The Millionaire Next Door: The Surprising Secrets of America's Wealthy
by Thomas J. Stanley, Ph.D., & William D. Danko, Ph.D.
(Longstreet Press, Atlanta, Georgia 1996)

"If-you've-received-a-major-prize,-legal-settlement-or-judgment, but-don't-want-to-get-small-payments-over-ten,-twenty-or-thirty-years, call 1-800-RICH-NOW today! We can convert your stream of payments into ONE BIG CASH AWARD that you can use however you want TODAY!!!" If you watch much late-night television, you've probably seen this commercial. My unscientific assessment is that it represents the low end of the growing industry centered around the purchasing of annuities from individual consumers, whether those annuities come from lottery winnings, slip-and-fall settlements or disability insurance payment streams. Somehow, it doesn't seem that those at whom the commercial is aimed are expected to take that big lump of cash and put it into the stock market. Rather, they are expected to "live it up", demonstrating through conspicuous consumption that they are the recipients of, well, a large lump sum of cash.

In other words, those at whom this rapid-fire connnercial is aimed haven't read this book, and they aren't like the millionaires described in it. In a country where consumption is glorified above virtually all else, where credit for consumer purchases is so widely available that our mailboxes are crammed full of teaser rate credit card offers and we find ourselves gathering debts as fast and as easily as we put on holiday pounds, these authors have uncovered a real bit of news--as they put it on page 1, "Many people who have a great deal of wealth do not even live in upscale neighborhoods." In fact, if you're an average middle class American, there's a decent chance that someone who's wealthy lives next door to you.

Not only does your wealthy neighbor live in a house like yours, but he also has a middle class lifestyle. As the title of Chapter 2 puts it, they are "Frugal Frugal Frugal." Fifty percent of American millionaires have never paid more than $399 for their most expensive suit; ten percent have never paid more than $195. The 50% figure for watches is $235, and the 50% figure for shoes is $140. Other measures of consumption are comparable. I'm guessing that, if you're a typical reader of this newsletter, you're a lawyer who is considered successful but isn't a millionaire. Perhaps you can console yourself with the fact that you dress like one!

You've probably realized by now that Stanley and Danko defme "wealthy" not according to the lifestyle or income one maintains but according to net worth, a much surer guide to financial independence in the long run. But they have discovered that most people don't define wealthy that way. Instead they think in terms of visible consumption-houses, cars, country club memberships, etc. Although it makes perfect sense that one must live below his means if he is ever to accumulate wealth and increase his net worth substantially, there are apparently many in this country who have absolutely no idea that life works this way. Leave it to these authors, however, to set the record straight. This book is chock full of data to bolster its author's arguments, and it uses more charts than Ross Perot. But, for the most part, the data is very useful, well presented, and sometimes quite interesting. Did you, know, for example, that many millionaires tend to buy fullsize automobiles that are cheaper by the pound? (One of the appendices lists the per-pound weight of dozens of models of cars-the average is $6.86, which is about what the typical millionaire pays; most of the lawyers I know are paying at least $8.00.)

Although the authors may not have intended it this way, one of the more interesting things about the book is what the reader learns about how so many Americans manage to live beyond their means. For exarnple, about thirty percent of the households in America that live in homes valued at $300,000 or more have armual household earned incomes of $60,000 or less. These are the UA Ws, or under accumulators of wealth, that the authors continually contrast with the PAWs, or prodigious accumulators of wealth. (They even include a test so you can determine which one you are.) Many of the pseudo-rich UAWs also drive luxury cars, enjoy country club memberships, send their children to private schools, and generally live the high life. How do they do it? As it turns out, it's not that hard to understand--like the high school student who drops out to seek union wages to buy a car, they've sacrificed long term gains in favor of short term consumption. Their family budgeting system is simple--spend all you have, borrow some more, and spend every dime you receive from parents and inlaws.

In Chapter 3, the authors provide a good picture of the difference between UAWs and PAWs. They describe two doctors, both successful middle-aged specialists with incomes of $700,000 a year. In a given year, the PAW family spent $8,700 on clothing, $12,000 on cars, $14,600 on mortgage payments, and $8,000 on club dues and fees. The UA W family spent $30,000 on clothing, $72,200 on cars, $107,000 on mortgage payments, and $47,900 on club dues. Interestingly, the PAW family was able to easily compile these numbers from their budgeting system. The UAW family didn't have a budget, so compiling the numbers required more work.

Both the UAW and the PAW approach to life transfer easily from one generation to the next, as we might expect. But the intricacies of these transfers are not easily surmised, and I for one would never have thought about, much less acted upon, some of the effects of intergenerational transfers of wealth that the authors identify. Indeed, the chapters on this subject sometimes read like sociobiology texts in the way they ferret out human motivations and reasons people act like they do.

I originally picked up this book because my father sent it to me accompanied by a warning that I should abandon all hope of any further financial support from him. In Chapter 5, I learned that this decision was, in fact, for my own eternal good, because "economic outpatient care," it turns out, is bad for one's soul and one's long-term potential net worth. To avoid confiscatory estate taxes and to help out those children who can't support the lifestyle their parents would like to see, more than 46% of the wealthy give at least $15,000 worth of economic outpatient care to their adult children and/or grandchildren every year. Maybe the money is for private school tuition for the kids; maybe it's for a house downpayment; or maybe it's for a new car. Whatever the purpose and use, the authors make a convincing case that the effects are clear and fairly uniform: those who receive substantial financial gifts from their parents on a regular basis consume more and invest less, are significantly more dependent on credit, and are generally less productive than those who do not receive such gifts. The tragedy of this pattern is that the parents, who tend to give money to the children who can't find steady work or who demonstrate a lack of ability to manage money and who therefore "need it the most", actually make their children's problems worse instead of better by conditioning them to be dependent on outpatient economic care. "People often attempt to shelter their children from the economic realities of life," the authors say. "But such shelters often produce adults who are in constant fear of tomorrow."

This last point, echoing as it does the popular political argument against our nation's welfare system, is a good example of just how close the authors come to making policy arguments without crossing the line that might have taken this book out of the self-help/business section at the book store and put it into the political studies/economics section. Because this isn't a policy study or a partisan sermon, the authors shy away from the obvious political implications of their fmdings on all but a few occasions. The most prominent exception (and a striking one) is the question they raise about affluent parents' tendency to provide economic outpatient care to their daughters, whom they tend to see as disadvantaged in the economic race:

The objective data make it quite clear. In America, the odds are against women earning high incomes. Some of this variation in income can certainly be explained by biases in the economic marketplace. But biases alone do not fully explain the fact that there are five men for everyone woman in the top 1 percent of the earned income distribution. Could it be that the tendency for affluent parents to subsidize their daughters is helping to perpetuate this inequality?

To be sure, the authors leave us wondering whether this "inequality" is one to be noted curiously like the per-pound price of cars, a result of free and rational choice, or a grave injustice to be remedied by all possible means. But, as I've said, the book doesn't purport to be a policy statement.

The other source for political points comes from the data assembled by the authors, which don't tend to support reflexively liberal notions about the wealthy. For example, they note that many people think that most wealthy Americans inherited their wealth and are part of an aristocratic upper class. But 80% are first -generation millionaires, only 17% went to private schools, and more than half never received even $1 in inheritance. And they don't necessarily fit the WASP proflle, either. Americans of Russian ancestry actually rank first among etbnic groups according to the percentage of group households who are millionaires, followed by Scottish-, Hungarian- and finally English-descended Americans. One stereotype about the wealthy holds true, however--they do worry about paying taxes (although PAWs, understandably, don't worry about income taxes as much as they worry about the possibility of a federal wealth tax, already a reality in some states).

Although this is generally an interesting and readable book (not to mention a bestseller in its 23rd printing), its emphasis on hard data and the goal of wealth accumulation does tend to marginalize the more human side of wealth creation and accumulation. For instance, once one realizes how frugal many of the wealthy are, one begins to wonder whether having a high net worth is really worthwhile. What's the good of having millions if you just sit on it and live like your neighbor who has nothing? The authors clearly advocate saving and building for the long run, but as has been famously noted elsewhere, in the long run, we're all dead. I also was left pondering questions of a moral and philosophical nature. UAWs, for example, tend to give a higher percentage of their income to charity than PAWs. But are they really more generous, or just less careful with money? It's obviously more of a mental sacrifice for the PAW to give a fixed percentage of his income than for a UAW to do the same, given the definitions of those terms. But whether that's because the UAW is irresponsible or because the PAW is greedy remains an open question.

In any case, it would be unfair to expect the authors to answer every question raised by their excellent research. Maybe I should just be satisfied with learning that I probably live next door to a millionaire.

* John Pickering is a regular contributor of book reviews to this newsletter. He is an associate with the law firm of Balch & Bingham in Birmingham, Alabama.