How to actually become a millionaire

I recently finished reading The Millionaire Next Door, in which authors Thomas J. Stanley and William D. Danko summarize more than 20 years of research into the most effective wealth-building habits of real millionaires.

Although the book was first published in 1996 (a new version was released in 2010 with a new preface), and being a millionaire ($1 million net worth or more) doesn’t mean as much today as it did then, many of the principles of wealth accumulation are still relevant today. In fact, the book is currently the #1 bestseller in Wealth Management on Amazon, which is a testament to its timelessness.

If you have a goal to grow your wealth and become financially independent, but haven’t had a chance to do much research into what actually works, this book recap is for you.

Unfortunately, if you’re hoping for a get-rich-quick guide, you won’t find it here. Stanley and Danko prove that building wealth takes self-discipline, sacrifice, and hard work more than anything else.

Here are my main takeaways from the book on how to become a millionaire:

Offense is important

Income generation (what the authors refer to as “offense”) is highly-correlated with net worth. The authors found that more than 2/3 of the millionaires in the U.S. had an annual income of more than $100,000 (equivalent to $157,000 in today’s terms). The more you earn, the more opportunity you have to become affluent.

And just in case you need additional incentive to make more money, life expectancy has been shown to greatly increase with income. The more you make, the longer you live.

Defense is even more important

While offense is important, defense (being frugal, budgeting, and planning) is even more important on the path to becoming a millionaire. The authors found that once you are a high earner ($150–250K annually or more in today’s terms), the amount of money you make is less important than what you do with what you already have. In fact, many extremely high earners do not become wealthy because they spend everything they make.

The authors assert that it is easier to make a great salary in America than it is to accumulate wealth?—?and even if you can’t increase your salary significantly, you can certainly still become affluent by playing great defense. Numerous millionaires were profiled in the book who made less than $80,000 per year, yet still managed to become quite wealthy through rigorous budgeting and planning.

Live well below your means

Being frugal is the foundation for growing wealth, and the number one common habit among millionaires. This means having the discipline to pass on the luxury car, fancy house, or designer clothes in order to live below your means and grow your money. As of the latest edition of the book, based on 2007 IRS estate data, millionaires who had estates worth $3.5 million or more owned homes with only a median value of $469,021?—?which worked out to be less than 10% of their median net worth. Bottom line?—?whatever your income, live below your means.

Invest at least 15% of your pre-tax household income each year

Saving and investing 15% of your annual income every year is a simple strategy for becoming wealthy. And the earlier you start investing your income, the greater your opportunity to accumulate wealth. So start the process of earning and investing as early as possible in your life, and put away 15% or more of your income every year for investment purposes. The compounded growth over time can be remarkable.

Invest Wisely

Wealthy people spend more time planning their investments, and they typically hire a high-quality financial advisor to help guide their investment portfolio. Although millionaires are typically frugal, they recognize the importance of working with (and paying for) top experts to help grow their wealth. The authors found that millionaires are actively involved with the planning of their investments, and often ultimately make their own investment decisions (with consultation from a financial advisor), but they are not “active” investors. Less than 10% of millionaires interviewed by the authors held their investments for less than a year, and 42% of the millionaires made no stock trades at all in the prior year. Millionaires spend their time on a small number of stocks, focusing on companies they know and understand well, and then stay in it for the long haul. Aspiring millionaires should follow the same approach.

The typical millionaire, based on the book’s research, held about 20% of their wealth in publicly traded stocks (and never more than 30%), and had 2.5 times more money in investment real estate than in their own personal homes.

You’re more likely to become a millionaire if you are self-employed

The authors found that people who are self-employed are 4 times more likely to be a millionaire than people who work for someone else. Self-employed people accounted for less than 20% of U.S. workers, but more than 2/3 of all millionaires. However, the authors are also quick to point out that many entrepreneurs and self-employed people never become wealthy. As we all know, it is hard to become a successful entrepreneur or business owner, and most never make it. High risk, high reward.

You can do it without the help of a trust fund

The authors note that 80–85% of millionaires are self-made. They are first-generation rich, meaning they did it on their own without huge cash gifts and ongoing economic support from their parents. It should come as no surprise that self-made affluent people are typically frugal and price-sensitive.

Spend your money on the important things

Millionaires are often frugal when it comes to consumer goods and services, but they do spend their money on investment advice, legal services, medical care, education for their children, and even vacations and other experiences with friends and family. The lesson is to cut back on your consumption lifestyle and spend your money where it will make a difference.