The Millionaire Next Door
Some characteristics of North American millionaires
This article was distilled from the March '97 "Success" (my
favourite magazine). Buy the magazine for far more detail, or better
still buy 'The Millionaire Next Door', by Thomas J Stanley and William D.
Danko, which is where Success found it. All dollar amounts are U.S.
- They don't eat caviar and vintage wine, but stick to regular food.
- More than 80% have accumulated their wealth during their lifetime.
- Most people who live in expensive homes and drive luxury cars do not
actually have much wealth.
- Wealth is not the same as income. If you make a good income each year and
spend it all, you are not getting wealthy.
- Wealth is usually the result of hard work, perseverance, planning, and most
of all, self-discipline.
- Portrait of a typical millionaire:
- I am a 57 year old male, married to my first and only wife, with three
children. I've lived in the same town my whole life.
- Among us millionaires, one in five is retired. Two thirds of us who are
working, are self employed. Three out of four of us who are self employed
consider ourselves to be entrepreneurs.
- Many of the businesses we are in could be classified as 'dull-normal.' We
are typically welding contractors, auctioneers, rice farmers, owners of mobile
home parks, pest controllers, coin and stamp dealers, and paving contractors.
- Our household's total annual taxable income is $130,000.
- Most of us own homes valued at an average of $320,000.
- We're fairly well educated. Only one in five of us is not a college
graduate. Many of us hold advanced degrees.
- On average, we invest nearly 20% of our household income each year. Most of
us have at least one account with a brokerage company, but we make our own
- I am a tightwad. That's one of the main reasons I completed a long
questionnaire for a crispy $1 bill.
What three words best describe the affluent?
FRUGAL FRUGAL FRUGAL
According to our most recent survey, the typical American millionaire never
spends more than $399 for a suit of clothing, and one in 10 paid $195 or less
for his most expensive suit. We are barraged by media hype about millionaire
athletes, for example. But if a ball player makes $5 million a year, having $1
million in net worth is no big deal. By our thinking, a $5 million-earner who
is 30 years of age should be worth $15 million or more. A tiny fraction of
athletes have a level of wealth in this range. The remainder will not stay
millionaires after their lucrative athletic careers are over unless they invest
and cut their spending drastically.
We prefer to define wealth not as net worth, but as a comparison between net
worth, and what net
worth you would expect someone to have based on their age and income. A rule of
thumb equation is: multiply your age by your realized, pre-tax annual household
income from all sources except inheritances. Divide by ten. This is your
expected net worth. If you've accumulated only half the expected amount, you
are an under achiever. To qualify as a prodigious accumulator of wealth (PAW)
you should be worth twice the expected level.
You aren't what you drive
About 15 years ago we did an interview with 10 millionaires. Afterwards, we
walked into the parking lot and were surprised to see that almost all were
driving Buicks, Fords and Oldsmobiles. One of us said, "These people buy
automobiles by the pound!" It's true. The full size Buick four-door sedan sells
for less than $6 per pound. A BMW 740 sedan costs more than $15 a pound.
Planning to be rich
Planning is a strong habit among people who have a propensity to accumulate
wealth. Millionaires spend significantly more hours per month planning and
managing investments than non-millionaires. Nearly all the millionaires we
surveyed own stocks; most have 20% or more of their wealth in publicly traded
stocks. Yet most don't follow the ups and downs of the market day by day, or
trade stocks in response to daily headlines. 42% of the millionaires in our
survey had made no trades in the year prior to our interview with them. They
focus on mastering their understanding of a much smaller set of investments.
If you aren't wealthy, examine your lifestyle:
Does your household operate on a budget? For every 100 millionaires
budget, there are 120 who do. Among the non budgeters, more than half use a
"pay yourself first" strategy, investing a minimum of 15% of their income before
they pay any other bills.
Millionaires are very goal oriented. One high-school
drop-out with more than $10 million told us: "I've always been goal-oriented. I
have a clearly defined set of daily, weekly, monthly, annual and lifetime goals.
I even have goals [for when I] go to the bathroom."
The Millionaire's Method
Most people try to improve their financial position by realizing more income,
which is subject to attrition by tax. The millionaire next door is Revenue
Canada's worst nightmare. Because he is frugal, he doesn't need to spend much
money, so he doesn't need a large income. The typical millionaire in our
surveys has a total annual realized income of less than 7% of his wealth. So
less than 7% is subject to income tax. The typical North American family
realizes $35,000 to $40,000 each year, or 90% of its net worth. The result is
that the typical household in America pays the equivalent of more than 10% of
its wealth in income taxes every year. On average, the millionaires we surveyed
paid a bit over 2% of their wealth in taxes. The fact is that the super
affluent got that way by being masters in minimizing their realized income.
For the purpose of wealth building, income doesn't matter much. Once you're
in a high income bracket, say $100,000 or more, it matters less how much
you make than what you do with what you already have.
Sudden Wealth Syndrome