Originally appeared on Forbes.com
When I first started learning about how money works, I read every money management book I could get my hands on. One of my favorites was The Millionaire Next Door. It was my intro to what true wealth looked liked: what the wealthy drove, where they lived, and what they did for a living. It was fun to dream of the day I too might be a millionaire. But what really stood out was the book’s fascinating insights into what, exactly, being a millionaire looked like. It wasn’t what I’d been led to believe.
I was excited when I learned a follow-up was released this fall, aptly entitled, The Next Millionaire Next Door. The new version provides fresh insights into how wealth-building has changed, as well as what has stayed the same since the first book’s release over 20 years ago. I thought it would be helpful to recap the old version, discuss the new one, and explore how you can use this information to enhance your own wealth-building potential. I’ve also provided a few assessments you can use, to figure out if you have what it takes to become the next millionaire next door.
The Millionaire Next Door: The Original
The original book’s co-authors, Thomas Stanley, Ph.D. and William Danko, Ph.D., started with a simple concept: researching how people became wealthy. They started their search in “upscale neighborhoods” across the country, surveying people on their wealth-building habits. In their research, they discovered something they didn’t expect: Many people who lived in expensive homes and drove expensive cars didn’t have much wealth. In fact, those who did have great wealth usually didn’t live in these neighborhoods.
This realization led Stanley and Danko on a journey to find the markers of true wealth. They reasoned that once you know the markers, you stand a better chance of becoming wealthy yourself. To that end, they identified seven traits among those who had successfully built wealth:
- They live well below their means.
- They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
- They believe that financial independence is more important than displaying high social status.
- Their parents did not provide economic outpatient care (e.g. overbearing gift-giving or hand-holding).
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They chose the right occupation.
Seeking to conduct the most comprehensive research on wealth in America, the book’s sustained popularity speaks to its success. More than 20 years after the original was published in 1996, it not only remains popular and widely quoted,. It’s also spawned three more books for Stanley: The Millionaire Mind, Millionaire Women Next Door and Stop Acting Rich. And, now, The Next Millionaire Next Door.
The Next Millionaire Next Door: The “Sequel”
In anticipation of the 20-year anniversary of The Millionaire Next Door, Stanley and his daughter Sarah Fallaw, Ph.D. decided to take another look at American millionaires, to examine what (if any) changes could be seen 20 years after the original publication. ““We wanted to understand if millionaires’ behaviors and lifestyle – the path that led them to build wealth on their own – had changed given all of the changes in our culture and economy in the past two decades,” Fallaw said.
Fallaw also emphasized that the overall purpose was to conduct ongoing scientific study of how individuals can build wealth on their own to confirm or refute myths, anecdotes, and feel good stories. She added, “Our work began to focus more on the science of financial success, and not just what “seems right.” The goal was to help those managing their own financial lives understand what really works when it comes to building and sustaining wealth.”
Tragically, in 2015, Stanley was killed by a drunk driver in a car accident. In part so his life’s work would not be left unfinished, Fallaw persevered, finishing their research, and publishing The Next Millionaire Next Door: Enduring Strategies for Building Wealth.
The resulting work expanded on the original traits with six more that the latest research suggests “will continue to be required by those who seek financial success.”
- Ignore the myths of wealth, including the confusion between income and net worth, and the barriers for creating self-made wealth.
- Recognize the influences others may have on financial attitudes and behaviors, and learning from those who are equally committed to financial success over and abo appearing to be rich.
- Make consistently good consumer decisions, starting with neighborhood, understanding its potential effect on reaching financial goals.
- Assess strengths and weaknesses related to improving where possible in areas such as frugality, owning responsibility for financial outcomes and confidence to make decisions based on knowledge.
- Decide early on a philosophy for work, and careers and do not assuming that the traditional view of work one that seems to dictate an 8am to 6pm existence from ages 25 to 67, is the only path.
- Recognize that successful investing behaviors can be learned and improved and that the fruits of effectively investing what is saved over time provide security for the more important aspects of one’s life.
As an advisor, I was most fascinated by the authors’ contention that financial success is enhanced by assessing strengths and weakenesses when it comes to frugality, responsibility and confidence.
That’s an important point. A lot of people come to me having struggled in some or all of these areas. I often tell them, to achieve their goals, they first need to understand and accept their financial challenges, before taking action to improve them. Testing their ability to perform fundamental wealth-building tasks is a great way to establish true awareness.
Developing Your Own Wealth-Building Potential
It turns out Fallaw was way ahead of me in developing a test to assess people’s wealth-building strengths and weaknesses. She founded a company called DataPoints, to help financial advisors identify, quantify and develop their clients’ propensity to succeed financially. Her test focuses on six key wealth-building behavioral characteristics:
- Social Indifference (not trying to “keep up with the Joneses”)
The culmination of these factors results in a wealth-building score, which shows your overall ability to turn income into wealth.
Are your financial behaviors similar to those who excel at building wealth? You can find out by taking some of these assessments:
- The financial planning assessment measures personal financial management behaviors, including tracking expenses, setting goals, and monitoring household financial health.
- The spending patterns assessment identifies your patterns in shopping and consumer behavior.
- The wealth potential assessment is designed to predict your net worth potential, regardless of your current age, income and net worth.
These assessments are shorter versions of the ones I give my clients, but they still provide great insight into your specific behaviors that are either helping or hurting your wealth potential.
Didn’t score very high? That’s okay! The great thing about these assessments is that no matter where you are in your quest to become a millionaire next door, they can help you start or continue to enhance your financial lifestyle and behaviors. It’s possible to become more frugal. You can increase your financial confidence. The assessments and your advisor can help you focus on specific tasks to improve in the areas where you need it the most.
The overarching premise of both Millionaire Next Door books is that achieving any major goal requires disciplined action over time, an awareness of your own abilities, and an effective allocation of your resources. Having a scientifically backed assessment of where you are can help you take effective action in reaching your true potential. By building your knowledge and pursuing small successes, you can soon find your footing on the path to financial independence.