The Millionaire Next Door: Book Notes

This post contains my personal notes from the book The Millionaire Next Door by Thomas Stanley and William Danko

Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend. Wealth is rarely due to luck, inheritance, advanced degrees or intelligence. Wealth is usually due to hard work, perseverance, planning, and self-discipline.

There are seven common denominators among those who build wealth:

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.

These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires-they don’t
even have millionaire names. Where are the millionaires who look like millionaires?

Millionaires do not own expensive suits, watches, cars or other status artifacts. They usually do not lease their motor vehicles.They live well below their means. They have married once and remain married. Their wives usually do not go to work. Their wives are conservative with money and budget and plan well. They live in middle-class neighbourhoods. Many of them are self-employed( entrepreneurs or self-employed professionals). Most of them work in dull-normal business. They usually own their home and did not receive an inheritance. They are well educated, spend good amounts of money for their children’s education and work hard(50 hours a week). They invest 15-20% of their income. They invest in stocks. They buy and hold and do not trade a lot. They share their wealth with their daughters also. They encourage their kids to go into professions that pay well. They are tightwads.

They define wealthy as owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle. Wealth is your net worth. Net worth is defined as the current value of one’s assets less liabilities (exclude the principle in trust accounts). A person’s income and age are strong determinants of how much that person should be worth. So higher-income people who are older should have accumulated more wealth than lower income producers who are younger.

How much should your net worth be?

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

PAW, or prodigious accumulator of wealth : Net worth > 2 x expected net worth for income/age
UAW, or under accumulator of wealth: Net worth < ½ x expected net worth for income/age

UAWs, have a higher propensity to spend than do the members of the PAW group. UAWs tend to live above their means; they emphasize consumption. And they tend to de-emphasize many of the key factors that underlie wealth building.

Most people who become millionaires have confidence in their own abilities. They do not spend time worrying about whether or not their parents were wealthy. They do not believe that one must be born wealthy.

To continue to remain wealthy, you future generations should also adopt these habits. If not, they will end up consuming a lot and lose wealth.


Webster’s defines frugal as “behavior characterized by or reflecting economy in the use of resources.” The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and overconsumption. Being frugal is the cornerstone of wealth-building.
Millionaires are frugal. They do not waste a lot of money on suits, shoes or watches. Their parents were also frugal. Their spouse is also frugal. The foundation stone of
wealth accumulation is defense, and this defense should be anchored by budgeting and planning. They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.

Have you ever noticed those people whom you see jogging day after day? They are the ones who seem not to need to jog. But that’s why they are fit. Those who are wealthy work at staying financially fit. But those who are not financially fit do little to change their status.

Do you wish to become affluent and stay affluent? Can you answer “yes” candidly and honestly to four simple questions?


They create an artificial economic environment of scarcity for themselves and the other members of their household. They invest first and spend the balance of their income. Many call this the “pay yourself first” strategy. These people invest a minimum of 15 percent of their annual realized income before they pay the sellers of their food, clothes, homes, credit, and the like.



Financially independent people are happier than those in their same income/age cohort
who are not financially secure. And goals help you become financially independent


Millionaires spend a lot of time studying and planning investments. Although millionaires have much more experience in making investment decisions, they allocate significantly more hours than do nonmillionaires in an effort to become even better investors. That is one of the main reasons that millionaires remain wealthy.

There are four more rules if you want to become wealthy:

1. If you earn to spend, you can never save enough. To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).

2. What if your goal is to become financially independent? Your plan should be to sacrifice high consumption today for financial independence tomorrow. Every dollar you earn to spend is first discounted by the tax man.

3. It’s easier to accumulate wealth if you don’t live in a high-status neighborhood.

4. If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.


PAWs allocate nearly twice the number of hours per month to planning their financial investments as UAWs do. PAWs, on average, spend less time worrying about their economic well-being.

Begin earning and investing early in your adult life.

High-income PAWs are significantly less likely than UAWs to hold graduate degrees, law degrees, or medical degrees..The reasons why this is true is because:

  • When you have a lot of education, you have spent a lot of time learning and hence you start earning late. This does not mean parents should not suggest that their children drop out of college and start a business
  • Another reason very well-educated people tend to lag behind on the wealth scale has to do with the status ascribed to them by society. High-grade doctors, lawyers, accountants, and so on are expected to live in expensive homes. They also are expected to dress and drive in a style congruent with their ability to perform their professional duties. They assume a professional is likely to be mediocre, even incompetent, if he lives in a modest home and drives a dull car.
  • They are also conned by so-called investment experts easily.
  • They are also generally unselfish, do not receive inheritances and spend a lot of time working and do not plan their finances well.

Planning and controlling consumption are key factors underlying wealth accumulation. They consume at the same level as the average family that earns about one-third as much as they do. They purchase quality clothing, but not at full price and never on impulse. Their spouse’s orientation toward thrift, consumption, and investing is a significant factor in accumulating wealth. On the other hand, it is very difficult for a married couple to accumulate wealth if one or both of them are spendthrifts. A household divided in its financial orientation is unlikely to accumulate significant wealth.

Do you know exactly how much your family spent last year for each and every category of product and service? Without such knowledge, it’s difficult to control your spending. If you can’t control your spending, you’re unlikely to accumulate prodigious amounts of wealth. A good start is to keep an accurate record of each and every expenditure that your family makes each month. Then work with her to develop a budget. The goal is to enable you to set aside for investing purposes at least 15 percent of your pretax income each year. By the way, this “15 percent method” is Mr. Gifford’s simple strategy for becoming affluent.

There is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future. Time, energy, and money are finite resources, even among high-income generators. PAWs in general, on the other hand, allocate their spare time to activities that they hope will enhance their wealth (see Table 3-6 later in chapter). Such activities include studying and planning their investment strategies and managing current investments.

Conversely, UAWs work hard to maintain and enhance their high standard of living. Many aggressively shop for bargains, but not for bargain stocks but bargain luxury goods. It is difficult to accumulate wealth if you spend much of your time, energy, and money for a so-called dealer cost price on an extremely expensive motor vehicle.

The concerns and worries of PAWs and UAWs are also different as shown in the figure below:

Concerns and worries of PAW and UAWChildren of PAW are accustomed to living in a much more frugal and disciplined environment. They are less likely to have a perceived need for major doses of economic outpatient care.PAWs are not worried about taxes, government spending, federal deficit, inflation and government regulation of business and industry.Both PAWs and UAWs want to increase their wealth, but PAWs do things on a regular basis which help them to increase their wealth. UAWs on the other hand, say it, but don’t do it. Planning and wealth accumulation are significant correlates even among investors with modest incomes.PAWs have a regimented planning schedule, start planning at an earlier age. They do a little planning each and every month. PAWs build wealth slowly. They do not live a spartan existence, but they do have a regimen when it comes to balancing working, planning, investing, and consuming.A lot of PAWs are self-employed. They have seen both good and bad times and do not take things for granted. Hence they plan well. PAWs hold their wealth in stocks, real estate and businesses while UAWs hold their wealth in cash and cash-like instruments. But PAWs do not actively trade. They buy and hold generally for the long run. They choose a financial advisor who is endorsed by an enlightened accountant and/or his clients with investment portfolios that in the long run outpace the market.


  • If your goal is to become financially secure, you’ll likely attain it. … But if your motive is to make money to spend money on the good life, … you’re never gonna make it.
  • In most of the cases we have examined, PAWs love working, while a large proportion of UAWs work because they need to support their conspicuous consumption habit.
  • Money should never change one’s values. … Making money is only a report card. It’s a way to tell how you’re doing.
  • Building wealth is not something that will change your lifestyle.Even at this stage of life, I don’t want to change the way I live.
  • True millionaires recognizes that many status artifacts can be a burden, if not an impediment, to becoming financially independent. Life has its own burdens. Why add excess baggage?
  • More than 80 percent of millionaires purchase their vehicles.If and when more than 50 percent begin leasing, we will change our recommendation..They usually buy good quality moderately priced cars and keep them for a long period of time( many years or decades).
  • It’s much easier in America to earn a lot than it is to accumulate wealth. To accumulate wealth one needs to be frugal and consume less.


Economic outpatient care refers to the substantial economic gifts and “acts of kindness” some parents give their adult children and grandchildren. The problem with economic outpatient care is this: It is much easier to spend other people’s money than dollars that are self-generated. Adults who sit around waiting for the next dose of economic outpatient care typically are not very productive. The reasons for this are:

  • Giving precipitates more consumption than saving or investing.
  • Gift receivers in general never fully distinguish between their wealth and the wealth of their gift giving parents.
  • Gift receivers are significantly more dependent on credit than non receivers.
  • Receivers of gifts invest significantly less than non-receivers.

The more dollars adult children receive, the fewer dollars they accumulate,while those who are given fewer dollars accumulate more.The gifts that will help your children become wealthy are education, creation of an environment that honors independent thoughts and deeds, cherishes individual achievements, and rewards responsibility and leadership. Teach your own to live on their own. It’s much less costly financially, and, in the long run, it is in the best interests of both the children and their parents.
Do not strengthen the strong child and weaken the weak child. Make a commitment to overcome the handicap of the weak child.
Webster’s defines courage as “mental or moral strength to resist opposition, danger, or hardship.” It implies firmness of mind and will in the face of danger or extreme difficulty. Courage can be developed. But it cannot be nurtured in an environment that eliminates all risks, all difficulty, all dangers.If you provide economic outpatient care, children do not develop the courage to risk and be successful and wealthy.


If you are wealthy and want your children to become happy and independent adults, minimize discussions and behavior that center on the topic of receiving other people’s money.

  • Never tell children that their parents are wealthy.
  • No matter how wealthy you are, teach your children discipline and frugality.
  • Assure that your children won’t realize you’re affluent until alter they have established a mature, disciplined, and adult lifestyle and profession.
  • Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.
  • Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
  • Stay out of your adult children’s family matters.
  • Don’t try to compete with your children
  • Always remember that your children are individuals.
  • Emphasize your children’s achievements, no matter how small, not their or your symbols of success.
  • Always strive to be the best in your field. … Don’t chase money. If you are the best in your field, money will find you.
  • Tell your children that there are a lot of things more valuable than money.

Good health, longevity, happiness, a loving family, self-reliance, fine friends . .. if you [have] five, you’re a rich man.. . . Reputation, respect, integrity, honesty, and a history of achievements! Money [is] icing on the cake of life. … You don’t ever have to cheat or steal . .. don’t have to break the law . .. [or] cheat on your taxes. It’s easier to make money honestly than [dishonestly] in this country. You will never exist in business if you rip people off! Life is the long run. You can’t hide from adversity. You can’t hide your children from life’s ups and downs. The ones who achieve do so by experiencing and conquering obstacles, . . . even from their childhood days. These are the ones who were never denied their right to face some struggle, some adversity. Others were, in reality, cheated. Those who attempted to shelter their children from every conceivable germ in our society . .. never really inoculated them from fear, worry, and the feeling of dependency. Not at all.

And remember “The King’s rules”

• Be tough … life is. In other words, there is no promise of a rose garden.
• Never say “poor me” … [or] feel sorry for yourself.
• Don’t walk on the back of your shoes…. Waste not, want not. In other words, don’t abuse your belongings. They will last longer.
• Close the front door…. Don’t waste your parents’ money letting the heat out.
• Always put things back where they belong.
• Flush.
• Say “yes” to those who need help before they ask.


The following are some of the market opportunities that can make you potentially wealthy.

  • Law: Estate attorneys, immigration attorneys, tax attorneys
  • Medical and dental care specialists- dentists, plastic surgeons, dermatologists, psychologists, psychiatrists, allergists and chiropractors
  • Asset liquidators, facilitators and appraisers: appraisers and auctioneers, coin and stamp dealers, pawn brokers, real estate management professionals
  • Educational institutions and professionals: proprietors and teachers at private schools and specialized areas
  • Professional service specialists: accountants
  • Housing specialists: Home building contractors, mortgage lenders, remodeling contractors, Renovation contractors, Residential real estate developers, Residential real estate agents,
  • Retailers of paint, wall coverings, and decorating products, Marketers of alarm and security systems and security consultation services, Providers of interior design and decorating services
  • Fund raising counselors: Professionals who conduct philanthropic research, develop targeting strategies, and counsel foundations and educational institutions
  • Travel agents and bureaus and travel consultants: Marketers of family-oriented vacation resorts, Marketers of cruises, tours, worldwide vacations, and treks and safaris


Most of the affluent are business owners, including self-employed professionals. You can’t predict whether somebody is a millionaire by the type of business he is in. The character of the business owner is more important in predicting his level of wealth than the classification of his business.But most businesses do not succeed. The other way to become wealthy is to become a self employed professional. But you to be careful that you don’t spend too much on consumption items.