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Bill Brown

A complicated man.

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I just finished reading The Millionaire Next Door by Thomas J. Stanley and William D. Danko. This is a book whose hype has long passed—I consciously avoided it when it came out—but I read it at the insistence of my friend Larry, who called it “my favorite financial book.” When L.G. Salzman speaks, I listen.

The book’s premise is that the average millionaire isn’t who you think it is. The authors assume that most people think of flashy spendthrifts living the life of luxury as prototypical millionaires. Not so, they argue, the average millionaire is a fifty-year-old small business owner who lives frugally and invests wisely. This is a very interesting fact and I think that the conclusions they derive from it are sound ones.

They suggest that, to become wealthy, you need to live within your means, pay yourself first (i.e., invest religiously), teach your children independence and self-reliance, and not buy expensive suits and cars. And time. They repeatedly emphasize that all of this is gradual and accrues over time. They support this with case studies, general surveys, and statistics. I think that they are spot on about the path to wealth.

Unfortunately, this book should never have been made. It would make for a wonderful feature article, but the amount of fluff that they had to generate to fill the book made the book tedious. They go into interminable discussions about how the average millionaire drives this model while a spendthrift typically drives that model. Or this watch versus that watch. Or this suit versus that suit. Or these credit cards versus those. You’re probably getting bored with my telling you about it. Now imagine that it’s drawn out to many pages interspersed with statistics about how many households who inherited their wealth bought domestic cars versus foreign ones.

In addition, the book drives each and every point home over and over and over. I understand the cognitive value of repetition, but there’s a point at which it stops helping you remember key points and it devolves into blathering on. They crossed that point many times over many subjects. I am especially thinking about their distinction between PAWs, prodigious accumulators of wealth, and UAWs, under accumulators of wealth. The two categories are pretty self-evident once you know what the acronyms stand for. The authors, however, aren’t sure that you’ll ever grasp the ideas so they torture you with Goofus and Gallant case studies. One time, the heading read Cinderella Sarah (186) and I thought it was going to finally break the mold— just talk about Gallant in other words. My hopes were soon dashed when Sarah’s Goofus sister Alice was introduced.

Many of the authors’ points were also rather strange. Their idea of wealth is based entirely on one’s net worth, regarding income as largely irrelevant to wealth-building—you need it, but, so long as you live beneath it, you will tend to become wealth given time. Several times they point out that a wealthy person has less to fear from massive tax hikes since the income tax as a proportion of their net worth remains very low. This is true if your income is sufficient to meet the higher taxes. Otherwise, you have to liquidate some assets in order to meet the obligation.

The nature of these assets among millionaires surveyed is also odd. They tend to be the owner’s equity in a business or retirement funds. These are among the most illiquid assets imaginable. It’s hard for me to think of someone as being able to live five to ten years on their wealth if he lost his job when cashing out those assets would entail serious tax liabilities in the case of retirement funds and elimination of income in the case of selling off your stake in a business.

Finally, the authors are ambivalent about income versus wealth, only they won’t come out and say so. They rail at the focus on income as misguided and consumerist, yet they tend to focus on high-income earners for their case studies. For example, the authors’ distinguish Drs. North and South in one twenty-odd page case study that is referred to over and over again. Both are specialists who have made very different lifestyle choices. But they’re both making over $700,000 per year. I think it’s going to be much easier for Drs. North and South to become millionaires than it is for the $30,000 a year school teacher. It’s a fact of life, but one that the authors’ take great pains to avoid admitting.

Overall, then, this book had a good message presented in an overly pedantic manner. I would recommend that you read it, but feel free to skip over the boring parts (you’ll know them when you see them).