Second Glance: The Millionaire Next Door

Thomas Stanley has written several books on the demographics and habits of American millionaires, both as a university professor and consultant to luxury goods companies.

The landmark book The Millionaire Next Door revealed that most millionaires live modestly, may drive a pick-up truck, own a few Laundromats and live unassumingly “next door”. Stanley seeks to identify who the millionaires are, who they are not and how you can become one.

In a follow-up book, Millionaire Women Next Door, the focus is on women, and mainly successful business owners (who make up the bulk of millionaire women). They were identified through detailed demographic analysis and survey, and not as one of Stanley’s C-students suggested, by finding those who drove luxury cars!

• These timeless studies apply to Australians, noting that we have a higher proportion of the wealthy professional class than entrepreneurs; and that tax and housing costs create a greater challenge for us.

The key and obvious lesson from both books is that this type of success comes from living below your means and directing your energies to creating wealth purposefully.

Portrait of a US millionaire (circa 1995)
Male, 57, married (never divorced) with three children.

• In 70% of the cases, the male earns 80% of the income.
• High income producer with frugal partner who budgets well.

One in five are retired; two-thirds of those working are self-employed business owners. The balance are professionals including doctors and accountants. Many are entrepreneurs.

Half of the wives don’t work; of those that do, the most common occupation is teaching.

The average household net worth is $US3.7 million (6% have more than $US10 million) and the median is $US1.6 million. The average household income is $US131,000 and the median is $247,000 (it is greater than $US1 million for 5% of households).

Ninety-seven percent are homeowners; the average home value is $US320,000; half have been in the same home for 20 years; non-millionaires in their neighbourhood outnumber them three to one.

Eighty percent are first-generation wealthy, having received no inheritance.

They live below their means, but spend heavily on children’s (and grandchildren’s)
education and save and invest 15–20% of their income.

They are generally “buy and hold” – passive not active investors.

Four out of five are university graduates (18% masters, 8% law, 6% medical, 6% PhD).

They are disproportionately from major ethnic groups Russian*, Scottish, Hungarian* and minor groups Israeli, Latvian! (*mainly as entrepreneurs).

Millionaires are generally frugal (not cheap)

Most millionaires live modest lives even after reaching this level, not being able to break the habit that made them wealthy:

• 50% never spent more than $US399 for a suit, $US140 for shoes, $US235 for a watch.
• Also many are self-employed, preferring to reinvest in their business and not broadcast their wealth to their clients.

More than half have a budget, know how much they spend and save before they spend.

For those that don’t budget, they “create an artificial economic environment of scarcity for themselves and the members of their family”.

Only a few have specialty credit cards: 3% Diners Club, 6% American Express platinum, 21% Neiman Marcus, 25% Saks cards; while 43 and 30% have Sears and Penney’s cards

On housing: Half do not live in recognised affluent suburbs (thereby having more cash to invest, avoiding the temptations of a high consumption lifestyle); several buy homes costing only twice their annual household income (not easily done in Australia, unfortunately).

On cars: 80% buy not lease, 50% never paid more than $US29,000, 37% bought used; they buy domestic (Ford, Cadillac and Lincoln first, second and third) before Jeep, Lexus, Mercedes (tied for 4th); 60% own cars that are less than three years old.

Most millionaires don’t encourage their children to follow in their footsteps

Two-thirds of working millionaires are self-employed owners of businesses.

• As an aside, you can’t predict if someone is a millionaire by the type of business they are in. The character of the business owner is the most predictive of success.
• This is not to suggest that some industries aren’t more rewarding than others.

Given the poor odds of small-business success, it is not surprising that millionaires encourage their children to become self-employed professionals such as doctors, lawyers, engineers, accountants or architects.

• Average profits are higher than for small business and the risks are lower.

Most don’t encourage their children to take over the business; only one in five do so.

A common multi-generational wealth pattern can emerge

• First generation affluent are entrepreneurs who lived frugally and beat the odds with respect to business failure or mediocrity.
• They want more for their children and a safer pathway encouraging and funding them to be high-income professionals.
• Along the way the children adopt a more costly upper-middle-class lifestyle, save little and may require “economic outpatient care”.

Guidelines for raising children if you’re wealthy

Never tell your children you are wealthy.

• “Underachieving wealth accumulators” are typically children of high-status, high-consumption parents who emulate early an expensive consumption style.

Teach your children discipline and frugality.

• Including living by example.

Minimise discussions about inheritances.

• Can create future conflicts and dependence.

Treat children as individuals.

• Don’t seek to equalise via gifts to “underachievers” as this typically only widens the gap.

Stay out of their family matters.

• Let them run their own lives; ask permission to give advice or gifts.

Emphasise your children’s achievements, not symbols of success.

• Teach your children to achieve not consume.

Tell them there are more important things in the world than money.

• Tell them not to chase money but to be the best in their field – if they are then “money will find them”; focus on integrity, reputation, health, family, friends.

Portrait of a US millionaire businesswoman (circa 2004)

She is 49, a wife and mother. Only 5% never married, 50% who are married were divorced, 18% are divorced now.

She wakes at 6am, retires at 10:30pm and works 49 hours a week. She exercises three times a week.

Earns 70% of the household income, which is $US241,000 (median) and $414,000 (average).

Ninety-eight percent are homeowners; one in three have no mortgage; only 4% owe more than $US500,000.

Have a household net worth of $US2.9 million (median) and $US4.8 million (average).

Sixty percent are college graduates; 50% paid their own tuition; 50% paid for their grandchildren’s tuition.

More than their male counterparts, they track expenses, research investing, hold stocks longer, and use the services of investment advisers including fee-based planners.

Donate 7% of their income to noble causes.

Are frugal and more frugal than men (the median spent less than $US400 on a suit, $US139 on shoes).

Seven in 10 took on a leadership role before their teens.

Their main drive to become successful was to be independent and once there many don’t want to reveal being rich.

Most are a product of a nurturing parental environment that fostered success. Their parents:

• Taught them to have empathy for others.
• Encouraged them to take initiative and not follow the crowd.
• Gave them responsibility early in life, including earning their own pocket money.
• Were supportive, not threatening, punishing or being cold and indifferent. (Conversely, one in five came from a disruptive family environment, which they overcame.)

The cite as the most important factors for their success: Perseverance (51%), education and training (34%), self-reliance (23%), caring/helping (22%), enjoyment (16%), saving/investing (15%), goals (14%), responsibility (14%), integrity (13%), spiritual (12%), advisers (11%).

Dr Doug Turek, the managing director of Professional Wealth Pty Ltd, is a financial adviser, wealth researcher and industry consultant.