Thomas J. Stanley, author of ‘The Millionaire Next Door,’ died last Saturday in a car crash. His legacy is an understanding of how many wealthy business owners think and act differently from what we might expect.
The Millionaire Next Door made an impression on me when I first picked it up in the late 1990s. I was running a business that aimed to help very large companies market to small-business owners. Stanley was also advising big companies (in his case, on how to sell to rich people), so I saw the parallels in our work.
Stanley articulated beautifully a phenomenon I had seen in studying business owners but was unable to communicate even half as eloquently, namely, that some of the most financially successful people around are business owners who keep a low profile; they live modestly and shun outward displays of wealth.
In honor of Stanley’s legacy, here is a list of seven things most millionaires do.
1. Start a blue-collar business.
Stanley found that some of the most financially successful people were business owners operating in blue-collar industries.
By contrast, he found that some of the highest income but lowest net worth people he studied were in white-collar industries such as law. Stanley reasoned that lawyers in particular were prone to spend beyond their means to make up for a lack of respect afforded to their profession (heard any good lawyer jokes lately?).
In fact, the working name of The Millionaire Next Door was “Big Hat, No Cattle,” a reference to the phrase some use to describe people who talk a big game but lack much in the way of substance to back it up.
2. Drive a beater.
Stanley found that most millionaires buy–rarely lease–cars that are just 10 percent more expensive than the average American car, despite having a multiple of the average American’s net worth.
Chances are the next time you see some guy in a Bentley, it’s leased.
3. Live small.
Most of the millionaires in Stanley’s research lived in smallish houses even though they could afford much fancier digs. Most millionaires preferred to remain in a basic house to avoid alienating longtime friends of more modest means.
4. Pick a neighborhood wisely.
Not only did millionaires live in houses much smaller than what they could afford; they also lived in middle-class neighborhoods despite being able to afford a prestigious ZIP code.
Stanley went so far as to state that nothing predicted your ability to accumulate wealth better than where you lived. He cited numerous statistics and examples of how moving to an expensive neighborhood has a knock-on effect as you feel the need to keep up with your neighbors by buying a fancy car and sending your kids to private schools and expensive sports programs.
5. Take money off the table.
Stanley found that, rather than bet on a big payday when it came time to sell, most millionaire business owners took money out of their businesses each year to create a nest egg of investments that were independent of their operating company.
6. Give kids roots, not things.
Stanley showed that the more money you give your adult children, the less likely they will be able to create wealth on their own. The relationship was binary–not squishy or subjective or open to interpretation: The more you give your kids, the less they will be able to make on their own.
To this day, Stanley’s finding is the most damning evidence I’ve seen for the dangers of passing down a family business (or the proceeds of one) to your kids.
7. Follow the 7 percent rule.
Stanley found that the average millionaire had an annual income that was 7 percent of his or her net worth. In other words, even though they had created considerable wealth, the millionaires he studied lived on a rather modest annual income relative to their net worth.
Stanley’s death is a loss to the world of personal finance and ironically comes at a time when more and more people are feeling wealthy. The stock market hits new highs almost weekly while the low unemployment rate is putting upward pressure on wages. But Stanley, for one, would have taken favorable economic conditions in stride, reasoning that it is the person who lives well below his or her means who becomes the millionaire next door.