The Millionaire Next Door is one of those books which truly inspired and influenced me after reading it right out of college. Before reading it, if you were to ask me to describe a millionaire, I’d describe someone who drives a fancy luxury car or flashy sports car. I would imagine that this millionaire would live in a mansion, have name-brand clothes, lots of jewelry, they would only be spotted in the trendiest clubs and take lavish vacations to exotic locales. This is how the media portrays the rich. They are the ones with the outward signs of the trappings of wealth.
The Millionaire Next Door, co-authored by Thomas Stanley shined a light on this myth and found that in actuality, most millionaires were frugal and lived beneath their means. They drive affordable but reliable cars. They live in modest homes in good neighborhoods.
A few weeks ago, Mr. Stanley passed away and a couple of people in the media took it upon themselves to proclaim that not only did the author die, the dream of the millionaire next door has died as well. Some even went further by making it a point that he died while driving a corvette, the type of car that surely a “millionaire next door” wouldn’t be driving.
I was pretty surprised at the criticism as the conclusions from the book are hardly controversial. It described the millionaire next door as one who spent less than they earned, avoided wasting money on status symbols, started their own business, and used the majority of their money to make money rather than spending it on consumer goods. As for Mr. Stanley driving a corvette, no one said you can’t enjoy life, you just have to do it within your means. I’m sure there were no car payments for that corvette.
The criticism of this mythological millionaire next door
Nassim Nicholas Taleb argued that the research suffered from survivorship bias: “What of the millions of investors who invested in the wrong things or whose paving companies failed? They outnumber the winners by a large margin. The book was written during an unprecedented bull market, and only a few years later the internet bubble burst and a few years after that we had a recession.” Taleb calls it luck.
The stock market has historically returned about 8 percent. Sure, the 90s were a great time to be invested in the stock market and it seemed like everyone was making money. But if you consistently invest money into a diversified index fund with low fees, you will reap the benefits of the upward trend of the stock market. While there will be periods where your return may be negative, as long as you stay the course and continue to save and invest, it has been shown to have positive results. You don’t have to worry about investing in the “wrong things.” I’ve invested through the internet bubble burst as well as the recent recession, and lived to tell about it. I am not yet a millionaire next door, but if I continue, I believe that I am on the right path there. As for Taleb’s argument that many businesses fail, I’m sure the millionaire next door would pick themselves up and start another business or find something else to be successful at. While luck plays a role in most success stories, luck generally favors the bold and those who are prepared to take advantage of opportunities. In any case, I prefer to make my own luck.
Thomas Frank described the millionaire next door as having a “militantly Calvinist attitude toward consumption” saving and investing are ends in themselves, evidence of moral virtue, while spending is empty dissipation.”
Wow, militantly calvinist attitude!? Where do I start? No where in my understanding of the millionaire next door was that of someone who scrimped and saved for the sole purpose of scrimping and saving. Perhaps financial security and freedom have little value to these critics of the book. I think the millionaire next door purchased modest homes in good neighborhoods and drove reliable yet older model cars. They are hardly militantly calvinistic, they just don’t see the need for status symbols.
Taleb also said, “I see no special heroism in accumulating money, particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from the wealth…. I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house.”
Oh the horror! Living in a starter house with only 3 bedrooms and a bathroom. Surely, we need to constantly upgrade to bigger homes so everyone has their own personal bathroom, man cave, guest rooms, playroom, den, office and large kitchen for entertaining. What these critics don’t seem to comprehend is the difference between being frugal and being cheap.
Helaine Olen argues that it takes money to make money, and those with well-to-do parents have a leg up. She says that they can help their children financially as well as with networking and paying for private school. While I do agree that children of those with money do have many advantages, I still believe this is the land of opportunity even for those without wealthy parents. No, it is not easy to become a millionaire next door. It will take hard work, discipline, and perhaps a bit of luck. But I still think that becoming the millionaire next door is still attainable.
Do you still think that it’s possible to be a millionaire next door?
Yes the rumors are greatly exaggerated. There is a lot of cynicism but I don’t think things are that bad. I do believe there is a lot of opportunity in this country. I believe the reason why so many are struggling is because of the debt they took on early before the great recession…i.e. houses that were too big when they couldn’t afford them and lied about them to the bank, credit card debt, etc.
Even if you make a lot of mistakes by taking on too much debt, this country still provides you with a lot of opportunities to turn things around especially because we also live longer. So if a person messed up their 20’s and 30’s, they still have their 40’s and 50’s to turn things around.
I hear Dave Ramsey’s show and a lot of his callers have like $20,000 to $400,000 in debt and yet many of them pay it off within 2-5 years. A lot of his callers also make an average income. I remember listening to one caller and the husband made $40,000, his wife was a stay at home mom, and they had $30,000 in savings. He often has callers that make $100,000 and have zero savings. I don’t work for Dave Ramsey, I’m just inspired by his show and his callers.
I suggest reading “These Hard Economic Times” because it shows that we are spending a lot as consumers even though we claim these are hard economic times. http://www.livingonadime.com/hard-economic-times/
I think one of the best ways to get ahead is to leave expensive cities like NYC and L.A. and go to cities like Omaha where an average income can go further. I live in Omaha, and if you are a professional and work in an industry like finance, insurance, healthcare, IT then you can make a lot more money and build security.
The American Dream is alive and well in Omaha, and also we have one of the lowest unemployment rates in the country. Frugality doesn’t mean deprivation. You can have nice things but buy them AFTER your debt has been paid off, and after you have a safety cushion in your money market account. Yes its still possible to be the millionaire next door.
Thanks for the link…I’ve noticed that too. While it may not apply to everyone, I did feel that this “Great Recession” was very different from the “Great Depression” when observing the behavior of the American consumer. You’re right that leaving high cost of living areas is often the right choice, unless you have a high paying job. I often wonder how much earlier I could reach financial independence if I lived in a lower cost area. But I have all my family and friends here and our household income is enough where we’re doing okay. I have heard many good things about Omaha though.
It’s a shame Andrew, but some people just have to hate. I think the crux of the Millionaire Next Door idea is that the people have enough money to live a more extravagant life, but they are living a simpler life at their own preference……and criticizing the guy for driving a ‘Vette. Come on.
Have you ever wondered at what point inflation will up the expression to the “Multi-Millionaire Next Door”?.
-Bryan
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Good point. I’ve already read in many personal finance articles in the mainstream media and in the comments that a millionaire isn’t much nowadays.
But much like these articles, those are greatly exaggerated. A million dollars is still fantastic, and 3% is still a conservative withdrawals rate. I’d live pretty well on $30,000 per year of passive portfolio income. We live well on half that amount now.
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Pretty awesome that you guys are able to live on half that amount!
It is amazing how they will choose to degrade a man, who can’t defend himself. What if that vette was a lifelong dream he finally realized when he turned 65 or maybe when his book hit the NY times best seller list. They criticize because they can’t save, while making 150K income; instead they justify their downfalls, and project it with hate. Either that or they just want to get a piece of his fame, by using this spotlight.
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Yea, I think the focus on the Corvette was a bit of a low blow. Apparently, he was cut off and passed away from the injuries suffered in the car accident.
I’m a big fan of Nassim Nicholas Taleb and a big fan of you, so it’s tough to see you in disagreement. I know Taleb is big on exploiting survivorship bias and in general is skeptical of pretty much everything. I think you raise a good point, though, that there are going to be down times in the economy and investing is more about consistency than about a small period of time where investments are thriving.
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Thanks, that means a lot. I’m not familiar with Taleb and his work, so I’m basing my comments solely on his statements. Maybe some statements were taken out of context, but I found the comment about living in a starter home being “Spartan” a bit extreme. I’m sure he has also done a ton of research, while most of my observations are anecdotal and based on personal experiences and observations. I do understand that luck definitely plays a role and that the research done in the Millionaire Next Door book may have some faults. But, ultimately, I do feel strongly that leaving within your means, choosing the right career, saving and investing consistently (in a low cost index funds as well other investment vehicles) that being a “millionaire” is attainable. Although many may argue that a million won’t go as far nowadays. I’ll have to check out some more of Taleb’s work.
I honestly didn’t read Taleb’s article and I’m only basing my opinion of him off of “The Black Swan.” I laughed out loud when I heard that he referred to living in a starter home as “Spartan”…unreal. I think he has a perspective on life (and many things) that others can’t relate to. Not everyone goes after a Black Swan investment and hits it rich like he did.
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I got the quotes of Taleb from an LA Times article by Michael Hiltzik. I couldn’t find where Taleb said that living in a starter home was Spartan. Though it does appear that he discusses survivorship bias and criticizes The Millionaire Next Door in his book Fooled by Randomness. I think that part of his argument has valid points. Although I still feel pretty strongly that living within your means, choosing a good paying occupation/business, investing is still a path to millionaire status. I actually am more bothered by Helaine Olen’s criticisms and she tends to encourage people to play the victim and blame the government/businesses for financial problems. While there are many things that need to be changed in government and business…that is much harder to control. You can only do what you can control, and often times those factors are more important. Her solution of writing to your politicians to make changes is horrible advice…and she criticizes Suzy Orman, Dave Ramsey, etc.
I think the biggest issue with culture and society today is that everyone feels like they “need” or at minimum, “deserve” so much. It’s like everyone thinks they need a fully updated home (I blame HGTV for this one haha), new clothes, great car, the ability to go out as much as they want, etc. If you live within your means – which are largely dependent on the career you choose – it certainly is possible to slowly invest and become a millionaire over time.
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I think Mr. Taleb has grossly misunderstood Thomas Stanley’s point. To me, his point is that happiness isn’t found by owning “stuff”. Instead, it’s found by not letting stuff or the money that buys it rule your life. I learned SO much from The Millionaire Next Door. It was the first place that I learned that people can be happy even if they don’t have mansions and Jaguars. Thomas Stanley’s book shattered America’s false image of the millionaire, and for that, I forever thank him.
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I know what you mean…I learned the same lessons from the book. While I was frugal back then (mostly because I didn’t make much money), but I always put a high value of mansions and fancy cars. I wanted those things and thought that they would bring happiness.
I did not realize that there was such a backlash! This reminds me of two things: One, I want to write a post called “You are not a Unique Snowflake, You’re Bad with Money” when I see all of the stupid comments and naysayers. “My situation is so special” is usually not true, just save your money peeps, and don’t spend it!
The second thing is that I will be promoting a super-obnoxious hashtag on twitter as soon as my household net worth crosses one million! #millionairelife is going to be full of packed lunches and older cars and scratch cooking and sales stickers. Yup. That’s how it’s ACTUALLY done folks.
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Absolutely agree with you. I hear it all the time, and while I try to keep my personal finances private sometimes when people hear that I paid cash for my car or that I put 20% down when purchasing our co-op, they say that they’re situation is different and, thus aren’t able to do the same. I am anxiously awaiting your “super-obnoxious hashtag!”
Haters will continue to hate, there’s no way changing other people. It’s better to ignore them and continue with your life.
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True, but it’s unfortunate when the mainstream media puts it out there for public consumption.
I agree. Unfortunately most people pay attention to mainstream media. They also likely don’t seek out other viewpoints.
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I’m currently reading The Black Swan by Mr. Taleb. He is a quant trader and a philosopher and definitely has his own strong opinions and way of thinking. His investment strategy from my memory is a a large percentage of treasury bills and a small percentage of venture capital or other investments that could yield a “black swan” return. But at the same time I believe the man is brilliant and enjoy his book thus far, but maybe a little removed from reality at this point.
Look at all the hate Go Curry Cracker yielded in their article on Yahoo Travel. Ignorant people behind a keyboard can be vicious with their criticism. That is why I have learned to care less about what others think I as get older.
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Interesting, I may have to check that out too. My investment strategy is to be a Boglehead…I stick with low cost index funds. I don’t need a black swan return…I’ll just swim with the flock of swans (is it a flock?) I was thinking the same thing about the Go Curry Cracker Yahoo article and the ridiculous comments there. Man…so much HATE! People are horrible when they can by anonymous.
Children of wealthy parents have an advantage because they go to better schools and their parents introduce them to the right people. But, you don’t have to run in those circles to be successful. My aunt is the perfect example of the Millionaire Next Door. High school teacher who lived within her means. She lived a full life with lots of experiences, not stuff, and died with an estate worth millions.
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That’s a great success story! It is exactly what I imagine a millionaire next door to be.
Sorry to burst your bubble. It is human nature to resist the role of luck (randomness, divine providence, privilege or whatever) in our personal successes, but it is absolutely a major factor.
ValueThinker over at the Boggleheads has quite a thoughtful summary here;
http://www.bogleheads.org/forum/viewtopic.php?f=2&t=87601
I read and enjoyed Millionaire Next Door. It reinforced my existing beliefs, so naturally, I thought it was spot-on accurate. But as I got a broader view of history, finance and statistics, I have to conclude that selection bias undermines the inferences drawn by Stanley & Danko. Even their own data doesn’t support the argument that their millionaires were particularly thrifty. The guys they profiled saved 20% of their income, but their incomes were 4X the US median. In today’s dollars, that’s saving 40K on an income of 200K. There is/was plenty left-over for a pretty posh lifestyle, because they had an income that was in the top 5%.
This is significant. I’d argue it is THE #1 determining factor. It is not being a hater to point this out. On the contrary, I think it is incumbent upon those of us who have been successful to acknowledge the advantages we’ve enjoyed that others have not. It’s not infrequent for a wealthy person to look on those who earn/have less as deserving their comparatively lower socioeconomic status because of their own faults or flaws. If there were a level playing field, the ethnic and gender make-up of those millionaires profiled would be a whole lot different.
Thanks for your insightful comment and for the link to the Bogleheads forum. I’m pretty big fan of that forum and go over there pretty often. I think you’re right that there are flaws in the findings by Stanley and Danko and that there are valid criticisms. And you’re absolutely right that often times a wealthy or successful person may look down on those who are poor because they don’t understand why they can’t “work harder” and become successful. More often than not, they are born on 3rd base so of course it is easier to be successful. However, with all that said, I still think that for most middle-class families with a decent income to attain millionaire status if they live below their means, saved and invested their savings.
People really love to hate for hating’s sake, but I still believe in the millionaire next door. I see it frequently with my clients so I know that it’s possible.
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Yes, it is possible!
I have read this book Millionaire Next Door few years back. I actually lost this book and now wants to read it again because it really does teach readers about money and change their perspective.
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I think he has a few other books as well.
It is definitely still possible to be a millionaire next door. I know several people who have achieved that status while living an extremely frugal lifestyle. Nothing wrong with living well below your means and sleeping great at night.
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It’s great when you personally observe the frugal lifestyle pay off. That way you know that it isn’t a myth.
People will always find someone to criticize even if they are a saint like mother teresa. They just have to find fault in anything. I think it’s still possible. Easy? No. But possible.
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Definitely not easy, but yes possible. I think people like to say it’s not so they don’t feel as bad that they weren’t able to attain it.
Crazy that so many people are dancing on his grave. Nothing’s sacred, I guess.
It’s probably simplistic, but my take is that these critics are just claiming sour grapes. Yeah, being a millionaire really sucks: I mean, I wouldn’t even want to be like those rich guys, anyway.
Done by Forty recently posted…Middle Class Wealth
Exactly…sour grapes. Plus, many don’t want to put in the work and like to have an excuse as to why others are successful and they are not.
The strength of online personal finance blogs, to me, shows that the spirit of “The Millionaire Next Door” is alive. Many of these blogs have very high traffic, which demonstrates that people want to learn how to save and invest. Further, the latest recession put some fear into 20 – 30 year-olds. They’ve seen how fast you can lose a job and the market can fall. As a result, I think that, over the long run, this generation will be more frugal than others.
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Great point! I find that to be true too. I see a few pf bloggers who have been successful and even retired early with a large nest egg at a young age. They did it even during a time period when the stock market has hit many bumps. As for whether this generation will be more frugal than others…hmmm…I’m not sure about that.
I definitely agree with your assessment, and find the critics a bit annoying. It’s still relatively easy to build wealth in America, and living in a 3 bedroom house is far from spartan…
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I still think it’s very much possible to be the millionaire next door. The mainstream media irritates me on a number of levels. They create so much “click bait” articles just to get people riled up. Frugality is not a new thing and I know quite a few people who are on their way to millionaire status because they watched their money, but also did stuff with their money.
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Yea, me too. I can’t read many of the mainstream media’s articles anymore.
We might just have enough proof that it’s possible, though it will really take heart, soul, discipline, mental fortitude, help and of course some luck as well.
Although I lack direct observations, it seems to me making money for the right reasons stands a better chance of success than going for the wrong ones (such as making money for the sake of making money). That is a dead end to me.
Whereas in the other instance, if one has a higher goal in mind and constantly upgrades him/herself and contributes to the community, the latter will help that person be raised to great fortunes. The people am doing work for, Bob’s are in essence an example of that, however I am yet to prove this little theory for myself but looks about right from first glance 😀
I think now more than ever is the best time to work towards becoming a millionaire next door. Frugality and being money conscious are coming back, just like cooking your own meals and taking a walk in the park. Sure it’s not for everyone but either is buying the new iPhone or living next to the Jones’, I hope I make it there and I have a plan to get there as well. So many opportunities, just have to work hard and grab one.
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I think you’ll make it. As a follower of the early retirement blogs, it boils down to the math…more or less. If you have a plan and are executed it like you are, you can do it.
I completely agree with you. The book is based in principles which are lasting. We are on the path and can completely see it coming to fruition. Let’s get it done!
PS. This book really helped me think about not needing a big fancy house. It inspired me to think about the millions of people who are millionaires but have the modest house in a nice neighborhood where they don’t need to flaunt their wealth. It has become a part of our #MoneyConscious plan.
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I didn’t hear about Mr. Stanley’s death. That is sad.
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In my opinion, Millionaire Next Door is a extremely beneficial book for people to read that would like to understand what it takes for the middle class to become wealthy. The first time I picked up the book, it appeared as if the book was written about me. I am living proof that the concepts work. I became a millionaire at the age of 39 and am accumulating wealth at a rapid pace 5 years later given that I live below my means and now have have zero debt. no car debt, no mortgage and no credit cards. I still take a vacation each year a go out to eat every cople of weeks but am fragile and invest a great portion of what I make. this book will help many people obtain millionaire status what I have seen as that many find it difficult to budget and set financial goals. most would rather borrow today vs. pay as you have the money.
Millionaire at age 39! Congrats to you for being a millionaire next door. It goes to show that it is still possible and that the book is still relevant now.