It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self-discipline.

~ Thomas Stanley & William Danko, The Millionaire Next Door

The Millionaire Next Door is one of the true personal finance classics. It was originally published in 1996, and the ideas behind it were based on surveys conducted in 1995. Still, the lessons of this book are just as relevant today as they were more than a decade ago.

When Thomas J. Stanley and William D. Danko set out to discover how people become wealthy, they began by surveying people in upscale neighbourhoods across the U.S.. They were surprised to find that many people who lived in large homes and drove expensive cars were not wealthy at all. Further, many people who possessed a great deal of wealth did not have big homes or fancy cars. Many of them didn’t even live in upscale neighbourhoods.

What Does a Millionaire Look Like?

A millionaire is someone who lives in a mansion, drives a $100 000 car, and is painted with the latest fashions and the best bling that money can buy. He or she floats from one lucky mate to the next and regularly vacations in exotic locales. Right? Wrong. Stanley and Danko’s research found that your average millionaire looks something like this:

• He’s a 57 year old male who earns most of the family’s income. (I’m going to use “he” from here on for simplicity and because research at the time showed that most millionaires were indeed male. Hopefully that’s changed a bit since 1995.)
• One in five millionaires is retired. Two-thirds of those working are self-employed. (Self-employed people make up a minority of workers in America, but a majority of millionaires.)
• Most are in businesses that would be considered dull to normal: contractors, farmers, pest controllers, etc..
• 80% are first generation affluent (ie. no trust fund babies here).
• About half of their spouses do not work outside the home.
• They live below their means, wear inexpensive suits, and drive American-made cars. A minority of them drive a current-year automobile and few of them lease a car.
• Most of their wives are excellent planners and meticulous budgeters, and most would say that their wives are even more conservative than they are with their money.
• They have a “go to hell fund” which comprises enough wealth for them to live on for 10 years or more without working. (Now that’s an emergency fund!)
• 80% are college graduates.
• Most have married only once and remain married.
• Most are what you might call cheap. I prefer to call them value conscious.

I could go on and on, but you get the idea. You can get much more information and detail by reading the book.

Are You a PAW or a UAW?

The authors continually contrast the habits of PAWs and UAWs. A PAW is a Prodigious Accumulator of Wealth, and a UAW is an Under Accumulator of Wealth. Here’s how you tell the difference:

“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.”

I encourage you to give this calculation a try. If nothing else, it’s a great incentive to update (or calculate for the first time) your net worth. When I did the calculation for our current situation, we ended up in the AAW (Average Accumulator of Wealth) category. I was pleasantly surprised given our recent financial setbacks, but I’m still resolved to improve our standing!

The authors say that a well-positioned PAW should have twice the net worth indicated by the calculation above. If you have accumulated half or less of the indicated net worth for your age, you are in the UAW camp and you probably need to make some lifestyle changes.

Should You Read This Book?

I think this is a book that everyone could benefit from reading, even if you’re already well on your way to millionairedom. (I just made that word up.) You budding millionaires may find the information here to be quite a reinforcing pat on the back. You might even benefit from some of the ideas raised by your fellow PAWs.

Here are a few reasons why I would recommend that you give this book a try:

• It can help reframe your thinking about money and how you handle it.
• It provides concrete, proven, and practical information on how to build wealth over a lifetime.
• There are some very interesting case studies and examples of what to do – and what not to do – in order to achieve enough wealth to retire comfortably.
• There are detailed examples on how different PAWs approach buying a car, proving that there’s more than one way to become a millionaire.
• This book can show you how to make financial planning a habit and really take control of your financial future.

Of course, the PAWs out there will likely choose to get the book at the library. The UAWs might look for an autographed hardcover copy. I’m an AAW, so I bought the paperback for about $14. I’m glad I did, as I plan to re-read it and use it as a reference for years to come. Incidentally, it looks like a new edition of the book is coming out in November of this year. If you would like more on millionaires, but you don’t even have the gusto to get to the library, click on over to Len Penzo’s informative and entertaining article on 19 Things Your Suburban Millionaire Neighbor Won’t Tell You.

Interestingly, Mr. Cents and I share many of the characteristics of the millionaires in this book. Um . . . except the one about being millionaires. But it does give a person reason to hope doesn’t it?

Did you find parts of yourself in the millionaire portrait? Are you interested in learning  more on how to become a PAW?