The+Millionaire+Next+Door

Austin Layton AP Economics 12/11/08 Period 3 __The Millionaire Next Door__ Book Review

To begin, __The Millionaire Next Door__ was written by Thomas Stanley and William Danko. Both are professors of sociology who specialize in studying wealthy Americans and their habits. They have performed extensive statistical research to profile who consists of wealthy Americans, how they acquired their wealth, how they live, and how their families function. The novel begins with a study of how people get rich, and the novel actually disproves popular American thought. Stanley and Danko make it clear that the image of the so-called, "Lifestyles of the Rich and Famous," has nothing to do with the lifestyle of most wealthy Americans. Most Americans inherently believe the most wealth is received from family and are part of the belief that people “can’t make it in America today.” Stunningly, eighty percent of America’s millionaires are first-generation rich – meaning that they have become rich on their own time and hard work without garnering any boosts from their family. While that is the general thesis of Stanley and Danko’s novel, they go on to argue why Americans get rich and what motivates people to become wealthy. Primarily, the authors use a high tech distinction on how to determine who is wealthy and who is not. They use something they call an “Average Accumulator of Wealth” or AAW. The national average, as stated by the authors, should have a net worth equal to one-tenth their age multiplied by their current annual income from all sources. For example, 30-year-old person who over the past twelve months earned employment income of $45,000 and investment income of $5,000 should have an expected net worth of $150,000. The authors make the distinction between a UAW, “Under Accumulator of Wealth”, and a PAW, “Prodigious Accumulator of Wealth.” A UAW would have half the amount of their expected AAW, and a PAW would have double their expected AAW. So how do people become wealthy, according to the authors? Most of the millionaire households that Stanley and Danko profiled did not have the extravagant lifestyles that most people would assume i.e. fiscal irresponsibility on the hot new cars and things that they only want so they can keep up with the Joneses. The authors used non-bias surveys to back up their results indicating how little these millionaire households have spent on such things as cars, watches, suits, and other luxury products/services. To be more specific, the book lists numerous reasons for why these people managed to accumulate so much wealth. A majority of the data showed that the millionaires next door live well below their means – meaning that they were frugal and saved a majority of their income. The authors make a distinction between the “Balance Sheet Affluent”, those with actual wealth and high net worth – the ones who were able to save up the amount of money they earned, as opposed to the “Income Affluent”, those with a high income, but little actual wealth, or low net-worth due to their fiscal irresponsibility. The same idea is the main thesis to Stanley and Danko’s first reason why people become rich or millionaires next door. The reason is people spend less than they earn. The authors make the claim that millionaires to tend go on a spending spree when they earn money, the same logic occurs when someone gets a raise and they immediately go and buy themselves a gift and go to a nice dinner. The logic used by the authors is that “if you are always spending up to or above what you earn, you will never increase your net worth no matter how much you make.” The authors discuss an odd term, prugal – a combination between the words prudent and frugal i.e. being smart with your money by not buying worthless items. Furthermore, Stanley and Danko have a few more reasons why people become wealth, or rather a tip on how to become wealthy. The authors frown upon the idea on the so-called “Keeping up with the Joneses.” The way the authors describe it is by recommending people to avoid buying brand name objects or buying status objects. Simply, they say not to live or lead a status lifestyle because it only results in worthless spending of money that has better uses for people. For example, the author says “buying expensive 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 neighborhood is not only poor value, but you will feel the need to keep buying status objects to keep up with your neighbors, who are mostly UAWs.” The authors claim that this constant spending will only move people into the Under Accumulator of Wealth category because their net worth will be on a steady decline. While not over spending is a necessary to becoming a millionaire next door, making important investments can also be very important. Next, the authors, Stanley and Danko, believe that a necessary factor for becoming a millionaire is making the necessary investments, especially if there is a high enough reward. After numerous studies by the authors, they concluded that PAWs, or a Prodigious Accumulator of Wealth, are willing to take financial risk in investments if it is worth the right amount of reward. That is just simple economics – spend money (but, apparently not too much) to make money. However, the authors take a closer look into the analysis of why millionaires make certain investment. They make sure that the risk of a high reward is good enough so that they can make money and not waste money in their investment. Just like Mrs. Moeller would say, economics is the trying to earn the highest amount of goods and services for the least amount of resources. The same theory applies with millionaires – they try to find the highest amount of reward for the lowest amount of investment. While personal choice and investment play about in becoming the millionaire next door, there are some things that the authors talk about that fall under another category. There are some things that people have very little choice about. The final example that the authors give has to do with economic outpatient care. What is economic outpatient care? Well, essentially, it is how much money a person receives from people close to them for monetary support i.e. family members. Empirically, Under Accumulators of Wealth have more outpatient care because they want to live such a high lifestyle they cannot afford they eventually need money the people around them. After studies, the authors concluded that UAWs tend to have children who require an influx of their parents' money in order to afford the lifestyle that they expect for themselves, and that they are less likely to have been taught about money, budgeting and investing by their parents. However, this is probably true for most of the youth of America. They have no regard to how much money they spend and the effect it has on their budget. Overall, the authors make economics and becoming a millionaire simple. They reduce becoming wealthy to four simple and easy steps. And, honestly, their arguments make perfect sense. Don’t spend money on worthless things like the brand name cars, brand name shoes, etc. Don’t spend less than you earn, and actually try to save money for future investment. If you do invest, make sure the risk of reward is large enough, and that there is not a huge risk of defaulting on that investment. Simple, be smart.