Friday, 19 March 2010

Review of The Millionaire Next Door by Thomas Stanley and William Danko

The book “Millionaire Next Door” was published in 1996, since then it has surprised many of the people who have read it, and I was certainly not an exception.

Just like you , I was surprised to read that in the USA, many millionaire-like people, who live in big houses in posh areas, drive luxury European or sports cars, wear very expensive suits and clothes, go on luxury foreign holidays and send their children to private schools are not necessarily multi-millionaires. These people may be affluent, but they tend to have lower net worth and their lifestyles are based on hyper-consumption.

This book revealed that most millionaires are ordinary looking people who could be living next door to you and they are frugal, frugal, frugal. Most of these types of millionaires are self employed business owners, who started their businesses with nothing. You would not easily recognise these people as multi-millionaires as they dress just like you, shop in the same stores where you shop and they drive second hand cars.

Many self made millionaires are frugal and price sensitive to products and services for their own consumption. However, they are not price sensitive when it comes to purchasing investment advice, accounting, tax and legal advice and services. In those cases they place a premium on quality. Also, they are not frugal at all when it comes to buying products and services for their children and grand children.

Despite the fact that most millionaires made their fortunes and accumulated their wealth as entrepreneurs and being self employed they go on to send their children to universities and encourage them to become professionals such as doctors, attorneys, engineers and accountants.

For these offspring, money is not their top priority, instead, their social status and respect from their peers are much more important. They tend to become affluent, but rarely become millionaires and have relatively low net worth. They end up having very high consumption lifestyle as described in the second paragraph.

The research also found that adult children who receive significant Economic Outpatient Care(EOC) from their wealthy parents such as cash and expensive gifts tend not to accumulate significant wealth.

The research also found that if you are self employed you are more likely to become affluent compared to employees, however, most business owners are not millionaires and will never come close to becoming wealthy.

This finding reminds me of Robert Kiyosaki’s cash flow quadrants, I believe that if you want to become a millionaire you must change your quadrant from left quadrant, self employed to the right quadrants of the business owner and investor.

This book recommends that in order to become a millionaire you should be frugal and live well below your means to accumulate wealth. However, Robert Kiyosaki, the author of best selling personal finance book “Rich Dad, Poor Dad” says that it is a criminal thing to encourage people to live well below their means.

Instead, Robert Kiyosaki encourages people to increase their financial IQ by learning so they can increase their earning abilities to earn more and control their expenditures to accumulate wealth. He encourages people to live well above their means rather than being frugal all the time. Honestly, I could not agree more with Robert Kiyosaki.

This book was very educational and I did learn a lot from various aspects, however I also like to reserve my point of view regarding how we should live our lives.