Under the Affluence

Do you sincerely want to be rich? If your answer is yes, then heed the advice of Thomas J. Stanley and William D. Danko, authors of The Millionaire Next Door: The Surprising Secrets of America's Wealthy (Pocket Books). In their book, the authors tell the surprising account of how the rich really live. Take this quick test: Do you spend more than you earn? Buy a new car every few years? Live in a ritzy neighborhood you can barely afford? Pay a lot to Uncle Sam? If you answered "yes" to most of these questions, then compared to you, the rich are different. Believe it or not, many of America's rich didn't inherit their wealth; they earned it--in entrepreneurial businesses like yours. In fact, a large majority of the truly wealthy don't live on Park Avenue; most millionaires live in average neighborhoods...like yours.

This New York Times bestseller isn't the first book this pair of former college professors have penned on what makes the rich tick. Selling to the Affluent and Marketing to the Affluent (both from Pocket Books) were also written from information gleaned from more than 20 years of research on those with a net worth of more than $1 million.

We asked Stanley to give us some insight into the partners' bestselling book and share some ideas on how you can imitate the patterns of the rich.

Entrepreneur:Anyone can pick out a millionaire--they're the ones in the new foreign cars, living in big houses in ritzy neighborhoods. No one like that lives next door to me, so shouldn't your book be titled The Millionaire Next Door to Someone Else?

Thomas J. Stanley: Not really. There are about 300,000 neighborhoods in the United States, and more than half of them have at least one millionaire living there. Most millionaires drive American cars. Out of the top 30 or 40 makes and models, Ford is number one, with about 10 percent of the market share. There are lots of things about millionaires that make them pretty ordinary, but what's not ordinary is their ability to accumulate wealth, how hard they work and what they do for a living.

Millionaires are risk-takers, and they don't become millionaires until they're 40 or 50. It's a slower process than a lot of people think.

Entrepreneur:They say no one gets rich working for somebody else. Your book seems to support that theory. Why is this the case?

Stanley: Let me give you some numbers. You've got nearly 100 million households in the United States, and about 4 million of those include millionaires. Twenty percent of those people are retired; out of the group that's left, about two-thirds are business owners.

If you're self-employed, you have nobody else to rely on. It's the journey and the difficulty that self-employed people encounter that make them more concerned about money. The wealthy are more interested in pension and investment planning, more interested in putting money back [into their businesses], and more interested in minimizing their realized income, maximizing their unrealized income and building wealth without immediately paying taxes on it. You've got a more astute group of people who are driven toward becoming independent, and to do that, they're very prudent about what they do [with their money].

Entrepreneur:In your book, you mention an example of two people, both with very high incomes, one who pays a lot of taxes and one who doesn't. The one who pays less in taxes fares better. While that's no surprise, how can we become more efficient in the way we make money?

Stanley: Tax laws in this country are very favorable toward business ownership: If you're building a business and have equity in it, you can grow it in appreciated value without paying immediate capital gains taxes on it. Because you're not selling your business, you're not realizing income.

The problem you have today is people try to maximize their realized, or spendable, income; many people don't even put money in pension plans because of that. What they're saying is "Yeah, I make $150,000, and I could put money into a pension plan, but I can't afford that because I have a summer home, three ranches, and this, that and the other thing." So they're on a treadmill, constantly maximizing income to pay taxes and pay for other things.

Entrepreneur:Describe the typical millionaire. What kind of neighborhood does he or she live in?

Stanley: Overall, you'll find people with a net worth of $1 million to $25 million living in homes valued at between $150,000 and $450,000. The typical millionaire lives in a house valued at $278,000. They own their own businesses. [The businesses are probably] low tech--scrap metal, garbage, exterminating services--things that people who go to college never think about doing.

In studies I did during the 1980s, I looked at people in terms of country origin and recent immigration. At the time, there was a large influx of Korean immigrants. These people were 300 times more likely to have an income of $100,000 than the average American household. Why? Because before they ever showed up in this country, they had some idea about what the profitable businesses were.

If you go into the finest colleges in the United States, including MBA schools, and ask what the 10 most profitable businesses are in the country, I'll guarantee there aren't two students out of 100 that can tell you; the industries are too mundane. But the guy from Korea who may never have gone to high school says "dry cleaning." Twenty years ago, there weren't any Korean dry cleaners. In fact, now there are so many Korean dry cleaners, they publish the trade publication in English and Korean.

For many years, Italian Americans dominated the retail and wholesale fruit and vegetable market. It's interesting to me how many Italian Americans without high school diplomas sent their kids to law school, MBA programs and so on. And what did they say? "I want you to have a better life; go to college so you won't have to work as hard as I did."

Meanwhile, the kids are working harder than the parents ever worked--and for somebody else, probably--and think they have to live in a $500,000 house. We put such a price on status that we've spoiled our children, [who now don't want to go] into businesses that may be low tech but can generate a lot of profit, put a lot of people to work, and make a lot of people financially independent.

Entrepreneur:It seems there are more and more women entrepreneurs.

Stanley: I'm glad to see that. I think the more women who figure out [business ownership] is the way to become wealthy and financially independent, the better off we'll be as a country.

Entrepreneur:Who wears the wallet in millionaire households, and how is wealth passed to the children?

Stanley: With most millionaire couples in this country, the male is the dominant partner.

I don't want to get into value judgments, but in this country, children who are the least productive get the bulk of the [parents'] wealth [in the form of handouts because they can't--or just don't--support themselves.] That's why there is such a great turnover of wealth. We weaken the weak and strengthen the strong.

Entrepreneur:What businesses should potential millionaires consider?

Stanley: I'm hesitant to talk about the [specific] businesses. It's really the heart of the entrepreneur. If you believe in what you're doing, if you're enthusiastic and can't wait to go to work in the morning, that's when you know you're going to win.

The latest data I have shows most successful people say they didn't come up with their ideas in a vacuum. These people have worked in a lot of different places and a lot of different jobs; they've been up, down and sideways; and very often they say "I stumbled across this extraordinary opportunity."

That said, scrap metal is still a profitable business, [as are] dry cleaners, exterminating services and hair-care salons. Look at all the small businesses you might have been familiar with as a child: funeral parlors, garbage collecting, these types of businesses.

Take my friend Richard, who always liked trucks. He worked for a company that repaired trucks, and one day, someone called to get a truck taken to the junkyard. He got almost more money for the used engine than it cost for the entire truck! He quit his job and now he sells used truck parts--and he's worth about $10 million.

What you'll find in life is that you'll have two or three major opportunities--some people take advantage of them. I always contrast this with the idea of "I want my son to be a lawyer." In the phone book, there are 54 pages of lawyers and doctors...and just one listing for used truck parts.

Entrepreneur:So the idea is to find something you love and do it?

Stanley: It's the feeling that "This is what I should be doing"; it's not just for the money. When it gets to the long hours, there's got to be something else. If you don't get emotionally excited, if your heartbeat doesn't move when you do this stuff, it's not going to work. It's the heart of the entrepreneur, the emotional intelligence, the tenacity.

Entrepreneur:What types of things should entrepreneurs who seriously want to be wealthy do?

Stanley: If you sat down and realized how little you have to put away to become wealthy, you'd be surprised. Like we say in the book, you've got to ask yourself, "What can I do in five years, 10 years, 15, 20...?"

In the book, I talk about what a salesman told me--his folks had no money because they had no income. What he forgot was that his folks smoked three packs of cigarettes every day for 46 years. If they had invested that money, it could be worth a million dollars today.

The fact of the matter is this: Somebody told working-class people that they'd never be rich because they didn't go to college, and that's ridiculous. Anybody with a reasonable income can become financially independent in a lifetime.

Lorayne Fiorillo is a financial advisor and first vice president of investments at Prudential Securities in Charlotte, North Carolina.