If you haven’t read the book, I’m going to spoil it in one sentence: most millionaires are working-class small-business owners with frugal lifestyles. The underlying principle — blindingly obvious in hindsight — is that to accumulate wealth, you need to spend less than you make. The working-class millionaire doesn’t spend much to maintain his lifestyle or keep up with the neighbors. On the other hand, the high-income professional may adopt a lavish lifestyle which prevents him from actually saving money.
The Millionaire Next Door reads like a modern-day book of Proverbs. It contrasts financial fools and the wise, and none of the advice is new or surprising. My main criticism of the book is that it defines new acronyms UAW / AAW / PAW to describe Under, Average, and Prodigious Accumulators of Wealth. It’s a mental strain to read paragraphs filled with these acronyms. I’m not linking the Wikipedia entry to the book because the use of acronyms makes a number of points unclear or simply wrong. The authors suggest that an Average Accumulator of Wealth (AAW) should have a net worth equal to one-tenth their age multiplied by their current annual income. That formula unfortunately doesn’t work well for young people who only recently entered the working world.
While a million dollars sounds like a lot of money to accumulate, it’s surprisingly in reach of many people. In one Lazarus at the Gates session, we used an Excel spreadsheet to add up the total amount of money we could save by making simple lifestyle choices. For example, you might decide to have a frugal yet meaningful wedding. Or as another example, you might decide to put your two children in public school instead of private school for grades 1-12. At an average annual tuition of $20k, this works out to 2 x 12 x 20k = $480k, close to half a million dollars in today’s money. If you assume a 6% annual increase, the total cost would be $675k.
The book heavily criticizes subsidizing the lifestyles of children who have grown into adults — it coins the term “economic outpatient care” for this practice. By teaching grown children that they can spend beyond their income, parents are passing on foolish values. As a result, these grown children are much less likely to save money and accumulate wealth.