The Millionaire Next Door
A massively influential personal finance book written 24 years ago. Does it still hold up?
Written in 1996, The Millionaire Next Door is cited as one of the most influential books about personal finance. Its counterintuitive findings - that most millionaires live in unremarkable houses, drive inexpensive cars, and buy their suits at stores like JC Penney - are often cited in other personal finance / advice books. Today, it is Amazon’s top selling book in the “wealth management” category. How has the book aged?
I love reading “old” books and seeing what’s changed, so this was a logical one for me.
What are the takeaways?
In one sentence: wealth = (post-tax income - consumption) * savings; focus on consumption and savings.
Focus on wealth, not income: While we often measure ourselves by our paychecks, they’re not the most important thing. Instead, the way to long-term happiness and financial security is to accumulate wealth. How do you do that?
Consume less, save more. As mentioned above, many of the millionaires surveyed lived low-key lifestyles. They often drove Fords and Chevys (unlike people with similar incomes and much less wealth). They lived in middle class neighborhoods. 50% of them have never spent more than $300 (inflation adjusted) on a watch. What do you do with the money you save?
Invest wisely. Millionaires make sound investments in stocks and other businesses (easier said than done). They don’t hide money under their mattress, where it doesn’t grow. They also don’t constantly trade stocks. Assuming this all goes well, how do millionaires distribute money to their kids?
Help your kids by not helping them. Giving your adult children additional money - or “economic outpatient care” as they call it - weakens them by teaching them that they do not need to live within their means. Wealthy parents usually give more money to their less affluent or well-off children, which further discourages those children from improving their own situation. “The weak get weaker” in their words. The exception to this - as you might guess - is education. Millionaires encourage their kids to get educated and will spend on it.
What holds up?
The psychology of consumption. Consumption begets more consumption - if you buy a nice rug for your living room, you will need to buy paintings and furniture that complement it. If you live in a fancy neighborhood, you will feel pressured to have a nice car. In addition, they talk about why people spend. Part of it is a desire to be “better off” than your parents (but maybe you should focus on wealth as opposed to consumption). Another reason is “keeping up with the Joneses”: we constantly compare ourselves to the people around us, who set a benchmark for what is acceptable and what is not. When you’re in your 20s, you might feel pressured to spend lots on restaurants and bars; in your 30s, you might not be comparing your hand-me-down crib to your neighbor’s $1300 Snoo.
Overall theme: Wealth over income. This makes complete sense, and is easy to miss sometimes. If you live in a high-cost location, your actual savings post-tax (including state / local!), childcare, and housing might be pretty low.
What doesn’t hold up?
1990’s references. There is a lot of focus on cars people buy and how millionaires buy cars by sending a fax to every dealer in their city. While there’s plenty of nostalgia in these references, millennials care less about cars than the boomers the book targeted. If you are reading the book and under the age of 50, you just need to do a bit of interpreting. Whenever they bring up buying cars or fax machines or fancy VHS players, just substitute in “food delivery” or “stuff from Amazon” or even “EXPERIENCES.” I know us millenials like to pat ourselves on the back for being “less materialistic” and prizing “experiences over things” and living our lives according to lululemon shopping bags, but experiences are still consumption. And still cost money.
Investment advice. The book encourages folks to use their knowledge and perspectives to choose high-quality stocks and other investments. Since then, investing has involved, and there is much more of a focus on “passive” investing, where you buy index funds that track the overall market, as opposed to stock-picking.
Costs are different. This book was written in the 90s, a decade of tremendous economic prosperity in the US (articulated in the very first episode of the Sopranos in 1999). Some millennials graduated into the great recession and many graduated with lots of debt due to the rising costs of education. In addition, other things - housing, childcare, healthcare - have risen much faster than inflation.
FIRE - the book’s focus on frugality and saving money closely echo the FIRE movement (financial independence, retire early) which has become increasingly popular in recent years. But where FIRE is all about being able to “retire” in your 30s to do the things you love, retiring early is not really discussed in this book. Thematically, it kind of clashes with the puritanical tone and ethos.
Overall, I enjoyed the book for some helpful reminders on personal finance as well as being a fun cultural artifact from the mid-90s. The book itself can feel quite puritanistic, with its disapproval of any superfluous spending and a chapter literally named, “FRUGAL FRUGAL FRUGAL.” Spending money intentionally can certainly bring happiness. Many wealthy people will buy a vacation home, often as an easy way to bring their children and grandchildren together. This makes sense to me if you have the money. Not surprisingly, many newer personal finance books have advocated for more of a “have your cake and eat it too” strategy, where you cut costs ruthlessly in areas you don’t care about, allowing you to splurge on your passions while still saving money.
Closing points / observations:
Much of the book talks about the time and energy people spend planning their investments. 25 years later, much of that has been addressed by roboadvisors like Betterment, Wealthfront, and Personal Capital, which simplify much of the investment process.
But at the same time, there’s lots of friction in tracking consumption (the other key lever to generating wealth). True, there are tools like Mint, but these aren’t particularly robust and require lots of tinkering: even with Mint, I still need to go through monthly transactions to double-check how it’s classified our spending and link to our “family financial statements.” It makes complete sense why it’s hard to build a good tool here - there are millions of vendors to classify, every family will have their own idiosyncrasies / adjustments to things, and many vendors are opaque and don’t offer detailed information (a line on your credit card that says “amazon.com” isn’t particularly helpful). If you know of any tools here, please let me know!
There’s some interesting discussion of taxes and how millionaires focus on “realized” income as opposed to pre-tax, by focusing on long-term investments, for example.
One nuance the book discusses is that many of the millionaires were entrepreneurs who ran decidedly boring businesses - waste management, industrial distribution, lawn care. As a result, they didn’t really feel pressure to buy fancy suits or consume much to impress their peers or clients. But what about professionals that work in high consumption environments? Can you be an investment banker and not wear Ferragamo ties? Can you work in venture capital without an $100 fleece vest? My guess is “probably more than you think.”
There’s a lot of discussion around planning and intentionality - wealthy people spend more time budgeting and planning their investments than do non-wealthy people with the same income. Simply seeing what you spend each month may subtlety (or non-so subtlety) impact future decisions.
The flip side, of course, is spending too much time worrying about money. The authors would probably say that if follow their prescribed lifestyle, you won’t ever have to worry because you’ll have enough saved. Or budgeting gives you the freedom to spend freely because you know your limits. That is easier said than done…
It sounds like it's still in the testing phases, but check out Pretzel (https://www.pretzel.io/) for tracking spending. It looks like they're able to itemize all your purchases unlike Mint, which would be a game changer for my budgeting. Joined the waitlist and already thinking of how I'm going to use it!