The Millionaire Next Door by Thomas Stanley

In American culture, “high-income” and “wealthy” are often used as interchangeable terms. In practice, there is a significant level of non-overlap between the two groups.

Wealth is often culturally associated with things like giant houses, upscale cars, expensive clothes, and fancy club memberships. The people who live such lifestyles are usually “pseudo-affluent” rather than truly affluent. They have high incomes but also high expenses, leading to low savings and low net worth. While the pseudo-affluent may appear rich to the outside world, their finances are a precarious house of cards, often fueled by consumer debt.

In contrast, the people who have high net worth (not just high income) tend to live surprisingly modest middle-class lifestyles. They live in modest homes, drive modest cars, and usually don’t give off the outward appearance of being wealthy. Most of America’s wealthy built their fortunes the slow and boring way, consistently spending less than they earned and investing the difference. Most millionaires in America are people who didn’t fall for the hedonic trap of increasing their household spending at the same pace as their income. The wealthy are frugal with their spending and diligent with their investments. Much of the growth in their wealth comes from capital appreciation rather than ordinary income, resulting in favorable tax treatment. Demographically, the wealthy are often of an immigrant background, well-educated, never-divorced, and often self-employed in some capacity. A typical pairing is a husband with a small business or an upper-middle-class job married to a highly frugal wife.

For the wealthy, the main benefit of wealth is peace of mind. The wealthy do not fear financial hurdles such as income tax hikes (their job income represents a small fraction of their wealth), job loss (they have huge emergency and retirement reserves), or inflation (their spending is low and flexible). In contrast, high-income high-expense pseudo-affluent people live in fear of all of these things.

Most wealthy people own their primary residences, but they picked a humble residence, put a lot of money down, borrowed much less than what they were approved for, and paid off their mortgages quickly. Likewise with car purchases, the wealthy diligently do their research, find a bargain deal, and pay for it in cash rather than taking out loans. For both homes and cars, the wealthy usually hold onto their purchases for a long time, resisting the urge to trade them in for something higher on the prestige ladder.

Many family fortunes are built up in one generation and then squandered by the next. Wealthy people often worry about their children ending up poor and therefore encourage them to seek out high-income professions. Many wealthy parents take their generosity too far and financially prop up their children well into adulthood. Young adults who receive too much aid become dysfunctional, develop unhealthy dependency and entitlement complexes, and eventually squander the family inheritance.

Successful parents keep their wealth away from their kids and often keep the extent of their wealth a secret, even when it feels uncomfortable to do so. First-generation-wealthy parents try very hard to impart good values in their children, in particular frugality, grit, and the value of hard work. Such children often grow up to be self-sufficient in their own right, even without direct aid from their parents. When the giant family inheritance eventually comes to them, these adults will handle the windfall responsibly rather than squandering it.