Jennifer Usry
FIN-1050
Book Review:
The Millionaire Next Door
In the United States, the promise of the “American dream” permeates the social,
political, and economic fabric of society, and (in one way or another) lies at the heart of most
Americans’ aspirations in life. Put simply, the American dream can be defined as the
opportunity to achieve prosperity and success regardless of one’s social and economic
background; furthermore, to many people, this dream entails the acquisition of wealth.
Unfortunately, however, as Thomas J. Stanley and William D. Danko point out in their book, The
Millionaire Next Door, most Americans are woefully misinformed about what it actually means
to be wealthy, believing that a high income (and the possessions that can be bought with it) is
one of the most important and necessary signifiers of wealth. And, sadly, it is this
misperception that may ultimately prevent many Americans from truly achieving real wealth.
Indeed, as Stanley and Danko point out:
Most people have it all wrong about wealth in America. Wealth is not the same as
income. If you make a good income each year and spend it all, you are not getting
wealthier. You are just living high. Wealth is what you accumulate, not what you spend.
(Pg. 1)
Thankfully, however, Stanley and Danko’s book - which provides a comprehensive
analysis of America’s millionaires and how they achieved their wealth – makes it clear that this
misconception is not impossible to overcome. Indeed, they assert that most ordinary people
can still achieve wealth, if they are willing to meet the many challenges of achieving financial
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independence. More specifically, the authors purport that one has a good chance of
accumulating wealth and becoming a “millionaire next door” if one is willing to adopt and
commit to certain characteristics that (for the sake of simplicity) can be classified into two
broad categories: (1) living below your means, and (2) devoting the time and effort necessary to
planning your financial future. Not surprisingly, these are the same fundamental characteristics
that are touted by virtually any source of professional financial advice, including one commonly
cited educational textbook by Kapoor, Dlabay, and Hughes, titled Personal Finance (9th edition).
In further discussing Stanley and Danko’s findings on what it takes to become a millionaire, the
key points of their study will be compared below to some of the core concepts of Kapoor et al.’s
personal finance textbook; and, in doing so, the secrets of becoming wealthy will be illuminated
as fundamentally “common sense” behaviors that, ironically, are not commonly exemplified.
The first broad category of mental and behavioral characteristics that Stanley and Danko
emphasize in their book can be described simply as “living below your means.” In discussing
this notion, they frequently refer to the concept of “net worth,” which is defined in Kapoor et
al.’s text as the difference between your assets and liabilities, which provides a “measurement
of your current financial position” (pg. 82). Stanley and Danko refer to net worth as a primary
indicator of wealth, and they succinctly describe it as “cattle, not chattel” (pg. 12). What both
sets of authors convey in their discussion of net worth is that it does not refer to money that is
readily available for use, but rather what would still be left over if you were to pay off all your
debts and expenses. This concept directly relates to an additional idea that is presented in
Stanley and Danko’s book, which is that material possessions don’t equate to high wealth or net
worth, and that someone seeking high net worth should not allow themselves to get caught up
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in the common trap of overconsumption. They assert that people who spend a great deal of
time and money trying to impress others or gratify themselves with expensive cars, clothes, or
other possessions will find it difficult or impossible to achieve a high level of net worth. Instead
those people will spend a great deal of their money purchasing items that don’t appreciate in
value and that can’t be used to support one’s self if all other sources of income were lost.
What Stanley and Danko strongly encourage throughout their book is that people
abandon the perception that wealth and success must be proven to themselves and others via
high consumption. In place of that perception, a person seeking true wealth should devote
themselves to one key behavior: to be “frugal, frugal, frugal” (pg. 28). Indeed, their study of
American millionaires indicated that they achieved this status by building net worth through a
consistent lifestyle of frugality and discipline, in which status is trumped by the higher goal of
financial independence, and the whims and desires of today are sacrificed for independence
tomorrow. To many Americans in the mindset of consuming for the sake of pleasure or status,
this might sound at first like a life of unpleasant self-denial and unhappiness. However, as
Stanley and Danko point out, their findings actually indicate that a life of strong self-discipline
and thriftiness will actually result in greater happiness and satisfaction, as it not only reduces
the fear of losing one’s financial independence should unforeseen events occur (such as losing
one’s job), but it also tends to bring confidence and maturity. Indeed, they found that many of
the millionaires they studied were significantly less worried about their future than people of
low net worth, and had also faced more struggles in the past that allowed them to overcome
their fears and strengthen their abilities to build even more financial and personal
independence. Meanwhile, those individuals who continually seek a false sense of happiness
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through spending and consuming will suffer from an increasing sense of fear and weakness,
having never really built any net worth to rely upon in the future when hard times come or
when they ultimately retire.
To maintain a disciplined financial life and become a truly wealthy individual, both
Stanley and Danko and Kapoor et al. suggest the same strategies, which can be summarized as
“allocating time, energy, and money efficiently, in ways conducive to building wealth” (pg. 3).
Kapoor et al. indicate that the key ways of increasing net worth are to: (1) increase savings
(which they discuss at length in chapters 3 and 5), (2) reduce spending (discussed in chapters 3
and 8), (3) Increasing the value of investments and other possessions (discussed in great detail
in chapters 13 through 17), and (4) Reducing the amounts you owe (i.e., reducing debt, as
discussed particularly in chapters 5 through 7). Additionally, Kapoor et al. strongly emphasize
the need to start early on your path to wealth (see chapter 18, which is devoted entirely to the
importance of financial planning from an early age).
Stanley and Danko’s book mirrors all of these suggestions and frequently drives home
the assertion that building wealth is not an easy task. It requires a consistent devotion to
planning and budgeting, to tracking all expenses and controlling spending, and to visualizing
your financial goals and proactively taking steps to achieving those goals on a regular basis
(ideally with the help of a well-recommended financial advisor). They emphasize that a key
difference between those who are excellent at building net worth (what they call “prodigious
accumulators of wealth” or PAWs) and those who are not skilled at creating net worth (“under
accumulators of wealth” or UAWs), is that PAWs spend significantly more time per month
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devoting time to the careful study and planning of their finances and investments. They may
not go so far as to track the daily ups and downs of the stock market, but they keep a consistent
eye on how their investments are performing and they play constant “defense” (as Stanley and
Danko refer to it) with their spending habits, never allowing themselves to fall into sloppy
spending habits and attitudes. In essence, they run their household and their finances like a
business. However, at the same time, as Stanley and Danko point out, this approach does not
mean that PAWs live a “spartan existence.” Rather, it simply means that they have develop and
maintained “a regimen when it comes to balancing working, planning, investing, and
consuming” (pg. 98), just as any well-run business should.
One of the primary ways that Stanley and Danko found that wealthy individuals adhere
to their budgets and build wealth is to track every expense in every category of their household
(i.e., they monitor their cash flow carefully, a strategy that Kapoor et al discuss in Chapter 5 of
their text). Furthermore, they actively look for bargains and buy less expensive clothes, cars,
and other necessary items. They also buy homes in lesser status neighborhoods in order to
save money on the cost of the home and on taxes. Additionally, and most importantly, Kapoor
et al found that wealthy people invest at least 15% of their pretax income each year. This does
not mean that they place these funds into a simple savings account where the funds may be
easily accessed for spending purposes; rather, it means that they invest the funds in stocks,
bonds, real estate, and other places where it cannot be easily converted to cash, and they leave
it for long periods to appreciate in value and thereby accumulate additional wealth. In other
words, by putting a significant amount of money into investments each year, they are
minimizing their realized income and maximizing their unrealized income, in the interest of
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creating wealth over time.
Overall, the message that one derives from Stanley and Danko’s book is that it is
possible for an ordinary person (even one with a relatively low income) to build wealth and
achieve financial success, but it takes continual effort and perseverance, and (for many) the
willingness and desire to switch from a consumer-driven attitude to an attitude of frugality and
discipline. Virtually all of the methods that are necessary to achieve wealth are not great
mysteries, but rather practical and straightforward money management strategies that can be
found in any personal finance textbook, such as that by Kapoor, Dlabay, and Hughes. What
Stanley and Danko ultimately convey in their study of the average American millionaire is that
achieving the American dream of financial success is not about spending money, but rather
holding on to it. What’s more, it’s not about living an easy life, but living a life of commitment
and integrity, in which you achieve security and happiness by staying true to your own financial
goals rather than by seeking the envy of others.
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