There’s an old book we’ve had in our office for over 20 years titled The Millionaire Next Door, which was published in 1996 by Dr. Tom Stanley and his colleague Bill Danko.  Every time we open it up again, right off the bat you see “Wealth is what you accumulate, not what you spend”. 

(It reminds us of one of our favourite lines by Morgan Housel in his book The Psychology of Money- “Wealth is what you don’t see.”)

Stanley’s book goes 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. Said another way… many spend almost all of their income!

Here are some key lessons and principles for wealth accumulation from their book, which was based on extensive interviews and studies with over 1200 millionaires.

Lesson 1: Spending vs. Accumulating Wealth:

Stanley emphasizes that wealth is not about how much you spend but what you accumulate. Surprisingly, even high-income earners often struggle to accumulate wealth as they succumb to societal expectations of projecting a high-status lifestyle. However, the secret lies in spending less than you earn, regardless of your income level.

Lesson 2: The Path to Building Wealth:

Contrary to popular belief, most millionaires interviewed in the book did not live extravagant lives. They were remarkably frugal, regardless of their income levels. Surveys reveal that they spent minimally on luxury products or services like cars, watches, or suits. Their focus on frugality allowed them to channel their resources towards wealth accumulation.

Lesson 3: Cars 

The chapter “You Aren’t What You Drive” sheds light on the relationship between cars and wealth. Millionaires rarely buy new-model cars and are less likely to own foreign or luxury vehicles. They prefer to buy, rather than lease, and tend to hold onto their vehicles for extended periods. In contrast, high-income earners who struggle to accumulate significant wealth often own luxury vehicles, leasing or financing them, hampering wealth creation.

Lesson 4: Investing for Long-Term Growth:

Nearly all millionaires (95%) surveyed owned publicly traded stocks as part of their investment strategy. They displayed patience by holding onto these stocks for long periods, allowing compound earnings to grow their wealth in a tax-deferred manner. In contrast, those who under-accumulated wealth tended to favor low-risk investments like cash or government-insured savings.

The book also has some great ideas on how we can help our children develop stronger habits too, such as avoiding to provide 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 when he said the following about his late 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).