The Millionaire Next Door: The Surprising Secrets of America's Wealthy (Paperback)

"The Millionaire Next Door" claims that there are seven key factors that lead to wealth accumulation. Included are:

1. Living Well Below your financial means. In other words being frugal. Buying the reliable used car versus the shinny new BMW or Porsche.

2. Spending your time wisely and in ways that lead to building wealth, such as studying investment.

3. Being more concerned about financial independence rather than showing off how much wealth you possess.

This is a book that will make you feel good about yourself if you are a compulsive coupon clipper or if you keep telling your kids to shut the door as they are letting the heat out of the house and it is costing you money. The book claims that it will teach you how to join the ranks of America's millionaires. Who could resist reading such a book?

To get rich, you must first learn not to be a hyperconsumer. In other words don't buy a lot of expensive stuff you don't need. You need good "offense" or generating earnings of at least $60,000 or more a year. Then you need good "defense" or saving a goodly portion of what you earn. Then you need to get old.

In fact, even if you don't have a million dollars, you can still be "rich" by being a PAW. PAWs or Prodigious Accumulators of Wealth have more money than you would think they would based upon their age and income. In contrast are the wasteful UAWs or Under Accumulators of Wealth. There are also AAWs (Average Accumulators of Wealth) but they aren't discussed much. No mention is made of how much EWOKS tend to accumulate. But, I'm betting those furry little fellows save a lot.

So even athletes worth tens of millions of dollars can be a UAW. There is something reassuring in that! There is a lot of interesting knowledge to be gleamed from this book. We learn that 3.5 of every 100 households in America have a net worth of $1 million dollars or more. But that 22 of every 100 households headed by Russians have a net worth over $1 million dollars. Interesting.

We also learn that self-employed people account for over 2/3 of the wealthy in America. But Stanley and Danko do not tell everyone to start their own business. That's too risky. In later chapters they do mention some businesses that they believe are poised for growth in the future. Businesses that cater to millionaires.

Despite having studied wealth for decades, and holding PhD's, Stanley and Danko seem to have some misunderstanding about the nature of wealth building via entrepreneurship. It is pointed out that many corporate businesses fail to report profits in any given 12 month period. No allowance is made for businesses like amazon.com which are growing rapidly and establishing themselves.

Nor is it pointed out that many businesses are started in a half-hearted fashion and will never succeed. And it is pointed out that many businesses demand considerable resources like land for coal mining. But, before this the authors are toting investing in assets that appreciate. Land is one of those assets.

We are told that one key factor of the rich is that they minimize their tax bite. The rich tend to pay a much smaller percentage of their overall wealth in taxes than most people. But, here it seems Stanley and Danko are mixing up cause and effect. Yes, the rich think about taxes. But, it is precisely because they have already saved a lot, and have retained wealth that is not taxed, that they pay a smaller percentage of their wealth in taxes. (And, capital gains are taxed at lower rates than income, and if you have more, you can invest more and build wealth via capital gains.)

But Stanley and Danko can be excused for any oversight as they hold PhD's and "being well educated has certain drawbacks" with regard to the creation of wealth. And, Stanley has, no doubt, become a millionaire by writing about millionaires.

The flaw of pursuing spending to show you are affluent and have financial status is very thoroughly trashed, as it rightfully should be. But, each socio-economic group has its own views about what is "important." All successful people tend to be achievement oriented. Unfortunately, many academics measure success by the degrees you hold or the degree of knowledge to which you have been formally exposed. Because of this "The Millionaire Next Door" misses that there are many successful endeavors which do not demand eight-year degrees. You will sense a certain academic bias in the book toward pursuing education. (Incidentally, that bias seems to vanish in "The Millionaire Mind." --another great book.) (There is some justification to saying education is good. I saw a Census study that said the average life time earnings of someone with a highschool degree is about $1.2 million. It's about $2.1 million for those with a college degree and about $4.4 million for those with professional degrees.)

Finally, there is some very interesting food for thought about how wealth will affect your children. I like this book a lot.

Peter Hupalo...