Are you an Under Accumulator of Wealth (UAW) or are you a Prodigious Accumulator of Wealth (PAW)?
In “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko we learn some valuable lessons from the millionaires of today.
This book is the ultimate personal finance textbook.
After studying how millionaires became wealthy for over 20 years, they concluded seven powerful lessons that everyone should know to become a millionaire. They are:
- 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.
- Their adult children are economically self-sufficient.
- They are proficient in targeting market opportunities.
- They chose the right occupation.
Eye-opening statistics learned from this 20-year study are things such as how much millionaires actually pay for clothing.
According to the study, millionaires who purchase white collar suites in most cases don’t ever pay more than a couple of hundred bucks, and below 5% of millionaires ever pay more than $1,400 for a suit. Go figure right? So scrap that dream of a $10,000 suit.
Other amazing statistics that might get you excited:
- 75% of millionaires never pay more than $199 for a pair of shoes, and 50% pay less than $140
- 50% of millionaires pay less than $235 for a watch, and only 25% ever pay over $1,125 for a wristwatch
- 70% of millionaires never paid more than $29,200 for a new vehicle, and only 5% ever paid more than $57,500 for a new vehicle
- 1% of millionaires have vehicles that are at least 2 years old, 12.4% three years old, 6.3% with vehicles at least 4 years old, 6.6% with vehicles at least 5 years old, and 12.3% with vehicles that are six years old or older
More than just the statistics are the lessons learned from the majority of millionaires today. Here is what each of the lessons means, and how you and I can apply them to building wealth in our own lives.
Table of Contents
A “Prodigious Accumulator of Wealth” (PAW) and Under Accumulator of Wealth (UAW) are terms used in The Millionaire Next Door book to describe the types of people and the way they spend their money and time to build wealth.
PAW’s are those who efficiently build wealth to become millionaires ordecamillionaires. They use their time properly, spend on a budget, live below their means, and invest regularly.
UAW’s are the exact opposite. They are the spenders who don’t take the time to budget or invest theirmoneyand often give in on impulse purchases.
They also are more likely to use bad debt like credit cards, personal loans for unnecessary purchases and other similar financial habits.
The Millionaire Next Door describes these 7 attributes that are followed by PAW’s to grow their wealth to self-made millionaire status.
1. Millionaires Live Below Their Means
According to The Millionaire Next Door, three main words come to mind when discussing the importance of living below your means: “FRUGAL, FRUGAL, FRUGAL!”
In the book, they discuss some of the interviews they had with what they called “decamillionaires”, or people worth at least $10 million dollars or more.
They prepared a very fancy gourmet meal with expensive beverages and invited the decamillionaires to a fancy penthouse to interview them on their path to wealth.
The first person they interviewed was a real estate investor and owner of multiple businesses, and he showed up in an older run-down suit.
This caught them by surprise because they expected someone of that net worth to be dressed much fancier.
Upon interviewing multiple decamillionaires, they made a few random but very important observations that say a lot about the road to wealth.
Not a single one of them that they interviewed ordered any of the expensive food, nor partook of the gourmet wine. The only thing they ate was the gourmet crackers!
What does this first observation say about self-made decamillionaires and millionaires? They live below their means…well below their means.
2. Millionaires Allocate Their Time, Energy And Money Efficiently
A PAW who follows this rule is one that uses their time efficiently, allocates their money properly and spends their energy learning how to build wealth regularly.
In the book, they state that PAW’s on average spend “…nearly twice the number of hours per month to planning their financial investments as UAW’s do.”
In other words, they budget regularly and invest often. They take the time to learn the basics and are persistent in following the proven process of building wealth.
Investing is a regular activity and in most cases, it is done automatically, meaning their investments are set up on automatic transfers on a regular basis and invest for the long term.
3. Millionaires Put Financial Independence Above Social Status
One would naturally think that if you are a decamillionaire and worth over $10 million dollars, that you might spend a little extra money on looking good or driving expensive and fancy cars.
The truth is almost the opposite. Upon studying many millionaires over their 20 years of study, Thomas Stanley and William Danko discovered that self-made millionaires actually spend less time on social status and more time on making wise financial decisions.
This includes taking the extra time to shop for a well-maintained used vehicle rather than buying the latest year or model of your favorite vehicle.
Not only do they purchase used vehicles, but they also purchase with cash. No vehicle loans allowed!
Millionaires realize the depreciating value of buying a vehicle and getting a loan to buy a depreciating asset just makes the numbers financially even worse for growing your wealth.
4. Millionaires Parents Did Not Provide Economic Outpatient Care
What is “Economic Outpatient Care?” In The Millionaire Next Door, this refers to parents who provide their kids money whenever they need it.
The book gives an example of a married couple who outwardly seemed like they made a healthy living.
However, the truth is that their parents are very wealthy, and give them thousands of dollars monthly when they need it.
And, in fact, the couple’s combined income never reached over $60,000 in their career!
A common misunderstanding from outsiders examining millionaires is that “perhaps their parents are wealthy…”, when in fact, after studying millionaires for 20 years the stats show us the exact opposite.
Millionaires, unlike the example above, did not receive “economic outpatient care” from their parents.
They learned to make money, budget, live below their means, save money and invest regularly.
5. Millionaires Adult Children Are Economically Self-Sufficient
Although somewhat self-explanatory, this topic goes hand in hand with lesson number four above.
The study described in “The Millionaire Next Door” that similar adults who receive extra help from their parents (as described in lesson four above) are also more likely to receive the larger portion of inheritance should their parents leave one for their children.
For example, a couple who passes away with 4 children needs to decide how their estate is split among the kids.
Most would think they would split it equally, dividing their estate into 25% for each child.
However, many families that may have children who are not self-sufficient and constantly seek help from the parents (again, as described in lesson four), the dependent children are more likely to receive a larger portion of their estate.
The millionaires of today are not these children who receive large portions of their parent’s estate.
They are, rather, self-sufficient and are perhaps the children who receive the least from their parent’s estate due to their financial health and ability to provide well for themselves.
6. Millionaires Are Proficient In Targeting Market Opportunities
Upon interviewing many millionaires of different upbringings and circ*mstances, it’s apparent that the majority of them are self-employed, small business owners or sales professionals who get paid on commission.
Furthermore, they discovered that millionaires aren’t just independent in their job roles, but they are also able to notice market opportunities to make money.
The Millionaire Next Door mentions that often times this means they follow the money and are often selling products and services TO the wealthy!
7. Millionaires Chose The Right Profession
Last but not least, a common denominator among the many interviews and studies of millionaires in America is that they choose a profession where the ability to make money is apparent.
In other words, getting a college degree in German philosophy is not necessarily the most marketable skill to enter the job market with.
Seeking a profession in needed areas such as business, finance, real estate, education, government work, healthcare, specialty healthcare, consulting, etc. gives you a much higher chance of building a career where you can make a good income to grow your wealth to millionaire status.
An Easy Formula, Followed By Few People
In short, becoming a millionaire is not rocket science. It’s apparent among many studies and years of interviews done by Thomas Stanley and William Danko, authors of The Millionaire Next Door.
Similar studies done by financial experts such as Dave Ramsey provide near exact conclusions and results as shown in The Millionaire Next Door, making the process even more credible and promising.
I am not going to be a hypocrite and say I followed all the rules, but I am close.
Now, over to you, which of the rules have you broken?
Adebayo
Website
I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
