September 8, 2008

Good Book : The Millionaire Next Door

This is a review of The Millionaire Next Door. Its by Thomas J Stanley and William D Danko and was published 1996.

If you're interested, you can read the first chapter here.

The Millionaire Next Door is a landmark book in personal finance. It gives us insight into who millionaires are and how they got there. The book discusses the traits and habits of millionaires in America. The big revelation is that most millionaires are living middle class lives, driving older American made cars and have never bought a Rolex watch. Millionaires made their wealth by living frugally. The book is a good read and has a nice mixture of stories of example millionaires and statistics on millionaires that the authors have researched.

From the book here are some basic facts about millionaires:
1. They live well below their means
2. They allocate their time, energy and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self sufficient
6. They are proficient in targeting market opportunities
7. They chose the right occupation.

The book discusses two groups which they call Under Accumulators of Wealth (UAW) and Prodigious Accumulators of Wealth (PAW). The UAW has less net worth then average and the PAW has much higher net worth than average. The PAWs are better at saving and accumulating wealth and thus they turn out to be millionaires more often than their peers. The Millionaire Next Door gives a simple formula for your expected net work:

Expected Net worth = Your age * Your income / 10

If your net worth is half the expected net worth amount then you're a UAW and if your net worth is twice expected then you're a PAW.

There are some other specific topics in Millionaire that are interesting. They dedicate an entire chapter to how millionaires buy cars. They discuss how many buy new versus used and how many shop around dealers. They take a chapter to talk about what they call Economic Outpatient Care. This is a term they use for parents giving money to their adult children. In general they say that EOC is detrimental to the financial health of the adult children receiving the money as it removes their incentives to gain wealth on their own.

I liked The Millionaire Next Door overall. It was an enjoyable read with some pretty interesting bits of information in it. If you want to become a millionaire then its a good idea to look to the habits of other millionaires as role models and inspiration.

On the negative side I thought that Millionaire was a bit lacking in concrete usable information. You could sum up large sections of the book with a single sentence and there isn't a lot of take aways for us to use in our own lives.

Overall The Millionaire Next Door is a good book and I'd recommend it. Look for interesting tidbits on millionaires spending habits and general attitudes, but don't expect much useful personal finance information. You can probably find a copy of The Millionaire Next Door at your local library. I'd recommend checking it out.

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