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book review
The Millionaire Next Door
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Thomas J Stanley and William D Danko

If you thought the average millionaire in the US drove a flashy car or lived in the best house in a swanky neighbourhood, here is a book that may prove to be an eye opener. The book is an everyman's guide to accumulating wealth. It isn't a get-rich-quick manual, in fact, it recommends a process that will disappoint the entrepreneurial lot. The mantra recommended by the book involves the slow process of becoming successful in your career or business, saving up your money instead of spending it, budgeting down to the last cent, investing carefully and prodigiously, seeking out good advice when necessary, and spending a tremendous amount of time on money matters. Few of the millionaires interviewed were young, this is a book more geared to someone who wants to be wealthy by the age of 50 and retire in comfort, as opposed to the usual goal of retiring young.

A common thread that runs through the book is that people who are destined to become extremely wealthy are very careful about using credit and tend to save for things before they buy them. The average millionaire in the book drove a second-hand American-built large family car. You would not know a millionaire by his house or car. Nor would you recognise him by his general lifestyle, the majority of millionaires were not members of yacht clubs and exclusive private golf clubs, and most sent their children to ordinary public schools. The average millionaire interviewed would describe himself as a ‘tightwad’, and never spent any money that was not absolutely necessary. He knows exactly what he spent over the last year on household items and domestic bills. He was extremely frugal and avoid branded stuff, and was a compulsive coupon saver with a freezer full of cheap meat and vegetables.

The project that inspired this book was originally a marketing exercise. The authors wanted to know how to market to the very wealthy. They did what most people would do first and started writing to people in the top suburbs. What they found instead was a bunch of high income earners with lots of expensive toys and lots of debt, but a low net worth compared to their income. Trying to figure out why this was the case was what brought on The Millionaire Next Door.

The authors have developed a formula for the amount of wealth a financially successful person accumulates as a function of his age and income. They have a complica-ted regression model, but it summarises nicely into: multiply your age by your gross annual income from all sources except inheritances. Divide this by ten. This, less any inherited wealth is what your net worth (excluding home equity) would be.

Millionaires believe financial independence is more important than displaying social status. A prodigious accumulator of wealth thinks more highly of having enough money to support himself and his family in the event of his income being cut off than owning a flashy car. He was a conservative person not fond of taking huge risks, and valued security above all else.

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