The recent death of Dr. Tom Stanley, who was in the media recently as a result of being killed by a reckless driver, prompted me to re-read a book of his I had sitting on my bookshelf. I first read his book over 15 years ago, titled The Millionaire Next Door, which was published in 1996 by Dr. Stanley and his colleague Bill Danko.
The book is based on groundbreaking research, extensive studies and interviews with more than 1200 millionaires. Literally from page one where Tom writes “Wealth is what you accumulate, not what you spend”, they are quick to point out that the majority of people (even high income earners) spend almost all of their income. In fact, they go on to show that many people in high income occupations (i.e. Doctors, Lawyers, Dentists) have an especially hard time accumulating wealth, as they are expected to project a high status lifestyle which in turn eats up the majority of their earnings.
They go on to show that millionaires come from many ranges of income levels and that the only key variable is to spend less than you earn. Anyone who does that will inevitably increase their wealth and when combined with compound earnings over long periods of time can achieve remarkable results. In fact, most of the millionaire households that they profiled did not have the extravagant lifestyles that most people would assume. This finding is backed up by surveys indicating how little these millionaire households have spent on things such as cars, watches, suits, and other luxury products or services. Most of these wealth accumulators are frugal no matter what their income level was!
One chapter that stands out is called “You Aren’t What You Drive”. The research they did demonstrates that these “Millionaires” rarely purchase new model cars and are in fact less likely to own foreign or luxury vehicles. They almost always buy rather than lease and tend to keep their vehicles for many years. In contrast, the high income earners who never seem to achieve significant wealth tend to be the owners of luxury vehicles and will lease or finance, which in turn allows them to spend more, and hinders any wealth creation over time.
Regarding their finances, almost all (95 percent) of the millionaires surveyed owned publicly traded stocks in one form or another, and tended to hold them for a very long time which allowed their wealth to grow in a tax-deferred way. On the other hand, a large portion of the under accumulators of wealth tended to leave what financial assets they did have in relatively low risk investments such as cash or government insured savings.
If you have never read The Millionaire Next Door– and even if you have- put it at the top of your list this summer. It cannot fail to help you be more determined and focused on the kind of person you want to be. There are also some great ideas on how we can help our children develop stronger habits too, and as they suggest, it is key to avoid what they call “weakening the weak” by providing our children with handouts. You can feel confident that it is far better, as they say, to teach our children to fish rather than just provide them with fish!
I think Warren Buffet summed it up best with this quote from a charity luncheon he recently attended when he said the following about his long time partner Charlie Munger:
“Charlie [Munger] and I always knew we would become very wealthy,” he told us, “but we weren’t in a hurry.” After all, he said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy — if you’re patient.”
(We agree with this statement and our experience with our clients parallels this view)