The Next Millionaire Next Door: It's a data-science powerhouse and hugely insightful
It's no secret that my favorite book about financial independence and building serious wealth is The Millionaire Next Door by Thomas Stanley and William Danko. Through years of research, the book proves that wealthy people aren't necessarily driving around in expensive cars, living in huge homes and shopping for $1,000 purses and wallets. It teaches us not to be deceived by apparent wealth.
Now, what if I told you that Thomas Stanley's daughter, Sarah Fallaw, published a new book full of completely updated wisdom? Naturally, I had to give it a read...and I begged her for a couple of free copies.
In about 250 pages, Sarah writes a story of what pseudo-affluence means using today's money and teaches exactly what it takes to build serious mind-numbing wealth using strategies that truly rich people practice every day.
All wisdom gathered through insanely interesting data science.
The Next Millionaire Next Door
Why did the original The Millionaire Next Door sell more than 5 million copies? "Perhaps it was because the research revealed that wealth could be achieved via our own behaviors," Sarah wrote on Page 1 of The Next Millionaire Next Door.
Boom, the stage has been set. We're talking about decisions that we make, not just the circumstances that happen to us.
Throughout the book, Sarah writes about the myths of wealth and the biggest influences that help us to achieve it. And, the devastating "freedom to consume" that saddles so many of us with a lifetime of debt.
Debt, by the way, that affects all of us - including those who earn a bunch of money.
And, that incessant need to always "keep up".
On Page 82, Sarah writes "Physicians and surgeons earn more than four times as much as the average American each year." The problem? "They fall into the 33rd percentile or below on our assessment of frugality and also tend to score low on financial acumen".
Earning big money doesn't necessarily equate to accumulating serious wealth. Okay okay, we already knew that from her father's original book. To veteran readers of the book, that's nothing new.
So, what's different?
"The new book was intended to examine data on wealth across multiple studies and over time, looking to see what may have changed, and examining consistent themes in how individuals are able to build wealth," Sarah told me in our chat (below).
In other words: The original book was written in 1996, and a lot has changed since then. Money is the same, but spending is different. We save differently. We've spent decades studying the spending habits of people to help reinforce (or disprove) what we thought that we knew.
Everything in this book is backed up and cited through numbers and research studies. Flip to page 251 for an incredible list of resources and references that built the foundation for this updated book.
Some of the more interesting observations made in The Next Millionaire Next Door:
- Job titles are better indicators of income than wealth
- Only 25% of millionaires spend more than $100 for a pair of jeans
- Nearly 70% of millionaires over the past three decades report being raised in an atmosphere of love and harmony (often having parents that encouraged their success)
- Millionaires consistently cite their spouse as a primary motivator for their success and wealth; 93% are married or remarried
- Knowledge about finances is critical to building wealth, but discipline often plays an even greater role in savings and spending
- The market value of a home is less than 20% of net worth, debt equals less than 5% of net worth and annual income tax is the equivalent of about 2% of net worth
Now, let's get to the question I know you're wondering about: Should I buy this book if I already read the original The Millionaire Next Door?
First, let me answer a slightly different question: If you haven't read the original The Millionaire Next Door, stop what you're doing (including reading this article) and pick up a copy of this book.
If you are anything like me, it will completely change your life.
I used to look at those who drive expensive cars, live in super-ritzy neighborhoods and shop at high-end department stores in a very different light than I do now. Before, I used to assume that they were superior.
Superior to me. Superior to society. Superior to just about everything.
But according to the numbers, the reality is very, very different. High incomes don't necessarily mean a stable family. Or, a solid financial position. Sometimes, more spending just equals more debt.
Okay, but what if you already read the original?
Buy it. But, let's manage expectations before you do. If you're already on the path to financial independence or early retirement - and you read the original, it probably won't change your life (again). You know the drill. You understand the majority of what this book teaches.
So, why buy it? Because the data packed within the covers of this book are remarkably interesting. Sarah is a data scientist by trade and knows how to conduct insightful research projects to improve our intelligence on life.
The new book undertakes to provide updated and modernized data as well as a more in-depth psychological and behavioral science element to support this expanding field of discussion.
Sarah Fallaw (in our chat)
The "Getting To Work" chapter alone is worth the price of the book. Here, Sarah discusses job titles and how they correlate to wealth. The upside to less than ideal careers. Compensation structures that assist in achieving success and what to look for at your workplace.
One of the biggest updates in this new version of the book is with the sources of income for millionaires (also detailed in the "Getting To Work" chapter. These numbers are much different than what they used to be. The more we know about how millionaires source their wealth, the better prepared we'll be at building it.
My chat with Sarah Fallaw
I had a chance to bounce some questions off of Sarah about the book she hopes will continue her father's incredible influence. Here are my questions and her answers.
1: Your dad's book The Millionaire Next Door is an oft-cited book in the personal finance blogosphere. Was your dad aware of how influential his book [still] is?
He clearly knew about the objective success of the book--something like 172 weeks on the New York Times bestseller list and millions of copies sold around the world.
And he also knew that it was highly influential and impactful in the lives of many of the readers. He loved hearing stories from his readers about the impact that his work had for them personally. Through these personal stories, he became aware that it was transformative for many individuals and families: to this day we still receive emails from individuals who share the impact the book had on their lives.
A few weeks ago I was at a conference for fiduciary financial advisors (XYPN Live), and many of these individuals shared with me their personal stories of how the book was instrumental in shaping their parents’ lives and now theirs. It’s amazing, humbling, and fun to hear.
After the commercial success of the book, and as it continued to sell prolifically even nearly two decades after its initial publication, he was aware that the idea that wealth was not what you drove or where you lived was and would continue to be enlightening and maybe even revolutionary to others--just as it was to him initially.
But with all that being said, I don’t think he realized the potential size and scope of the communities and tribes that came into being at least in some small part based on the ideas in his work - the FI/RE community being a prime example.
While I think he recognized that the book was successful and impactful on a large scale, I’m not sure he realized the full impact that it had on the culture in certain pockets of our society. And a lot of the development and growth in the FI/RE community, for example, really took off after his passing in February 2015.
But it is really great for his surviving family to see the concepts and findings of his books and his writings afterward are now being shared among a new generation of individuals focused on being financially independent.
2: What prompted you to write The *Next* Millionaire Next Door? Did the original book need an update?
My father and I began the research and development for this book back in 2012 as the 20th anniversary of the The Millionaire Next Door was approaching (in 2016). He never wanted to do a revised or updated version of the first book, and instead, the new book was intended to examine data on wealth across multiple studies and over time, looking to see what may have changed, and examining consistent themes in how individuals are able to build wealth.
We worked together on the outline for the book and the survey instrument.
At that time my role was going to be primarily in the area of data analysis and psychological research/writing, but that changed when he was killed by a drunk driver just prior to the survey being sent out in 2015. But I knew at that point that it would be my mission to complete the book that we had started together.
In the wake of his death, another motivation surfaced.
As the tragedy of his death brought some amount of media attention to his body of work, there was a lot of commentary along the lines of “yeah, that whole millionaire-next-door thing, that was great back in the late 90s, but it just isn’t possible today in light of increased healthcare and college costs.”
Our data that we had gathered was telling us something different. And so I was motivated to write something that would serve as a counter-argument to the naysayers. It ultimately took me nearly three years to finish the book--a task that was made much harder given that the first author wasn’t here to share his gift of insights and expertise related to the new data.
3: What is new in this version?
This book focuses on the influences and behaviors that will lead to becoming wealthy on your own regardless of the economic conditions of the day.
We covered how those who will become wealthy (without winning the lottery, for example) must accept responsibility for their financial future and ignore the myths about wealth that continue to be perpetuated throughout our culture.
We highlight how our upbringing and the people we surround ourselves with (both in person and via social media) play roles in how we view wealth and behave related to money.
It focuses on consumption, examining similarities and differences over time and related to the spending patterns of millionaires. We focus on the core competencies for building wealth--what it takes to be an effective household CFO, as well as careers and experiences that allow us to be successful on the revenue-generation side. Finally, we examine investing behaviors and mistakes, as well as characteristics of millionaire investors.
4: Why should someone buy this book if they've already read your dad's?
The original is a classic and cannot be replaced--especially in light of the reality that at the time of its publication there really weren’t many other sources to get this kind of information that provided a look into the details of the financial lives of stealth millionaires.
Today, of course, we have a new universe of blogs that provide a wealth of detail in this respect. But the new book undertakes to provide updated and modernized data as well as a more in-depth psychological and behavioral science element to support this expanding field of discussion.
The Millionaire Next Door describes a type of millionaire that is frugal and effectively self-made and is much more descriptive in nature about the habits, lifestyles, and attitudes of millionaires that accumulate wealth on their own.
In The Next Millionaire Next Door, we examine multiple studies of wealth, including our most recent survey conducted specifically for this book, and examine consistencies in the millionaire-next-door approach to building wealth over time.
While we discuss many of the same concepts, there is more of an emphasis on consistency in the data over time and on highlighting the principles that have proved to be universal and timeless.
And there’s more emphasis on the personality, behavioral patterns, and attitudes related to wealth than in prior books because of my background in industrial psychology.
5: What was the biggest *complaint* of your dad's original book?
There were several--just look at the reviews of the book for some examples!
And to be fair, some of them have merit. From a scientific perspective, the biggest complaint was that he studied individuals who had already “made it” and his conclusions suffered from what’s called “survivorship bias.”
I think it’s an interesting criticism but only applies when we consider conclusions based on descriptive data or when he discusses habits of millionaires exclusively. I don’t believe this criticism is applicable in the areas where he compares the data related to PAWs versus UAWs-- where he divided the sample of individuals into quartiles based on their net worth minus their expected net worth.
Here he was looking at both the group of individuals that had “made it” as well as those who had not (i.e., not just the “survivors”).
Through my continuing work at DataPoints, a business that I started with the goal of putting my father’s research regarding the affluent to practical use in the financial services industry, we’ve gone several steps further into examining the life experiences and behaviors that are conducive to building wealth, creating predictive models of these core competencies.
The point here is that even if survivorship bias was in play to some extent in my father’s initial work, we’ve since then examined empirical relationships between specific characteristics (e.g., being frugal, confident, and socially indifferent to others) and found that they predict net worth above and beyond the factors of age and income (two factors that obviously impact net worth to a great degree).
6: You're standing in front of a classroom of 6th graders as a guest speaker. A kid raises her hand and asked, "What should I do to get rich?" What do you say to that 6th grader?
How much time do I have?!
I love this topic because I have children around this age. I would break it down into three lessons, the first being that consumption doesn’t equal wealth, that you cannot judge a book by its cover, and likewise, you don’t know if your friends (or your friends’ parents) are wealthy because of their fancy house or car. This concept must come before talking about technical issues related to saving and spending because this is what hits middle schoolers (and, a lot of us!) the hardest: the social pressure to fit in and emulate those who are perceived to be cool, wealthy, or successful based on the shoes they wear or the model of phone they have.
Next, I would talk about what money gives you: freedom, the ability to take care of emergencies, to buy things or experiences you want, and to help others. But to have that freedom requires tradeoffs and sacrifices. And this lesson is much harder to grasp for children who are handed everything by their parents.
Finally, I would get into the mechanics: saving, spending, budgeting, investing. It would be easier to start there (and I think this is where most parents start), but if we hold certain beliefs or attitudes about wealth, it’s going to be harder to implement the desired behaviors. The “how to be rich” lesson can’t start there because the mindset about wealth is what trips us up throughout our daily lives.
The above answer is probably longer than I would have time for in the classroom, so if I only had 60 seconds or so, I would respond in a way that I suspect your readers are very familiar with: “It’s simple but not easy: keep your cost of living as low as comfortably possible, spend less than you earn, invest the balance and sit back and watch it grow over the long term.”
7: Of all the research you did to write The *Next* Millionaire Next Door, what surprised you the most?
The data related to investing mistakes in Chapter 7 surprised me: the idea that these successful PAWs, worth many millions of dollars in some cases, shared that they made plenty of mistakes along the way was interesting.
These findings demonstrate that even financially successful Americans make plenty of investing-related mistakes, but also that these wealthy heads of household continue to invest. They don’t give up. I hope it serves to show those who are wary or skeptical of investing in stocks the benefit of understanding what some of those mistakes are, and (hopefully) avoiding them through building their personal knowledge.
8: If I only had time to read a single chapter in The *Next* Millionaire Next Door, what chapter should I read, and why?
I would refer to Chapter 3, the chapter on influences on wealth, focusing specifically on our upbringing. This may be counterintuitive, but no matter what topic we’re talking about, whether it’s finances or how we parent our own children or our approach to work, understanding our life experiences can help give insight into why we do what we do today.
It can serve as a starting point for making sense of the behaviors we exhibit today, but it shouldn’t be used as an excuse, along the lines of “I can’t save money because my parents never saved money.” At some point, self-reflection must turn into action: either continuing the behaviors that were aligned with success or changing behaviors to be more successful.
One of the areas I started studying several years ago was parental impact on later financial success. I examined adolescent life experiences and (surprise!) our parents spending time teaching us about money and careers has a significant and positive relationship with future net worth, regardless of our age and income. But again, even if there is a statistical relationship between the two, it doesn’t excuse what we do today: to build wealth, we must take responsibility for our financial future, even if our past was less than ideal.
9: Do you believe in following your passion even if that means less earned income throughout a career?
This is an interesting and complex topic that isn’t susceptible to a yes or no answer. First, if you don’t have alignment between your interests and your career, the likelihood that you’ll stay in that role for very long is reduced, and you may job hop, and/or generally be frustrated/unproductive.
“Passion” is a tough one, and I think passions for certain careers can shift and change (and, some people are just more passionate about things in general!).
But assuming you have a well-defined passion that you want to pursue, like with everything else, it has to be grounded in the reality that you may not be able to have it all. Costs and benefits should be evaluated.
You can follow your passion and become an artist or work for a non-profit or some other role that may not be associated with a high income. But then you may have to adjust your expectations and desires: it may not be realistic to expect to be able to buy a $300k home, save enough to retire, save money for your children’s college education, contribute to noble causes AND follow your passion all at the same time, and all right away.
I think what trips a lot of people up (including me!) is having multiple, incompatible life goals and having expectations that aren’t grounded in reality, taking into account the costs and benefits of a course of action.
With all that being said, I think the ideal career result is to pursue a career that you are passionate about and that will allow you to fund a lifestyle that you are comfortable with, whatever level that may be, while saving enough for the future that you want (whether that’s financial independence at age 35 or 75).
10: Sell me. I'm an 18-year-old dude who just graduated high school. I have no idea what to do with my life, but I know that I love cars. Expensive cars. What advice can you give me, and how will your book help point me in the right direction?
Knowing what you love and what your interests are early on is great--you can make thoughtful decisions because you know what is important to you and what you love. My dad worked at a Chevy dealer when he was growing up and he loved cars and all things cars. It was an interest of his from a very early age, too. An affinity for a somewhat expensive hobby isn’t necessarily mutually exclusive to achieving lasting financial independence.
Maybe the place to start with our 18-year old dude is to go back to the idea of costs and benefits. I might first ask what he likes about cars: is it a hobby that he is content to engage in once in a while?? Is he content to drive a 15-year-old Honda to work for 10-15 years while saving for a Lotus? And sacrifice other things along the way? Is he willing to work an additional 10 years to fund this consumption? I might then refer him to the discussion of the Wells family in Chapter 4 of the new book--they made sacrifices in different areas but were able to spend on multiple trips around the world.
Alternatively, maybe our high-schooler is interested in cars because he believes that’s what “successful people” drive. In that case a little bit of education might serve to shake this financially unhealthy world-view. If he wants to emulate what “wealthy people” do then he should consider the data regarding how those who build wealth on their own did it--they drove Hondas, Toyotas, and Fords, sometimes for many years (and many still do). The revelation that around 80% of individuals that are driving luxury automobile brands aren’t millionaires may be a shocking revelation.
In either case, the key is for our young auto-enthusiast to understand the long-term costs related to his short-term actions in his hobby, and to enter into that bargain with eyes wide open.