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Insights From The Millionaire Next Door Pt.2 (#36)

The Millionaire Next Door is a flawed and silly book at times but there is actually some sound wisdom and advice in it.

This blog post shares some stats on how millionaires spend their money, the characteristics of those with less wealth than they should have, and rules for financial independence.

Net Worth Formula

To add context to the rest of this email and the book - follow the formula in the next bullet point that helps you figure out what your net worth SHOULD be according to the authors. Net worth is the current value of one’s assets less liabilities (exclude the principle in trust accounts).

  • Multiply your age times realized pretax annual household income from all sources except inheritances. Divide by 10, this less any inherited wealth, is what your net worth should be. 
  • If you have 2x or more you’re a (prodigious accumulator of wealth) - PAW
  • If you have ½ or less you’re an under-accumulator of wealth - UAW
  • If you’re 1x you’re an average accumulator of wealth - AAW

Playing Offense vs. Defense (Financially Speaking)

  • Great offense in economic terms means that a household generates an income significantly higher than the norm. 
  • Great defense is that the household is frugal when it comes to spending for consumer goods and services. 
  • The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning. 
  • Most millionaires measure their success by their net worth, not by their realized income. 

  • The affluent tend to answer “yes” to 3 questions we included in our surveys:
    • Were your parents very frugal?
    • Are you frugal?
    • Is your spouse more frugal than you are?

Frugal Frugal Frugal Consumers

  • Millionaires believe that financial independence is more important than displaying high social status.
  • It is easier to purchase products that denote superiority than to be actually superior in economic achievement. 
  • If you acquire one status product, you will likely have to purchase other status objects so that your lifestyle is congruent.

The Typical Millionaire...


Highest Price Paid

Expensive Suit


Pair of Shoes/Sneakers




  • Few people can sustain crazy spending habits and simultaneously build wealth. 
  • Millionaires became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way. 

You Aren’t What You Drive

  • Entrepreneurs, as a rule, are more price-sensitive than others when it comes to acquiring motor vehicles. Successful entrepreneurs judge each expenditure in terms of productivity. 

  • The average American buyer of a new motor vehicle paid more than $35K (in 2020 dollars) for their most recent acquisition. This is not much less than the $42K (in 2020 dollars) paid by millionaires. 
    • The average buyer of a motor vehicle in America has a net worth that is less than 2% of that of these millionaires. 
  • Typical motor vehicle buyers in America spend the equivalent of at least 30% of their net worth for such purchases. 
  • More than 80% of millionaires purchase their vehicles. 

Purchase Behavior

  • Most affluent people have strong make/brand preferences concerning motor vehicles. Favorite 
  • Many Euro luxury automobiles depreciate rapidly during the first 3 years following their initial purchase. 
  • In purchasing cars that are 2 or 3 years old, millionaires feel that the original owner has paid while the vehicle was depreciating in value.
  • Those who are not wealthy are less likely to shop, haggle, and negotiate than those who are millionaires.
  • Millionaires constantly remind themselves that many people who have high-status artifacts, such as expensive clothing, jewelry, cars, and pools, have little wealth. 

  • The majority of people do not have the ability to increase their incomes significantly. Yet income is a positive correlate of wealth. If you cannot increase your compensation significantly, become wealthy some other way. Do it defensively. 
    • More than 70% of millionaire’s neighbors earn as much or more than they earn. But fewer than 50% of their neighbors have a net worth of $1 million or more. 
  • It’s much easier in America to earn a lot than it is to accumulate wealth. 
  • In most of the cases examined in the book, PAWs love working, while a large proportion of UAWs work because they need to support their conspicuous consumption habit. 

Characteristics of Under Accumulators Of Wealth

  • You don’t have the discipline to control your spending. You don’t take the time to budget or plan.
  • Not all millionaires budget. However more than half of the millionaires who don’t budget invest first (roughly 15%) and spend the balance of their income. This is called the “Pay yourself first” strategy.
  • UAWs usually think they have more wealth than their neighbors. Many UAWs also believe that people drive the best than they can afford. 

  • Many high-income/low-net worth types have no idea how much they spend each year 
  • Often high-income/low-net worth respondents boast about much money they save on taxes via their mortgage deductions. 
  • Financially independent people seem to be better able to visualize the future benefits of defining their goals. 
  • Millionaires spend significantly more hours per month studying and planning their future investment decisions, as well as managing their current investments, than high-income non millionaires. 

How To Help UAWs (under accumulators of wealth)

  • It is often useful for UAWs to be told the naked truth:
    • “Friend, you’re worth less than ½ of the expected amount for those in your income/age group”
  • How can someone change when they have more than 20 years experience as a UAW. 
    • First, they must really want to change. 
    • Audit your consumption habits over the past 2 years by category.
    • Go thru a “cold turkey” cutback program, meaning that all elements of consumption are reduced by a minimum of 15% for the next year or 2. 

Taxable Income Stats

  • Typical millionaire in the surveys spends less than 7% of his/her wealth on some form of income tax.
  • Typical household in America pays the equivalent of more than 10% of its wealth in income taxes each year. 
  • To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow). 

Rules For Financial Independence

  • Being a well-educated, high-income earner does not automatically translate into financial independence. It takes planning and sacrificing. 


  • If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income. 
  • Living in less costly areas can enable you to spend less and to invest more of your income. 

Time, Energy, and Money

  • People who become wealthy allocate their time, energy, and money in ways consistent with enhancing their net worth. 


  • PAWS allocate nearly twice the number of hours per month to planning their financial investments as UAWs do. 
  • The earlier one starts investing one’s income, the greater the opportunity to accumulate wealth. 
  • People who spend many years in college, professional school, or graduate school are more likely to have higher levels of household overhead than less educated people. 
  • Some high-income producing UAWs figure that working hard translates into a large income and that, therefore, there is no need to design a household budget. Some ask why they should waste time budgeting and with investments when there is so much money to be made. 

Fears And Worries

  • Many 30-something UAWs cannot maintain anywhere near the lifestyle they had while living with Dad and Mom. Many are unable to purchase even a modest home without financial subsidies from their parents. 
  • Most millionaires who are PAWs are self-employed. 
  • Most of us want to be wealthy, but most of us do not spend the time, energy, and money required to enhance our chances of realizing this goal. 
  • Most high-income generators, whether they are PAWs or UAWs, work more than 40 hours a week. 

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