The Millionaire Next Door: The
Surprising Secrets of
American's Wealthy
By THOMAS J. STANLEY, Ph.D and WILLIAM D.
DANKO, Ph.D
Longstreet Press
CHAPTER ONE
Meet the Millionaire Next Door
These people cannot be millionaires! They don't look like
millionaires, they don't dress like millionaires, they don't eat like
millionaires, they don't act like millionaires--they don't even have
millionaire names. Where are the millionaires who look like
millionaires?
The person who said this was a vice president of a trust department. He
made these comments following a focus group interview and dinner that
we hosted for ten first-generation millionaires. His view of millionaires is
shared by most people who are not wealthy. They think millionaires own
expensive clothes, watches, and other status artifacts. We have found this
is not the case.
As a matter of fact, our trust officer friend spends significantly more for
his suits than the typical American millionaire. He also wears a $5,000
watch. We know from our surveys that the majority of millionaires never
spent even one-tenth of $5,000 for a watch. Our friend also drives a
current-model imported luxury car. Most millionaires are not driving this
year's model. Only a minority drive a foreign motor vehicle. An even
smaller minority drive foreign luxury cars. Our trust officer leases, while
only a minority of millionaires ever lease their motor vehicles.
But ask the typical American adult this question: Who looks more like a
millionaire? Would it be our friend, the trust officer, or one of the people
who participated in our interview? We would wager that most people by
a wide margin would pick the trust officer. But looks can be deceiving.
This concept is perhaps best expressed by those wise and wealthy
Texans who refer to our trust officer's type as
Big Hat No Cattle
We first heard this expression from a thirty-five-year-old Texan. He
owned a very successful business that rebuilt large diesel engines. But he
drove a ten-year-old car and wore jeans and a buckskin shirt. He lived in
a modest house in a lower-middle-class area. His neighbors were postal
clerks, firemen, and mechanics.
After he substantiated his financial success with actual numbers, this
Texan told us:
[My] business does not look pretty. I don't play the part . . . don't act
it.... When my British partners first met me, they thought I was one of our
truck drivers.... They looked all over my office, looked at everyone but
me. Then the senior guy of the group said, "Oh, we forgot we were in
Texas!" I don't own big hats, but I have a lot of cattle.
PORTRAIT Of A MILLIONAIRE
Who is the prototypical American millionaire? What would he tell you
about himself?(*)
* I am a fifty-seven-year-old male, married with three children. About 70
percent of us earn 80 percent or more of our household's income.
* About one in five of us is retired. About two-thirds of us who are
working are self-employed. Interestingly, self-employed people make up
less than 20 percent of the workers in America but account for
two-thirds of the millionaires. Also, three out of four of us who are
self-employed consider ourselves to be entrepreneurs. Most of the others
are self-employed professionals, such as doctors and accountants.
* Many of the types of businesses we are in could be classified as
dullnormal. We are welding contractors, auctioneers, rice farmers,
owners of mobile-home parks, pest controllers, coin and stamp dealers,
and paving contractors.
* About half of our wives do not work outside the home. The
number-one occupation for those wives who do work is teacher.
* Our household's total annual realized (taxable) income is $131,000
(median, or 50th percentile), while our average income is $247,000.
Note that those of us who have incomes in the $500,000 to $999,999
category (8 percent) and the $1 million or more category (5 percent)
skew the average upward.
* We have an average household net worth of $3.7 million. Of course,
some of our cohorts have accumulated much more. Nearly 6 percent
have a net worth of over $10 million. Again, these people skew our
average upward. The typical (median, or 50th percentile) millionaire
household has a net worth of $1.6 million.
* On average, our total annual realized income is less than 7 percent of
our wealth. In other words, we live on less than 7 percent of our wealth.
* Most of us (97 percent) are homeowners. We live in homes currently
valued at an average of $320,000. About half of us have occupied the
same home for more than twenty years. Thus, we have enjoyed
significant increases in the value of our homes.
* Most of us have never felt at a disadvantage because we did not
receive any inheritance. About 80 percent of us are first-generation
affluent.
* We live well below our means. We wear inexpensive suits and drive
American-made cars. Only a minority of us drive the current-model-year
automobile. Only a minority ever lease our motor vehicles.
* Most of our wives are planners and meticulous budgeters. In fact, only
18 percent of us disagreed with the statement "Charity begins at home."
Most of us will tell you that our wives are a lot more conservative with
money than we are.
* We have a "go-to-hell fund." In other words, we have accumulated
enough wealth to live without working for ten or more years. Thus, those
of us with a net worth of $1.6 million could live comfortably for more
than twelve years. Actually, we could live longer than that, since we save
at least 15 percent of our earned income.
* We have more than six and one-half times the level of wealth of our
nonmillionaire neighbors, but, in our neighborhood, these nonmillionaires
outnumber us better than three to one. Could it be that they have chosen
to trade wealth for acquiring high-status material possessions?
* As a group, we are fairly well educated. Only about one in five are not
college graduates. Many of us hold advanced degrees. Eighteen percent
have master's degrees, 8 percent law degrees, 6 percent medical
degrees, and 6 percent Ph.D.s.
* Only 17 percent of us or our spouses ever attended a private
elementary or private high school. But 55 percent of our children are
currently attending or have attended private schools.
* As a group, we believe that education is extremely important for
ourselves, our children, and our grandchildren. We spend heavily for the
educations of our offspring.
* About two-thirds of us work between forty-five and fifty-five hours per
week.
* We are fastidious investors. On average, we invest nearly 20 percent
of our household realized income each year. Most of us invest at least
15 percent. Seventy-nine percent of us have at least one account with a
brokerage company. But we make our own investment decisions.
* We hold nearly 20 percent of our household's wealth in transaction
securities such as publicly traded stocks and mutual funds. But we
rarely sell our equity investments. We hold even more in our pension
plans. On average, 21 percent of our household's wealth is in our private
businesses.
* As a group, we feel that our daughters are financially handicapped in
comparison to our sons. Men seem to make much more money even
within the same occupational categories. That is why most of us would
not hesitate to share some of our wealth with our daughters. Our sons,
and men in general, have the deck of economic cards stacked in their
favor. They should not need subsidies from their parents.
* What would be the ideal occupations for our sons and daughters?
There are about 3.5 millionaire households like ours. Our numbers are
growing much faster than the general population. Our kids should
consider providing affluent people with some valuable service. Overall,
our most trusted financial advisors are our accountants. Our attorneys are
also very important. So we recommend accounting and law to our
children. Tax advisors and estate-planning experts will be in big demand
over the next fifteen years.
* I am a tightwad. That's one of the main reasons I completed a long
questionnaire for a crispy $1 bill. Why else would I spend two or three
hours being personally interviewed by these authors? They paid me
$100, $200, or $250. Oh, they made me another offer--to donate in my
name the money I earned for my interview to my favorite charity. But I
told them, "I am my favorite charity."
"WEALTHY" DEFINED
Ask the average American to define the term wealthy. Most would give
the same definition found in Webster's. Wealthy to them refers to people
who have an abundance of material possessions.
We define wealthy differently. We do not define wealthy, affluent, or rich
in terms of material possessions. Many people who display a
high-consumption lifestyle have little or no investments, appreciable
assets, income-producing assets, common stocks, bonds, private
businesses, oil/gas rights, or timber land. Conversely, those people whom
we define as being wealthy get much more pleasure from owning
substantial amounts of appreciable assets than from displaying a
high-consumption lifestyle.
THE NOMINAL DEFINITION OF WEALTHY
One way we determine whether someone is wealthy or not is based on
net worth--"cattle," not "chattel." Net worth is defined as the current
value of one's assets less liabilities (exclude the principle in trust
accounts). In this book we define the threshold level of being wealthy as
having a net worth of $1 million or more. Based on this definition, only
3.5 million (3.5 percent) of the 100 million households in America are
considered wealthy. About 95 percent of millionaires in America have a
net worth of between $1 million and $10 million. Much of the discussion
in this book centers on this segment of the population. Why the focus on
this group? Because this level of wealth can be attained in one generation.
It can be attained by many Americans.
HOW WEALTHY SHOWED YOU BE?
Another way of defining whether or not a person, household, or family is
wealthy is based on one's expected level of net worth. A person's income
and age are strong determinants of how much that person should be
worth. In other words, the higher one's income, the higher one's net
worth is expected to be (assuming one is working and not retired).
Similarly, the longer one is generating income, the more likely one will
accumulate more and more wealth. So higher-income people who are
older should have accumulated more wealth than lower-income
producers who are younger.
For most people in America with annual realized incomes of $50,000 or
more and for most people twenty-five to sixty-five years of age, there is a
corresponding expected level of wealth. Those who are significantly
above this level can be considered wealthy in relation to others in their
income/age cohort.
You may ask: How can someone be considered wealthy if, for example,
he is worth only $460,000? After all, he's not a millionaire. Charles
Bobbins is a forty-one-year-old fireman. His wife is a secretary. They
have a combined annual income of $55,000. According to our research
findings, Mr. Bobbins should have a net worth of approximately
$225,500. But he is worth much more than others in his income/age
category. Mr. and Mrs. Bobbins have been able to accumulate an
above-average amount of net worth. Thus, they apparently know how to
live on a fireman's and secretary's income and still save and invest a
good bit. They likely have a low-consumption lifestyle. And given this
lifestyle, Mr. Bobbins could sustain himself and his family for ten years
without working. Within their income and age categories, the Bobbinses
are wealthy.
The Bobbinses are quite different from John J. Ashton, M.D., age
fifty-six, who has an annual income of approximately $560,000. How
much is Dr. Ashton worth? Is he wealthy? According to one definition,
he is, since his net worth is $1.1 million. But he is not wealthy according
to our other definition. Given his age and income, he should be worth
more than $3 million.
With his high-consumption lifestyle, how long do you think Dr. Ashton
could sustain himself and his family if he were no longer employed?
Perhaps for two, at most three, years.
HOW TO DETERMINE IF YOU'RE WEALTHY
Whatever your age, whatever your income, how much should you be
worth right now? From years of surveying various high-income/high-net
worth people, we have developed several multivariate-based wealth
equations. A simple rule of thumb, however, is more than adequate in
computing one's expected net worth.
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.
For example, if Mr. Anthony O. Duncan is forty-one years old, makes
$143,000 a year, and has investments that return another $12,000, he
would multiply $155,000 by forty-one. That equals $6,355,000. Dividing
by ten, his net worth should be $635,500. If Ms. Lucy R. Frankel is
sixty-one and has a total annual realized income of $235,000, her net
worth should be $1,433,500.
Given your age and income, how does your net worth match up? Where
do you stand along the wealth continuum? If you are in the top quartile
for wealth accumulation, you are a PAW, or prodigious accumulator of
wealth. If you are in the bottom quartile, you are a UAW, or under
accumulator of wealth. Are you a PAW, a UAW, or just an AAW
(average accumulator of wealth)?
We have developed another simple rule. To be well positioned in the
PAW category, you should be worth twice the level of wealth expected.
In other words, Mr. Duncan's net worth/wealth should be approximately
twice the expected value or more for his income/age cohort, or
$635,500 multiplied by two equals $1,271,000. If Mr. Duncan's net
worth is approximately $1.27 million or more, he is a prodigious
accumulator of wealth. Conversely, what if his level of wealth is one-half
or less than expected for all those in his income/age category? Mr.
Duncan would be classified as a UAW if his level of wealth were
$317,750 or less (or one-half of $635,500).
PAWs versus UAWs
PAWs are builders of wealth--that is, they are the best at building net
worth compared to others in their income/age category. PAWs typically
have a minimum of four times the wealth accumulated by UAWs.
Contrasting the characteristics of PAWs and UAWs is one of the most
revealing parts of the research we have conducted over the past twenty
years.
A good example of the difference between PAWs and UAWs is
revealed in two case studies. Mr. Miller "Bubba" Richards, age fifty, is
the proprietor of a mobile-home dealership. His total household income
last year was $90,200. Mr. Richards's net worth, as computed via the
wealth equation, is expected to be $451,000. But "Bubba" is a PAW.
His actual net worth is $1.1 million.
His counterpart is James H. Ford II. Mr. Ford, age fifty-one, is an
attorney. His income last year was $92,330, slightly more than Mr.
Richards's. What is Mr. Ford's actual net worth? His expected level of
wealth? Mr. Ford's actual net worth is $226,511, while his expected
level of wealth (again computed from the wealth equation) is $470,883.
Mr. Ford, by our definition, is an under accumulator of wealth. Mr. Ford
spent seven years in college. How can he possibly have less wealth than
a mobile-home dealer? In fact, Mr. Richards has nearly five times the net
worth of Mr. Ford. And remember, both are in the same income/age
cohort. In trying to answer the above question ask yourself two simpler
questions:
* How much money does it take to maintain the upper-middle-class
lifestyle of an attorney and his family?
* How much money is required to maintain the middle-class or even
blue-collar lifestyle of a mobile-home dealer and his family?
Clearly, Mr. Ford, the attorney, must spend significantly more of his
household's income to maintain and display his family's higher
upper-middle-class lifestyle. What make of motor vehicle is congruent
with the status of an attorney? Foreign luxury, no doubt. Who needs to
wear a different high-quality suit to work each day? Who needs to join
one or more country clubs? Who needs expensive Tiffany silverware
and serving trays?
Mr. Ford, the UAW, has a higher propensity to spend than do the
members of the PAW group. UAWs tend to live above their means; they
emphasize consumption. And they tend to de-emphasize many of the key
factors that underlie wealth building.
YOU OR YOUR ANCESTORS?
Most of America's millionaires are first-generation rich. How is it possible
for people from modest backgrounds to become millionaires in one
generation? Why is it that so many people with similar socioeconomic
backgrounds never accumulate even modest amounts of wealth?
Most people who become millionaires have confidence in their own
abilities. They do not spend time worrying about whether or not their
parents were wealthy. They do not believe that one must be born
wealthy. Conversely, people of modest backgrounds who believe that
only the wealthy produce millionaires are predetermined to remain
non-affluent. Have you always thought that most millionaires are born
with silver spoons in their mouths? If so, consider the following facts that
our research uncovered about American millionaires:
* Only 19 percent receive any income or wealth of any kind from a trust
fund or an estate.
* Fewer than 20 percent inherited 10 percent or more of their wealth.
* More than half never received as much as $1 in inheritance.
* Fewer than 25 percent ever received "an act of kindness" of $10,000
or more from their parents, grandparents, or other relatives.
* Ninety-one percent never received, as a gift, as much as $1 of the
ownership of a family business.
* Nearly half never received any college tuition from their parents or
other relatives.
* Fewer than 10 percent believe they will ever receive an inheritance in
the future.
America continues to hold great prospects for those who wish to
accumulate wealth in one generation. In fact, America has always been a
land of opportunity for those who believe in the fluid nature of our
nation's social system and economy.
More than one hundred years ago the same was true. In The American
Economy, Stanley Lebergott reviews a study conducted in 1892 of the
4,047 American millionaires. He reports that 84 percent "were nouveau
riche, having reached the top without the benefit of inherited wealth."
BRITANNIA RULES?
Just before the American Revolution, most of this nation's wealth was
held by landowners. More than half the land was owned by people who
either were born in England or were born in America of English parents.
Is more than half of this nation's wealth now of English origin? No. One
of the major myths concerning wealth in this country relates to ethnic
origin. Too many people think that America's affluent population is
composed predominantly of direct descendants of the Mayflower
voyagers.
Let's examine this assumption objectively. What if "country of origin"
were the major factor in explaining variation in wealth? We would expect
that more than half of America's millionaire population would be of
English ancestry. This is not the case (see Table 1-1). In our most recent
national survey of millionaires, we asked the respondents to designate
their country of origin/ancestry/ethnic origin. The results may surprise
you.
Those designating "English" as their ethnic origin accounted for 21.1
percent of the millionaire population. People of English origin account for
10.3 percent of the United States household population in general. Thus,
American millionaires of English origin are more prevalent than expected,
given their numbers in the entire U.S. population (10.3 percent versus
21.1 percent). In other words, this group has a millionaire concentration
ratio of 2.06 (21.1 percent of all millionaire households divided by 10.3
percent of all households headed by persons of English origin), meaning
that people of English origin are about twice as likely to head households
in the millionaire category than would be expected from their portion of
all households in America.
And yet, what percentage of the English ancestry group in America is in
the millionaire category? Would you expect the English group to rank
first? In fact, it ranks fourth. According to our research, 7.71 percent of
all households in the English category have a net worth of $1 million or
more. Three other ancestry groups have significantly higher
concentrations of millionaires.
How can it be possible that the English ancestry group does not have the
highest concentration of millionaire households? After all, they were
among the first Europeans to arrive in the New World. They were on the
ground floor to take economic advantage in this land of opportunity. In
1790 Colonial America, more than two-thirds of households were
headed by a self-employed person. In America, the achievements of the
current generation are more a factor in explaining wealth accumulation
than what has taken place in the past. Again, most American millionaires
today (about 80 percent) are first-generation rich. Typically, the fortunes
built by these people will be completely dissipated by the second or third
generation. The American economy is a fluid one. There are many people
today who are on their way to becoming wealthy. And there are many
others who are spending their way out of the affluent category.
WINNING ANCESTRY GROUPS
If the English ancestry group does not have the highest concentration of
millionaire households, then which group does? The Russian ancestry
group ranks first, the Scottish ranks second, and the Hungarian ranks
third. Although the Russian ancestry group accounts for only about 1.1
percent of all households in America, it accounts for 6.4 percent of all
millionaire households. We estimate that approximately 22 of every 100
households headed by someone of Russian ancestry has a net worth of
$1 million or more. This is in sharp contrast to the English ancestry group,
in which only 7.71 in 100 of its members are in the millionaire league.
How much wealth does this Russian American millionaire group have in
total? We estimate approximately $1.1 trillion, or nearly 5 percent of all
the personal wealth in America today!
How can one explain the economic productivity of Russian Americans?
In general, most American millionaires are manager-owners of
businesses. Russians in disproportionate numbers are manager-owners of
businesses. Further, this entrepreneurial spirit seems to translate from one
generation of Russians to the next.
The Hungarian ancestry group also is entrepreneurially inclined. This
group accounts for only 0.5 percent of all households in this country. Yet
it makes up 2 percent of the millionaire households. Contrast this with the
German ancestry group, which accounts for nearly one in five households
(19.5 percent) in this country. Only 17.3 percent of all millionaire
households are headed by persons of German ancestry, and only about
3.3 percent of German households are in the millionaire league.
THRIFTY SCOTS
The Scottish ancestry group makes up only 1.7 percent of all households.
But it accounts for 9.3 percent of the millionaire households in America.
Thus, in terms of concentration, the Scottish ancestry group is more than
five times (5.47) more likely to contain millionaire households than would
be expected from its overall portion (1.7 percent) of American
households.
The Scottish ancestry group ranks second in terms of the percentage of
its clan that are in the millionaire league. Nearly twenty-one (20.8) in 100
of its households are millionaires. What explains the Scottish ancestry
group's high ranking? It is true that many Scots were early immigrants to
America. But this is not the major reason for their economic productivity.
Remember that the English were among the earliest immigrants, yet their
concentration numbers are far lower than those of the Scots. Also
consider that the Scots did not enjoy the same solid economic status that
the English enjoyed during the years the nation was in its infancy. Given
these facts, one would think that the English ancestry group would
account for a higher concentration of millionaire households than those in
the Scottish group. But just the opposite is the case. Again, the Scottish
ancestry group has a concentration level nearly three times that of the
English group (5.47 versus 2.06). What then makes the Scottish ancestry
group unique?
If an ancestry group has a high concentration of millionaires, what would
we expect the income characteristics of that group to be? The
expectation is that the group would have an equally high concentration of
high-income producers. Income is highly correlated with net worth; more
than two-thirds of the millionaires in America have annual household
incomes of $100,000 or more. In fact, this correlation exists for all major
ancestry groups but one: the Scottish. This group has a much higher
number of high-net worth households than can be explained by the
presence of high-income-producing households alone.
High-income-producing Scottish-ancestry households account for less<
than 2