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Dustin Palmer
Personal Finance 1050
The Millionaire Next Door
The Millionaire Next Door by Thomas Stanley and William Danko summarizes
what the typical millionaire in American society is today. This book teaches that there is
a large and growing number millionaires in the United States but they are not always the
person you would envision and don’t necessarily get there the way one might imagine.
While affluent inheritors were demonstrated more common were the first generation
millionaires who meticulously saved and invested their not always high salaries. These
people were not likely to purchase exotic luxury cars or posh mansions. Even their attire
is relatively modest despite high incomes, with much shopping occurring at JC Penny or
Sears. Above all this book demonstrates that it doesn’t take a millionaires salary to
become a millionaire, so long as the individual’s importance is placed on wealth more
than status.
“The average American millionaire is a 57-year-old married man with three
children, an old car, a $320,000 home, which he bought years ago for substantially less,
and an annual household income of $131,000.” This is not a lucky college kid building
Facebook, this is not Justin Timberlake or Brad Pitt, this is the older gentleman next door
who owns that small janitorial business that you’d never think to look twice at if looking
for wealth. This is because he was able to save and invest his money that otherwise
would have gone into a larger house, a nicer car, and the payments on those equally
functional but more lavish items thereafter. He also didn’t lose money in a divorce or on
alimony, as having had the same wife is another common feature of millionaires. In fact
the families of millionaires as displayed in this book seem to have a very large influence
on whether or not someone will become a millionaire themselves.
The average millionaire is normally a saver, as is his wife, if not more so
according to many in the book’s survey. His family is also likely to feel the effects of
this as their parents saving will teach them about the importance of frugality in their lives,
indeed many millionaires came from households were unnecessary expenditures were
kept to a minimum, which taught them to save and didn’t get them accustomed to the
more expensive upper middle class lifestyle. In contrast those whose parents had high
incomes and continued on to have high incomes themselves didn’t necessarily save much
wealth, despite their high earnings, due to the fact that they had learned to earn to spend
and would likely teach their children the same thing as they maintain the lifestyle they
had grown up with. This saving is important, however another equally important feature
that millionaires share is using this saving well, specifically by putting it into prudent
investments.
Investments are essential for the aspiring millionaire, most millionaires I the
survey had investments, about all in stocks and bonds and many in businesses.
Undoubtedly part of the reason that your average millionaire is fifty seven years old is
because investments build over time, as interest builds on interest money collects pretty
fast over the years. For example using the rule of seventy two if you were to get a six
percent return on investment your initial investment would double in twelve years, as you
are to duvude seventy two by interest earned to find out how long it takes an investment
to double. Six percent investments, especially longer term ones are relatively safe and
even at this lower than a good stock portfolio interest an investment would have double
about twice by the time age fifty seven is reached depending on how early the
investments started of course. This naturally makes it much easier to accumulate wealth
through investments as your age progresses, resulting in older millionaires. While
millionaires are prone to be good investors they aren’t, as some may falsely assume,
jackpot winners that invested in Google upon inception, at least not often. Many of the
affluent maintain their portfolios themselves but most at least employ help as well, this
being one of the fields that millionaires aren’t frugal in.
Millionaires, known by this book as avid savers, do have several fields which
loosen their wallets, such as financial advising. Millionaires are prone to seeking out the
best financial advisers through networks of associates, to increase the pressure on the
adviser to perform well. This is important because as discussed before the interest
received from investments plays a large in role in whether one becomes wealthy or not,
as some investments such as speculative investments have larger possibilities of losing
money, which also warrants higher potential earnings. A good adviser is much better at
targeting these market opportunities than your average business owner so millionaires are
willing to pay for the right one. The other fields the book declared millionaires to spend
more in were education and health care. Education is important to the millionaire
community despite not all of them even having graduated high school. Most have funds
put aside for their children’s and even grand children’s education and many received
similar payments from their parents when they were obtaining their secondary and
graduate education. Although education is a correlate to earning power this doesn’t
necessarily ensure a new generation of millionaires as many high paying jobs come with
high spending lifestyles the parents didn’t have.
Other than educational subsidies most millionaires did not report receiving any
significant gifts from their parents. The children that do receive these gifts are not
commonly millionaires despite having similar or even higher incomes when the gift is
factored in. This can be accounted for by the simple fact that it’s much easier to spend
someone else’s money, and even outspend your own if you have someone to break your
fall. When children are taught the value of thrift and are instead given an education to
increase their own potential for earning capitol they become much more likely to accrue
wealth and do not become financially dependent on their parents like their counterparts
are prone to do. Even material gifts can be a drain, an anecdote quoted in the book
involved an excellent multi-millionaire investor denying the gift of a Rolls Royce from
some colleagues. He didn’t do this to be rude, but because he understood that such a
symbol of status would affect other parts of his life, he wouldn’t be able to fish in it or be
forced into insuring and maintaining two cars, which didn’t even seem to be an option for
this millionaire. He also considered the effect it would have on his employees, seeing
their boss pull in such a high class vehicle would denote his economic status directly to
them, which is much higher than their own and they may start feeling used. Such status
symbols seemed to be a key difference between millionaires and high income non
millionaires, the latter being the only group to truly put emphasis on it of course. While
gifts from frugal affluent parents seem to be a rarity one scenario which seemed to spur
giving was the allocation of inheritance before death to decrease estate taxes on loved
ones.
All fears expressed by prodigious accumulator of wealth millionaires had
something to do with the federal government, one of the foremost being taxes. Taxes are
a problem for many and as your realized(taxable) income increases, so do your taxes.
There are many ways to lower taxes, like lowering estate taxes by giving non taxable
gifts to your beneficiaries each year, but one of the best ways to do this is by lowering
your taxable income. The prodigious accumulators of wealth in this book were said to
have the majority of their wealth in savings, so while the percentage of taxes on their
earned income was high the taxes on their total wealth and earned unrealized income in
unsold stocks and other investment appreciation was actually quite low in juxtaposition to
their taxes on realized income. If you were to have a home that lived mostly off realized
income with hardly anything left to share, or worse surviving on credit, and your taxes
increased, you’d be forced to downgrade your quality of living, whereas those with a low
taxable income would not.
Should one be able to join the ranks of America’s growing millionaire population
a very important topic would be sure to crop up, what to do with their estate after they
die? It’s important that you write a will because should you die intestate then your states
laws of descent and distribution become your will, nullifying any wishes you may have
had but failed to formalize legally. As mentioned an important consideration in estate
planning is taxes, which can be lessened by decreasing your net worth by the time of your
death. Distribution can be a tough area as many may feel compelled to help their weaker
offspring, but the millionaires from this study seem to conclude it’s best to only give the
money to them when they’re already financially stable or in educational trusts, in
continuity with their emphasis on education.