Most of us work hard at earning our income, and on figuring how best to save and invest it.


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Photo by PublicDomainPictures (Pixabay)

We all want a better future, for ourselves and our families — and especially for our children. Achieving financial security is an important milestone on the path to making this ambition a reality.

And so, day after day, we head off to work and put in another day’s labor, hoping we’re one step closer to the moment when we finally have “enough” money socked away.

There are literally thousands and thousands of books that have been written on how to amass wealth. Some excellent, some less so; and too many not worth the paper they’re printed on. Each posits its own special strategy, promising a future of riches to the reader. Of course, were there a sure-fire recipe for making millions, it’s a safe bet that the last thing the guy who figured it out would do is share it with the world.

But as mentioned, some of these books have real value. One whose lessons have stuck with me in the decades since I first read it is The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, first published in 1996 by two PhD researchers, Thomas Stanley and William Danko.

Unlike most personal finance books that pitch a particular model for “becoming rich”, this book is the summary of a scientific profiling of people who have successfully amassed wealth. Rather than push an ideology, it simply reveals: These are, statistically, the factors wealth-accumulators have in common.

The book is fun to read, as many of the authors’ research results defy our conventional image of a “millionaire” (and, remember, when the research was conducted over 20 years ago, $1 million in net worth meant substantially more than it does now):

  • A frugal lifestyle is the #1 reason people become millionaires
    • Despite the popular caricature, most millionaires don’t buy new-model cars, McMansions, expensive clothes, or luxury goods
  • Most millionaires are self-made (80%), vs. having inherited their wealth
  • Most are self-employed businesspeople or professionals
    • Less than 20% of the workers in America are self-employed, compared to 2/3 of millionaires
    • Most of these self-owned businesses are not “sexy” (welding contractors, auctioneers, rice farmers, mobile-home park owners, pest controllers, etc.)
  • Most don’t have outlier income – but they save more of what they make than most
    • The average annual realized taxable income (different from gross income) for most millionaires is near the 50% median
    • They manage to invest 20%+ of this income each year
  • 97% are homeowners but they remain in the same home for decades vs. trading up or ‘flipping’
  • Most are married and consider their spouse to be even more frugal than they are
  • A minority attended private schools growing up
  • They value work/life balance and are not “slaves” to their businesses
    • 2/3 work less than 55 hours per week

Many of the specific mindsets and behaviors of these Prodigious Accumulators of Wealth (PAWs) will likely resonate well with readers of, Zero Hedge, and other similar websites. Pragmatism, practicality, and discipline are big hallmarks of the PAWs’ success.

Accumulating Wealth Is Easier Than Sustaining It

But as someone aspiring to build financial wealth for my own family’s long term benefit, I was dismayed by one of the insights from the book: Self-made fortunes are often quickly lost after being passed on, usually within one generation.

Does becoming a millionaire mean you’re doomed to have spoiled kids who quickly fritter your money away trying to keep up with the Rich Kids of Instagram?

While that does happen in a minority of instances (usually combined with a failure of parenting), the answer is “no”.

The actual reason for this swift wealth dissipation is really interesting and more nuanced. And it’s caused by the unwitting choices of the millionaires themselves…

When Protection Hurts Rather Than Helps

Understandably, most wealthy parents want their children to be well-off, too. But they don’t want their kids to have to suffer through the years of uncertainty, anxiety-ridden toil, and risk that they had to endure. So they guide their children into “safer” and more elite professions — like medicine, law, finance, accounting, etc.

But perversely, this insulates their children from the very stimuli that made these self-made millionaires successful. Overcoming adversity, developing iron discipline, learning to get by without enough, facing fears, turning failures into successes because there is no other option, etc.

Without this ‘Masters in Grit’ from the University of Hard Knocks, their children are more professionally cautious and less likely to make sacrifices in their household spending when they can’t afford it. By protectively insulating their children from the more Darwinian forces of capitalism, wealthy parents often unwittingly make their children less likely to become PAWs. The kids just don’t develop the musculature for it that their parents did.

As Stanley and Danko put it:

The first generation affluent in America are typically entrepreneurs. They beat the odds. Their businesses succeed and they become affluent. Much of their success depends on their living a frugal existence while building their businesses. Luck is often involved. And most who succeed understand that circumstance could have gone against them.

Their children will have it better. They will not have to take significant risks. They will be well educated. They will become physicians, attorneys, and accountants. Their capital is their intellect. But unlike their parents, they will postpone entering the job market until they are in the late twenties or even early thirties. And most likely they will adopt an upper-middle class lifestyle as soon as they start working, a much different lifestyle than their frugal parents had when they started their businesses.
Often their children are not frugal. How could they be? They have high-status positions that require higher levels of consumption and thus lower levels of investing. As a consequence, they may require economic outpatient care. In spite of earning high incomes, as most professionals do, they are obligated to spend.

Tough Love Parenting Embraces Struggle

My takeaway from Stanley and Danko’s research is that adversity is an experience parents should expose — rather than shield — their children from.  A very different approach from the “helicopter’ form of parenting so ubiquitous these days.

Of course, this should be done responsibly, with safeguards when needed (someone tossed in the deep end of the pool doesn’t instantly learn to swim). But, in order to learn how to actualize their own value-creation, our children need to “find their way” by persevering through the common challenges life will throw at them — like setbacks, doubt, fear, and being bested by the competition.

As Chris and I point out in our book Prosper!: How To Prepare for the Future and Create a World Worth Inheriting, humans are wired for learning from failure. If we don’t fail, we don’t fully mature:

The Value Of Mistakes

Another reason the kaizen framework is useful to know about is that it bears strikingly similar resemblance to the way in which our minds learn.

To gain new knowledge — to become smarter — our brain formulates a hypothesis, tests it out, observes the results, processes them, and then begins the cycle anew:

This test-and-measure, or “trial-and-error”, approach

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