In the book
The Millionaire Next Door, the authors Thomas Stanley and
William Danko surveyed more than a thousand households that had
accumulated more than a million dollars in net worth, looking for
traits among them that were decidedly different than the mainstream
population. What did people who had accumulated wealth do that
others do not, and vice versa?
The entire book discusses the results of that study, but very
early in the book the authors efficiently boil down the
differences in financial behavior between those who are able to
accumulate wealth and those who do not down to seven key
factors. These seven factors are the key things that
people who are effective at building enough wealth to be
financially independent do that are different than most people.
While rereading the book, I thought these seven factors were
interesting enough to discuss on their own, so let’s walk through
Factor #1 – They live well below their means.
Spend less than you earn and do something worthwhile with the
difference. It’s at the core of pretty much every personal
finance strategy out there – every one that actually works with
any level of reliability, anyway. Yet many Americans struggle
deeply with this strategy. The average American saves somewhere
around 5% of their income (depending on the exact moment in time
and the exact survey), and that includes the prodigious savers that
put away large portions of their income. To average out at 5%, for
every person that saves 50% of their income, there are nine more
who are saving nothing.
People who accumulate wealth at a high rate simply save money at
a high rate. They choose not to spend a sizable portion of their
income and instead invest it for their future, and they achieve
that by simply spending a lot less than they earn and not letting
their spending keep expanding to gobble up their entire income.
Let’s say a person brings home $100,000 a year. The average
American would spend about $95,000 of that and putting aside
perhaps $5,000 of it. Someone who is on track to become wealthy is
likely spending something more like $60,000 of that and putting
aside $40,000 of it. One of those two people is treading water
financially, while the other is heading toward building wealth.
How do you do this? Well, it’s the main topic of The Simple
Dollar (if there is one), so if you’ve been here for a while,
you’re probably familiar with many of the best strategies.
Here’s a quick refresher.
Understand your needs versus your wants. There
are some things in life that you need – basic food, basic
shelter, basic hygiene products, basic clothing, transportation to
and from work. Almost everything else is a want – it’s stuff
that’s not necessary to continue to enjoy life. That includes
better versions of those basic items. Understand what is a want and
what is a need.
Be selective about fulfilling wants. People who
end up spending everything they earn are often in a cycle of
drowning themselves in want fulfillment. They fulfill countless
impulses, big and small, and never really say “no” to
themselves. The thing is, most impulsive desires are really a waste
of money. They fade very quickly if you don’t fulfill them right
away. Even if you do fulfill them, they bring only an instant burst
of pleasure which immediately fades. Learn how to be selective with
Look at the big expenses first. The big
expenses for most people are things like housing, a car, and
insurance, along with any other monthly bills that top the $100
mark (this might include things like a cell phone, a cable or
satellite service, and so on). What can you do to cut that cost?
You can cut housing costs by living in a smaller place or in a
different location. You can cut transportation costs by using mass
transit or a bicycle or your own feet to get places. You can cut
your insurance costs by thinking about each policy and shopping
around for them. You can cut your cell phone costs by shopping
around and moving to a plan that matches your use. You can cut your
cable and satellite costs by simply ditching cable. Cutting a big
expense can make a difference of hundreds of dollars a month.
Try out some basic frugal strategies. I suggest
trying frugal strategies as a thirty day challenge and then
deciding for yourself whether they work out after thirty days of
commitment. Here are a few ideas: buy all of your food and
household staples in store brand form; prepare all meals at home
without eating out; take leftovers to work every day; don’t spend
any money on hobbies and instead enjoy and use the hobby materials
you have; and avoid the coffee shop and make your own; don’t
watch television and see if you really need cable.
Factor #2 – They allocate their time, energy, and money
efficiently, in ways conducive to building wealth.
In other words, people who are efficient at accumulating wealth
tend to use their already-available resources in ways that
accumulate wealth rather than devour it.
They tend to indulge in hobbies that don’t have much upkeep
cost compared to their level of income. They put their money to
work by investing it in things that will grow in value or produce
More importantly, they tend to avoid spending their time, money,
and energy on things that are going to consistently drain money
from their accounts.
This doesn’t mean that they sit around Scrooge-like using
their money to count their coins. Rather, it just means that the
way they spend their time and energy doesn’t work in strong
opposition to their financial progress.
Here are some practical ways to do this.
Get interested in your own financial state and financial
planning. Make it your goal to know your budget inside and
out and how to stick to it. Also, make an effort to understand
where your money is invested, why it’s invested there, and
whether it’s making a good return. Make this into a minor hobby
– it doesn’t need to be an obsession, but it does take some
time to read some books on investing and understand what you’re
doing with your money.
Choose hobbies that require active mental or physical
involvement and don’t require much financial upkeep and practice
those hobbies. There are infinite free or very low cost
hobbies out there. Reading is one, as long as it centers around
reading and not just buying books to put on your shelf. Hiking or
just going on walks is one. Golfing, on the other hand, isn’t
one, nor is shopping. Which of your hobbies require active mental
and/or physical involvement and don’t require much financial
upkeep? Those are the ones to target. I generally aim for hobbies
that require less than $1 in expenses per hour of
Avoid media sources and people who mostly just encourage
you to buy stuff. A surprising amount of media –
television and magazines and social media in particular – is
oriented around making you aware of and making you desire the
latest stuff and the latest premium (read: expensive) experiences.
Dump all of it. Cut your news reading down drastically – breaking
news is often inaccurate, so read the news once every few days and
stick to well-reported sources. Skip social media unless you’re
actively looking to contact someone. You’ll be better off for
Factor #3 – They believe that financial independence is more
important than displaying high social status.
Often, the millionaires in your community dress pretty casually
and drive reliable and non-flashy cars. They aren’t dressed to
the nines most of the time. They aren’t driving a new Maserati.
Those are things that people who are up to their eyeballs in debt
Why wouldn’t they enjoy the “good things”? They are
enjoying the good things. The good things are things that don’t
break down along the side of the road. The good things are things
that aren’t a target for theft. The good things are things that
put a smile on your face without taking money from your wallet. The
good things are things that you do to lift yourself up, not to
attract or impress others. The good things are deep relationships
with good people, not “impressing” people who drive by or who
see you on the sidewalk. Not having to go to work each day?
That’s a good thing. Being in control of your own destiny?
That’s a good thing, too. Independence. Freedom. Not worrying
about what others think. Low stress. All good things.
People who accumulate wealth have decided that those good things
are more important than things like dressing up or driving nice
cars or constantly eating at fancy restaurants or having huge wine
cellars or having an Architectural Digest home to impress
Here are some strategies to move toward that mindset.
Question your thinking, especially when you’re about
to buy something. Why are you buying this? Are you
thinking of impressing other people with the item you’re
purchasing? This is more and more important as the purchase gets
bigger and more expensive and should really matter when it comes to
things like cars and homes.
Cultivate friendships with people who appear to be like
who you really are inside, rather than the image you want to
portray. If you put in the time to build a social circle
around you consisting of people who truly share the values you hold
inside, you’re going to be much more able to simply not worry
about what others think regarding your personal choices. If
you’re constantly worrying about what your friends will think of
you, reboot your social circle. If you have interests you’d love
to explore except you’re worried about what your friends think,
reboot your social circle. Don’t live your life based on what
your friends might think.
Stop trying to be perfect. This is especially
true if you invest significant time trying to create a
“perfect” picture of your life to show others on social media.
Perfection can never be attained and the journey to try to get
there is self-destructive. Rather, just try to be a better person
than you were yesterday in the areas you care most about.
Factor #4 – Their parents did not provide economic outpatient
In other words, people who tend to accumulate wealth typically
did not receive money from their parents once they reached
adulthood and had a job. Their parents didn’t slip them money to
help them maintain a higher level of affluence beyond what they
could afford with their own earnings.
If you’re in a situation where this is currently happening,
your parents are financing an unsustainable lifestyle, one that
makes you beholden to them. If you’re in a situation where this
used to occur, you know quite well how difficult the transition can
be when the spigot is turned off.
What can you do if this is your situation?
Spend less than YOU earn. You absolutely must
learn to live on less than what you are
earning. This does not include what your parents
are handing you. You have to learn to live on less than your
paycheck, because that extra income is not a reliable one and it
leaves you dependent on your parents.
Remember that the money is theirs, not yours.
Many people who receive additional money from their parents in
adulthood move into the mindset that such gifted money is a right
of theirs and not a gift from their parents. A sense of entitlement
to that money often appears and it adds a great deal of strain to
the situation. You have to completely accept that such money is not
yours and that your parents have an independent life of their own
and may choose, at any time, to stop giving money. That’s not
only their right, it’s probably what they should do for their own
financial health, which they are sacrificing so that you can have a
few extra bucks in your pocket. This is a gift and should be deeply
appreciated. It’s not a right to be demanded.
Use the money that’s being given to you to eliminate
debt and supercharge savings. You should be making minimum
payments on your debt from your own earnings (and still spending
less than you earn overall), but the money from your parents should
go to making extra debt payments so that you get out of debt
quickly. If you don’t have any debts, this money should go into
savings and investment so that you can rapidly move toward
Factor #5 – Their adult children are economically
This is the flip side of the above situation – people who
accumulate wealth with ease do everything they can to raise
children who are financially and emotionally independent from them
and then do not hand them additional money to artificially inflate
The reason is clear: giving your children money to inflate their
lifestyle not only damages your own financial state, it causes the
child to be dependent on that financial assistance, which, as noted
above, means it’s less likely that your child will be financially
successful on their own. Giving your child money means they’re
less likely to find independent success.
Following this step is pretty straightforward.
If you have younger children, make it clear as they grow
older that you expect them to be fully independent as early as
possible. This doesn’t mean that you’ll consign them
to homelessness as soon as they’re eighteen. What it does mean is
that you expect them to be preparing for a career, actively finding
work, or working in a career path as soon as they graduate, and
that they should plan to choose a career path that can sustain the
lifestyle they want.
If you have children who already have a full time job
after school, start weaning them off of any financial assistance
you’re providing them. Sit them down, make it clear that
you want them to be fully independent of you and have their own
life under their own control and destiny, and then start peeling
back that money. Don’t make it abrupt, as that can cause
financial hardship, but start moving gently in that direction by
slowly turning off the spigot.
If you have a child on the verge of independence,
don’t start financial support. Even if it appears that
the change will be difficult for them, this is a moment where you
must let the young bird spread their wings and fly on their own. If
you’ve given them any indication that you will continue to give
them money once they’ve made the leap, correct that indication
Factor #6 – They are proficient in targeting market
What this means is that they frequently look for opportunities
to make money with relative ease, usually through investing money
they’ve put aside just for this purpose. They look for
opportunities to leverage their own knowledge and the money
they’ve been able to accumulate to either save a ton on future
expenses or to make a very nice return.
This takes a lot of forms, but it boils down to two ingredients:
knowledge in a certain area and money on hand. People who
accumulate wealth use those things to generate more wealth as often
as possible, keeping their eyes constantly open for
There are many ways to do this. Here are a few.
Watch Craigslist, estate sales, and yard sales for
enormous bargains on items you know you can easily flip.
This takes advantage of some particular domain knowledge that you
have and uses cash you’ve accumulated from spending less than you
earn to turn a quick profit. For example, I do this with older
trading cards, old video games, and other such hobby items – I
have an idea of what things are worth and will often buy items just
to flip them. I go to yard sales and thrift stores and estate sales
looking for those kinds of items.
Cultivate a hobby in which you make things that you can
use (at a lower cost than buying them), sell, or inexpensively
gift. For example, I love home brewing and making
fermented foods, and I have given both away as gifts in the recent
past, often as items to bring to the host when invited to a party,
but sometimes as holiday gifts as well. I make my own sauerkraut
(my favorite condiment, where I can make a quart for about $0.30
which is a tiny fraction of the store cost) and my own kombucha
(which costs about 10% of the price of buying it in the store).
I’ve made many, many other things over the years, too. The key is
that I get personal enjoyment and value out of the process of
making it, and it just so happens to produce something that I can
use or that can serve as an inexpensive gift.
Invest in something that can become your hobby that you
can eventually turn around for a profit. I have a close
friend that does this with old homes. He’ll buy one, move in for
a few years, spend those years renovating it as an evening
activity, and then sell the house at a tidy profit and move
elsewhere, buying a old house with some of the proceeds. I have a
few family members that do this with junk cars – they’ll buy an
old junker, renovate it and completely rework the body, then sell
it for a tidy profit and buy a junk car with some of the proceeds.
In both cases, they’re using their passion to make a little
money, but it’s more about their passion on their own terms than
making money. It’s a hobby that happens to line their pockets a
Factor #7 – They chose the right occupation.
This doesn’t merely mean an occupation that pays well. Rather,
it means that they chose an occupation that pays well that
also aligns with their natural skills and is something they don’t
mind doing. It doesn’t have to be a burning passion, but
it needs to not be something they intensely dislike, so that they
don’t wind up hating the work.
Finding this career path and finding it early in life seems to
be the key for many people in terms of finding financial success.
Having a job they don’t hate that earns a reasonably good income
and offers opportunity because it happens to match their skills
tends to lead to a very solid lifetime of income, and that makes it
much easier to follow the other factors on this list.
Here are some strategies for this, even if you’re already on a
Gain some awareness of what your skills and strengths
actually are. There are many ways to do this. Some involve
tests, while others involve
procedures of self-reflection. One element I’ve always found
important is to trust the opinions of others who know you well in a
professional or academic context, as they often know what you’re
good at and not good at in comparison to others on the team.
Consider what classes came easy for you when you were in school.
These are the things you want to lean into when choosing a career
(or rebooting one).
Look for jobs you can reasonably enjoy that match up
with those skills and strengths (and, ideally, pay well,
too). Once you have a good idea of where your strengths
lie, start looking for jobs that utilize those strengths. Filter
those jobs through a lens of what you might reasonably enjoy doing
– you don’t have to love it, but at the same time, you probably
shouldn’t turn your hobby into a job, either. If you’re still
finding a lot of things, start filtering those prospects by income
level and choose one that pays well.
Always look for career situations that let you lean in
to your strengths. If you know what you’re good at and
what you’re not good at, it’s a good idea to find positions
that really line up well with what you’re good at. It’s never
bad to try to work on your shortcomings, but you’ll generally be
most highly rewarded when your skills line up with your job,
because you’ll be a top performer in that specific field.
These seven factors often don’t line up with how the average
person makes choices in their life, but at the same time, the
average person struggles to build a good financial foundation.
Remember, almost four in five Americans live paycheck to paycheck.
Those that do not are doing something different with their lives,
and the data in
The Millionaire Next Door points strongly at these seven
factors. It’s very likely that you’ll find it worthwhile to
integrate these factors into your life.
Source: FS – All-News2-Economy
The Seven Factors