by Thomas Stanley, PhD and William Danko, PhD, published 1996, 2010
One out of ten Americans has a net worth of $1,000,000 or more, but how did they get that way (and more puzzling, what is going on with the one in ten Americans who have a negative net worth)? According to Stanley and Danko, accumulating a million dollar net worth has less to do with luck and inheritance and more to do with simple behavioral habits. The wealthy tend to be good at generating income, sure, but they’re even better at saving it, that is, spending far less than what they take in over any given period of time. As they put it, it’s no use having a good financial offense if you don’t know how to play defense and thus give up too many financial goals.
The authors recommend running your household like a small business– creating budgets, tracking expenses, reviewing your actual versus expected financial results, etc. They focus on the spending habits of the affluent decile to illustrate the surprising (for some) fact that those who have accumulated a million dollars or more in net worth typically don’t spend as if they have done so, highlighting tastes in clothing and automobiles (“purchasing vehicles by the pound”) amongst a few others. I expected the book to highlight more domestic life decisions, such as millionaire households doing home cooking versus eating out, and I was also expecting to see a lengthier investigation into housing accommodations and finance given that 97% of millionaires own their own homes or carry a mortgage rather than rent, an impactful statistic.
Thankfully, the authors spent a significant amount of time discussing the intergenerational wealth dynamic amongst the affluent which is a particular interest of mine. Highly affluent individuals tend to be less-educated than their children and are typically self-employed business owners, whereas their children tend to be more-educated (masters and even doctoral degrees) and employed as professionals (doctors, lawyers, engineers, accountants, etc.) It seems affluent people attribute a lot of their success to non-repeatable luck, and/or believe it’s possible to insulate their children from the volatility and vicissitudes of a more competitive life by encouraging them to obtain more education to enter cartelized industries with licensing or other legal obstacles to entry. The expectation (in terms of probability) is that these people will obtain less total wealth than their parents, but also experience greater security in their incomes and more stability in their long-term earnings path. As they say,
the relationship between education and wealth accumulation is negative… the longer one stays in school, the longer one postpones producing an income and building wealth
It would seem that regardless of the level of education our professional status of an affluent person’s children, the most important thing they need to learn is the same expense-control habits as their parents. Can that be taught in higher education? What happens if you become a stable doctor with a local practice and a strong propensity to consume all you earn? This isn’t exactly a profound point, but I was a bit astonished to see how little emphasis appears to be given amongst affluent families to instructing their children about how to manage accumulated wealth. One noted habit of the affluent is to avoid talking about receiving money that hasn’t been individually earned with their young children, the goal appears to be to avoid a sense of entitlement and get them to think about establishing their own financial position. But if they’re eventually due an inheritance (or manage to accumulate their own stack), why reinvent the wealth management wheel intergenerationally? Why aren’t more affluent people or families talking about how to responsibly manage, ie, grow, a starting base of capital accumulated in prior generations?
The book doesn’t explore the differences in behaviors between the merely wealthy ($1M+ net worth) and the significantly wealthy (say, $10M+) or the incredibly wealthy ($100M+), and while there are undoubtedly exceptions to the rule, my hunch is that any family that manages to sustain a fortune over subsequent generations ($100M+>$100M+) or grow it ($100M+>$200M+) is spending a lot of time talking with their children about how to handle this responsibility. The decision to have these conversations or avoid them is likely the tipping point between clearly defined social classes. Some people can’t imagine being anything but comfortably upper middle-class and glory in such identity, while others can’t imagine being anything but the cream of the crop.
Here are some other interesting ideas from the book:
- Self-employment is a major positive correlate of wealth
- “Employment-postponing” via higher levels of education has a meaningful impact on lifetime wealth accumulation
- Is your spouse more frugal than you are? Millionaire households would answer “yes”
- Most wealthy people feel that you get what you pay for in the realm of financial advice
- Millionaires know how to play both sides of the wonder of interest– small expenses become big expenses over time; small amounts invested become big investments over time
- The higher one’s net worth, the better off they are at minimizing realized income
- Begin earning and investing early in your adult life; the longer your runway, the higher chance you have of becoming a millionaire
- Under-Accumulators of Wealth (UAWs) usually think they have more wealth than their neighbors
- The more dollars adult children receive, the fewer they accumulate
- Good gifts for affluent parents to give their children:
- subsidizing education
- earmarking gifts so they can start or enhance a business
- prefer to give their offspring private stock
- Ask permission when contemplating giving significant gifts to your children
- cash gifts are the single most significant factor for explaining the lack of productivity of adult children of the affluent
- A typical behavioral mistake of affluent parents is to “strengthen the strong child, weaken the weak child”
- Discipline and initiative can’t be purchased like automobiles or clothing off the rack
- Courage can be developed, but it can not be nurtured in an environment that eliminates all risks, all difficulty, all dangers.
- The sales profession is good exposure for the children of affluent; retail sales jobs provide children with objective third parties to evaluate their behavior
- One of the proven ways that domineering parents control their children is by living close to them
- Most spouses feel that charity begins at home
- At least one outsider should be co-executor of an estate