The book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy (1996, ISBN 0-671-01520-6) is by Thomas J. Stanley and William D. Danko.

This book is a compilation of research done by the two authors in the profiles of ‘millionaires’. In this case they used the term ‘millionaire’ to denote U.S. households with net-worths exceeding one million dollars (USD). The results that they gathered were quite surprising.

UAWs Versus PAWs

The authors make a distinction between Under Accumluators of Wealth (UAWs) and Prodigious Accumulators of Wealth (PAWs). Most of the millionaire households that they profiled did not have the extravagant lifestyles that most people would assume. This finding is backed up by surveys indicating how little these millionaire households have spent on such things as cars, watches, suits, and other luxury products/services. Most importantly, the book gives a list of reasons for why these people managed to accumulate so much wealth (the top one being that “They live below their means”). The authors make a distinction between the ‘Balance Sheet Affluent’ (those with actual wealth, or high net-worth) and the ‘Income Affluent’ (those with a high income, but little actual wealth, or low net-worth).

Main Points

Spend Less Than You Earn

If you are always spending up to or above what you earn, you will never increase your net worth no matter much you make. The author discusses being prugal: prudent and frugal.

Avoid Buying Status Objects or Leading a Status Lifestyle

Buying imported vehicles is poor value and you will constantly need to buy the newest model. Buying status objects such as branded consumer goods is a never-ending cycle of depreciating assets. Living in a status neighbourhood is not only poor value, but you will feel the need to keep buying status objects to keep up with your neighbours, who are mostly UAWs.

PAWs Are Willing to Take Financial Risk if it is Worth the Reward

PAWs are not misers who put every penny under their mattress. They invest their money for good returns, and will consider riskier investments if they’re worth the reward. Many put money not in the stock market, but invest in private businesses and venture capital. They do not gamble or speculate on long-odds stocks.

Economic Outpatient Care

The authors also make an interesting observation in that UAWs tend to have children who require an influx of money from their parents in order to afford the lifestyle that their children expect for themselves, and that they are less likely to have been taught about money, budgeting and investing by their parents.

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A millionaire is a either an individual or any person who resides in a household whose net worth or wealth exceeds one million United States dollars, or Canadian Dollars, Euros, British pounds or units of a comparably valued currency. A centimillionaire has a net worth of more than 100 million units of currency. While statistics regarding financial assets and net worth are presented by household, the term is also often used to describe only the individual who has amassed the assets as millionaire. Thus the term statistically refers only to households, while in common language use it may only refer to an individual.

A certain level of prestige is associated with being a millionaire, which makes that amount of wealth a goal for many. However, due to inflation, the status of millionaire is no longer as exclusive as it once was. The increasing number of millionaires is partially due to inflation: a million dollars, for example, provides far less purchasing power today than it did in the 19th century. However it still ensures a comfortable lifestyle for those becoming millionaires.

Net worth vs. financial assets

Recently there has been some controversy over how to correctly determine a person’s status as a millionaire. One of the two most commonly used measurements is net worth, which counts the total value of all property owned by a household minus the household’s debts. According to this definition a household owning an $800k home, $50k furnishing, two cars worth $60k, a $60k IRA, $45k in mutual funds and a $325k vacation home with a $250k mortgage, $40k in car loans and $25k in credit card debt, would be worth $1,025,000 and every individual in this household would thus be a millionaire. However, according to the financial assets measurement, real estate equity, which accounts for the greatest portions of wealth among American households, is excluded. So are all other fixed assets such as the car and furniture.

While millionaires constitute only a small percentage of the population, they hold vast control over economic resources with the most powerful and prominent individuals usually ranking among them. Forbes and Fortune magazines maintain lists of people based on their net worth and are generally considered authorities on the subject. According to Forbes’ 19th annual list of the richest people published in 2006 there are 793 US-dollar billionaires in the world. The number of millionaires is much higher.

Multi-millionaire

Another commonly used term is multi-millionaire. As the term implies, multi-millionaire applies to those individuals residing in households with a net worth or wealth of two million or more. Only a small minority of millionaire households are indeed multi-millionaire households, yet many of the stereotypical millionaires shown in televisions programs such as “The OC” are actually multi-millionaires. The term also has a more prestigious connotation than millionaire.

Roughly 0.9% of high net worth individuals (HNWIs) can also correctly be identified as ultra-high net worth individuals (Ultra-HNWIs), those who reside in households with a net worth or wealth of thirty million or more. There are approximately seventy thousand ultra-HNWIs in the world with 54,000 or 77% residing in the United States and Europe.

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