s world. There’s no mention of the role of computers, for example, or recognition that a house is not a solid investment per the 2008 crash.
There is also a really bizarre chapter where they assert that PAWs buy their car on a cost per pound basis. No, they buy the car that is going to do the job they need it for the longest possible time. In 1996, that might have meant buying an American-made car. Today, that probably means you’re buying a Toyota or a Honda.
But their overall observations of how best to become a PAW is still technically sound. You cannot be consumption minded, if you want to have a large rainy-day fund. You have to marry someone who is as frugal – if not more frugal – than you. Real wealth – the kind that lets you retire in your 50s – requires sacrifice and living below your means. All of which are lessons that were drilled into me as a child.
(I will say, though, that I found the comment that “I’m my favorite charity” to be off-setting rather than the admirable characteristic that Stanley and Danko say it is. I’m glad that attitude wasn’t drilled into me.)
The most interesting chapter for me, though, was the one dedicated to what Stanley and Danko call “economic outpatient care”. EOC occurs when parents set up certain lifestyle expectations for their children and then provide monetary assistance to keep that lifestyle up.
I’ve seen such assistance offered to my friends over the years, but I assumed that was a function of the economic outlook for millennials. (Crushing student debt. Underemployment.) However, Stanley and Danko found EOC offered back in the 1990s was largely offered to daughters.
This assistance then traps them in an UAW cycle as they never have to make the budgetary sacrifices that their parents made to become millionaires next door. As a result, Stanley and Danko suggest parents limited to EOC – for sons and daughters – to education only, which is what my parents did for my brother and my undergraduate degrees.
When it came to my Master of Science degree, though, I took out the loans and carried the debt for three years until I paid it off in full. If that sounds like a brag, I’d point out that I am far, far below the point where Stanley and Danko say I should be in order to be considered a PAWs.
If your net worth equals your income multiplied by your age and divided by 10, then you’re a PAW. If it doesn’t, then you’re a UAW and you probably aren’t going to be a millionaire next door, according to Stanley and Danko.
Although, I do feel like this formula has to be taken with a grain of salt when you’ve only been in the workforce full-time for less than five years! (To which Stanley and Danko would probably point to their chapter on how attitudes towards consumption and savings change among the descendants of a PAW.)