The Millionaire Next Door

Thomas Stanley

📚 GENRE: Business & Finance

📃 PAGES: 272

✅ COMPLETED: April 30, 2023

🧐 RATING: ⭐⭐⭐⭐

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Short Summary

How can you become a millionaire? Drawing on decades of interviews and surveys of millionaires, Thomas Stanley delivers the fundamentals of wealth-building and explains why anybody with the right mindset and habits can achieve financial freedom.

Key Takeaways

1️⃣ Live Below Your Means — Living a frugal lifestyle is maybe the most important key to building wealth over time. You have to live below your means. When you do, you’re able to consistently save and invest money. Living a frugal lifestyle takes some sacrifice and self-discipline, but it’s what allows you to build your net worth and become financially independent. 

2️⃣ Invest Wisely — Not all investment opportunities are built the same. Invest your money in assets that appreciate in value and deliver cash flow (i.e. real estate) rather than assets that are flashy but depreciate in value (i.e. cars, watches). You have to spend time thoroughly researching investment opportunities. Do your homework. Track your money. Take it seriously. 

3️⃣ Teach the Kids — Rather than giving your kids money all the time, teach them the benefits of a frugal lifestyle at a young age. Teach them the importance of discipline and sacrifice and how those traits can help them achieve financial success as adults. Save most of your economic help for a child’s education. You want to support them, but you don’t want them to be dependent on you when they become adults. 

Favorite Quote

“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?”

Book Notes 📑

Introduction

  • Wealth — Building wealth isn’t about your income, job title, or education; it’s about hard work, perseverance, planning, and self-discipline. This kind of lifestyle will lead to a lot of success. There are a lot of people who are making a nice income but never accumulate much wealth. You have to focus on living below your means and buying assets. 
  • Lifestyle — Building great wealth and achieving financial freedom is a lifestyle more than anything else. Most people who are wealthy weren’t “lucky” or “given” anything; they created generational wealth through consistent hard work, sacrifice, and discipline. The authors of this book found that millionaires have the following seven things in common:
    • Frugal — Live well below their means
    • Efficient Resource Management — Allocate time, energy, and money efficiently and in ways conducive to building wealth.
    • Finances > Social Status — They believe financial independence is more important than high social status 
    • No Parental Help — Their parents did not provide economic assistance 
    • Successful Children — Their children are economically self-sufficient
    • Opportunists — They are proficient in targeting market opportunities
    • Dream Job — They chose the right occupation
  • The Research — The research for this book was comprehensive and included interviews with over 500 millionaires and a survey of over 11,000 high-net worth or high-net income respondents over the course of 20 years. The survey included 250 questions and asked respondents about their attitudes and beliefs toward money and finances.
    • Quote: “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?”

Ch. 1: Meet the Millionaire Next Door

  • ‘Big Hat, No Cattle’ — Many people do not become financially independent because they lack the discipline that is required to consistently build wealth. They are prone to spending money on things that aren’t necessary. They live above their means. They buy cars, clothes, watches, etc. that they don’t really need. They have a big hat, but no cattle.
  • Typical Millionaire — As of this book’s writing, the typical millionaire is about 57 years old, married with three children. About 65% of millionaires are self-employed — interestingly self-employed people make up less than 20% of the workforce, but account for 65% of millionaires. Three out of every four self-employed millionaires consider themselves to be entrepreneurs. Other key findings include:
    • Household income is $131,000
    • Median household net worth is $1.6 million
    • The average millionaire lives on less than 7% oh his wealth
    • 97% of millionaires own a home with an average valuation of $320,000. About half have owned their homes for over 20 years and have experienced significant capital appreciation
    • The average millionaire saves and invests about 15-20% of his earned income every year
    • The average millionaire has around 20% of his wealth in transactional securities, like stocks
    • Income is highly correlated with net worth; more than 2/3 of millionaires in America have a total annual household income of over $100,000. 
  • Defining Wealth — Wealth is defined as your net worth, which is the value of all of your assets minus your total liabilities. You are considered wealthy if you have a net worth of $1,000,000 or more. By this definition, only 3.5% of American households were considered wealthy at the time of this book’s writing. 
  • Calculating Wealth — To calculate what your wealth should be, multiply your age by your total income and divide it by 10. This will give you a rough estimate of where your net worth should be given your age and income.
    • Ex. Middle Aged Man — A 51-year-old man with a total income of $110,000 should have a net worth of $561,000. 
  • Entrepreneurs — Interestingly, many of the millionaires interviewed and surveyed as part of this book were self-employed and classified themselves as entrepreneurs. They own their own business or businesses. Being an entrepreneur and working for yourself can be risky, but it removes any cap on what you can make. There are no limitations. 
  • Chapter Takeaway — Becoming wealthy demands a certain lifestyle. Most millionaires were not lucky; they became wealthy through consistent effort, discipline, and sacrifice. The average millionaire focuses on living below their means, saving money, and investing in assets that produce cash flow and/or appreciate over time. Anybody can build great wealth; it’s not a mystical thing. 

Ch. 2: Frugal, Frugal, Frugal

  • Be Frugal! — Millionaires are very frugal and conservative when it comes to what they spend their money on. They live well below their means. For the most part, they don’t spend money on things that aren’t absolutely necessary. They instead put their money into assets and things that are going to deliver cash flow. On the other hand, the average person overspends and operates with a consumer mindset. They give in to instant gratification. Live a frugal lifestyle!
    • Quote: “What are the three words that profile the affluent? Frugal, frugal, frugal… Being frugal is the cornerstone of wealth building.”
    • Quote: “If your goal is to become financially secure, you’ll likely attain it. But if your motive is to make money to spend money on the good life, you’re never going to make it.”
    • Ex. Suits — The majority of millionaires surveyed reported the most they ever spent on a suit was around $350. 
    • Ex. Shoes — Half of the millionaires surveyed said they never spent more than $140 on a pair of shoes. 
  • Have a Plan — It’s important to have a plan with your money and document how your money is coming in and going out. Try to track how you’re spending your money so you can pick up in patterns. You might end up finding some spots where you can improve and cut out some unnecessary spending habits. 
  • Chapter Takeaway — Being frugal with how you spend your money is maybe the most important principle in this book. You have to live below your means. A high consumption lifestyle won’t allow you to build wealth over time — it takes consistent saving and investing through sacrifice and discipline. 

Ch. 3: Time, Energy, and Money

  • Focus Your Resources — Most people want to become wealthy and financially secure, but aren’t willing to put the time, energy, and capital into wealth-building endeavors. Building wealth and putting your money into the right opportunities takes effort. It takes time and effort to become financially educated. It takes time and effort to research different investment opportunities so you can make good decisions. High net worth individuals make the time to become financially educated and research investing opportunities. 
    • Quote: “Strong wealth producers are more likely to invest in categories that usually appreciate in value but do not produce realized income. They tend to have a greater percentage of their income invested in privately held businesses, real estate, publicly traded equities, and their pension plans, annuities, and other tax deferred categories. These types of investments require planning. They are also the foundation for wealth.”
  • Hold Stocks Forever — If you’re investing in stocks, hold them for the long term. Active traders pile up taxes and fees by buying and selling stocks frequently. You should always buy stocks with the idea of holding them forever. Otherwise, the stock isn’t worth investing in. 

Ch. 4: You Aren't What You Drive

  • Careful What You Drive — If possible, you really shouldn’t buy a new car until you are financially independent and have built considerable wealth. Cars are depreciating assets — they lose value the second you buy one. You should instead direct your money toward assets that will appreciate in value over time and deliver cash flow. In line with living a frugal lifestyle, the average millionaire surveyed in this book was very conservative with what they spent on cars. Many of them even reported buying used cars. Again, it comes down to choosing to live below your means. That is one of the keys to building wealth. 

Ch. 5: Economic Outpatient Care

  • Economic Outpatient Care (EOC) — Many parents help their adult children a little too much when it comes to giving money or helping with house and car purchases. While the parents have good intentions, this kind of consistent giving can lead to the kids becoming financially dependent long into their adult lives. It can lead to an unproductive or lazy lifestyle. For some kids, the gift money only fuels their high consumption lifestyle. Over 2/3 of the millionaires surveyed in this book reported not getting any kind of economic help from their parents aside from their education. 
  • Teach Kids Frugality — Although the parents are trying to help their kids by giving money, it often has bad consequences because it teaches the adult children to count on the help rather than living a frugal lifestyle and building their own wealth. Rather than giving money consistently, the best thing you can do as a parent is to teach kids the value of frugality at a young age. Teach them the discipline and sacrifice if will take to build wealth as an adult. Develop those traits in them. Don’t just give them money and buy them things all the time. Education is one of the few things you should help them with. 
  • Attack Weaknesses — Don’t run from things you aren’t good at; instead attack them straight on and try to improve in those weak areas. Running from things is never a great solution. If you’re a poor verbal communicator, consider getting into Toastmasters or some program where you’re speaking in front of people. 

Ch. 6: Affirmative Action, Family Style

  • Raise Kids Carefully — Make sure you have a plan when it comes to how you approach discuss, give, and spend money around your kids. Regardless of how wealthy you and your family are, it’s crucial to teach kids to be frugal and disciplined. Teaching them this lifestyle at a young age will help them tremendously as adults. Don’t just give them everything. Teach them the fundamentals of wealth building.Â