When I first read The Millionaire Next Door by Thomas Stanley and William Danko, it didn’t inspire me. It’s not that I disagreed with the authors, but I found the book uninteresting. It was one of the first financial books I read after beginning Consumerism Commentary, and it came highly recommended from readers here and participants in The Motley Fool‘s community.
Without getting too much into my problems with the book, I will say that the idea that a “millionaire” is more likely to be your local business owner rather than someone born into a family of money was new to me.
Recently, PNC Wealth Management conducted a survey of people with more than $500,000 free to invest as they like, a fair definition of “wealthy,” and possibly “millionaire” once you begin including home equity and other assets. Only 6% of those surveyed earned their money from inheritance alone. 69% earned their wealth mostly by trading time and effort for money, or by “working.”
Here are some interesting statistics I pulled from an article discussing the survey results.
- 36% of earners and 27% of heirs are concerned about an economic recession.
- 77% of earners and 67% of heirs believe they have a lot of control of their financial future.
- 39% of earners and 21% of heirs are moderate or risky investors.
- 75% of earners and 50% of heirs have less stress thanks to their wealth.
- 51% of earners and 33% of heirs believe their wealth has led to increases of happiness.
- Heirs are twice as likely to believe that their wealth causes more problems that it solves.
- 37% of earners and 25% of heirs believe that luck played a major role in their financial success.
For me, the choice is clear. There is only one option if I want to find myself with $500,000 of investible assets: earn rather than inherit.
[Yahoo Finance, MarketWatch: Earnings Growth]
Published or updated April 10, 2012.
{ 21 comments… read them below or add one }
Good summation of the article. I understand the conclusion, however, it’s not really a choice in most instances. Either you WILL inherit wealth due to kin or windfall, or you WILL earn it over your life.
A lot of the answers are to be expected. People who work hard their whole life and who have that type of investment capital NOW, have not always been that way. They have grown comfortable with their money over a long time. People who receive a windfall or inherit, often have not had the opportunity to grow comfortable with increasing capital over a long time, and thus that huge chunk of money is like a foreign object to them. Earners know how they lived early on, and though it isn’t ideal, they could return to a lifestyle they once knew if they had to. However, odds are they haven’t changed it a LOT, much as people who inherit or receive a windfall do. Earners probably still live in a moderate home compared to their wealth, while large inheritances and windfalls cause large decisions.
On the risk factor – risk is what got the earner to this point. They are more comfortable with it because they’ve been able to see it’s longer-term effects. Even if it’s just 20 years worth. The heirs, on the other hand, may have had much less exposure to the long term benefits, and thus witnessing a wild swing in the market and its effect on their stash is going to be harsh, painful, and not able to be looked at with a long-term view.
Regarding wealth “causing more problems than it solves.” Just as “The Millionaire Next Door” revealed – often you don’t even KNOW who the millionaire is. Thus, if people are not perceived as being very wealthy, it doesn’t attract as much of the negative attention. Inheritance and windfalls are MUCH more visible, and thus attract more negative attention.
I wish the article had given more details – average age of the two groups, and average investment capital (not just “over” $500,000). Perhaps they didn’t have an ideal cross-section, but I think those details would have helped interpret the answers a bit better.
Exactly, I’d happily inherit if I could! :)
(Although I’d not leave a large inheritance to children — I like Buffett’s thinking on that. And I’d prefer lower taxes on the living, and a higher inheritance tax on death.)
I actually found it quite inspiring to learn that most people who get wealthy do so through their own efforts rather than the efforts of previous generations.
Earn or inherit? Like you, I’ll take earn if I have a choice but wouldn’t decline anything that came my way should some long lost relative pick me to inherit a fortune.
You know, this is why I really DO believe America is the land of opportunity. In most other nations in the world, those that are wealthy were born into it. America has the most self made millionaires in the world by an enormous margin. I would personally take earn over inherit every day. What achievement is there in simply being born?
37% of earners and 25% of heirs believe that luck played a major role in their financial success.
Think about that. Only 25% of people born into wealth consider it luck. Did they choose their parents?
My husband will likely inherit quite a bit of money when his parents die. But we never look at that as our sole retirement plan and we certainly aren’t spending today like there is a huge windfall in our future. There are several reasons for this
1- I married him, I may never see a dime of that money – so I really have very little stake in his inheritance at this point.
2 – This money may never materialize – his parents may blow it (not likely), may need a significant portion for their care (again, unlikely they’ll need it ALL), he has 2 other brothers that may see the inheritance before we do.
In other words a lot can happen. His parents are in their early 60s and likely will live another 20 years. His mother is a petite woman who exercises daily and eats organic and very healthy – she’s got many years ahead of her. Personally I’m not willing to wait 20 years to be comfortable. By taking control of finances now we can reach that goal in 20 years on our own accord. Why wait on an inheritance that could not materialize? Whatever we receive in the future is just lagniappe. No one should sit and wait on an inheritance.
Well, surely there’s not a great deal you can do about whether you inherit wealth or not. The only thing you can really control is whether you make money or not (and even then, there’s still luck).
Four issues:
1. The amount is actually very small: $500k is not wealthy … even add personal assets and bring that to $1 Mill. and we are talking about a ‘safe’ withdrawal level of perhaps $40k a year.
2. The truly wealthy were surveyed in a very recent book that shows that most Ultra-High-Net-Worth and Mega Rich ($5 Mill. to $25m+) have about a third of their assets in a business; another third in real-estate (including own home/s); the final third in stocks etc.
3. I don’t consider any of these ideal benchmarks to be aiming for, they are just how the ‘mediocre average’ of multimillionaires happen to have ended up … fortunately, for most of them this kind of ‘mediocrity’ is good enough … otherwise they wouldn’t be included in the surveys!
4. I can understand how those who made their own money would find the stress levels much lower and the happiness levels much higher: they have achieved a major (probably, lifetime) goal!
I can assure you that I will be much happier having made my own money than my own two Ugly Sisters, who have been ‘lucky’ enough to get handouts from a mother who has just inherited.
I’d pretty much be willing to bet that the reason people who inherit wealth are not the most wealthy individuals is because those people don’t stay wealthy! I’ve always believed that people who are truly rich tend not to be conspicuously rich; they appreciate the value of money and are not so terribly interested in showing off what they have. When you build your own business from the ground up, or when you scrimp and save in order to kick-start investments, you really realize the value of every one of those dollars, and you’re not going to waste them or lose them very easily.
It’s mostly luck, whether you work or earn. Whether your parents give you money or lay the groundwork for you to earn money is not always relevant to me. If, as a child and teen, you are raised and surrounded by people who don’t value education or hard work, you’re not really likely to break out of that – through no fault of your own. No one picks their parents or their upbringing.
I can appreciate this article, I think most wealth is made, but it lacks one major issue. We’ve all heard the saying, it takes money to make money. College costs money and lots of it. I work three jobs over 70 hrs a week, I don’t want to go on welfare, but where is the equal opprotunity this country brags about? I would go to college in a heartbeat, but lets face the truth, wealthy kids from wealthy families are more likely to go to college and “earn” a living than low income families. So I guess, when you report most wealth is earned, we are not looking at the whole picture. So mabey it goes like this, most wealth is earned, most of the opprotunities to earn are inherited.
You guys realize, I hope, that the millionaires in that book are the ones that have 5-10 million bucks, not the truly rich ones like the Walton children.
So, yeah, MOST MILLIONAIRES earned their own money; but MOST of the RICHEST people inherited a huge chunk of it. These are not contradictory statements.
Isn’t it obvious, anyone would prefer to believe they are wealthy beacause of hard work. It is important to remember that this was a survey (opinion) so the results are not facts. Of course those who are fortunate would like the fact that they are so special and hard working to be the sole reason for success, duh!
This totally ignores the fact that opportunity is an asset of wealth in a capitalist economy.
It’s an interesting set of facts that the majority of wealthy people have worked to attain their money rather than just inheriting it. Especially with blasting the wealthy being all the rage in politics right now. I find it very interesting that as a larger percentage of people in this country are receiving benefits and money from the government that success becomes something to be attacked rather than admired and emulated.
It is amazing and telling that more of the earners feel lucky than the heirs. I think a person is lucky if they find something that they love and love working hard enough at to earn a large share of money. Perhaps the heirs are pressured to work in the lucrative family business that is not their “thing.” I think that they are all pretty lucky!
Yes most rich people earn their wealth. Thats true.
For the data given they’re talking about $500k level which is not exactly stinking rich. Higher wealth people are a bit more likely to inherit the money. If you raise the bar to 100M or higher then its likely more like 10-20% inherited it.
Another detail, in the article it says : “Only 6% of those surveyed earned their money from inheritance alone.” that word at the end there “alone” makes this potentially fuzzy information. You could legitimately inherit $500k and then go earn another $20k and claim that you didn’t get your money from inheritance alone. (I know someone who would say exactly that) I doubt that happened much if at all in the survey results, but you could see people who started with $1m and got up to $2m. Thats not “inherited alone” but its a massive step in the direction of wealth to start with $1m. I think it would be more accurate to ask what % had received NO inheritance whatsoever or inheritance of less than 10% of their assets.
Interesting concept. Maybe heirs feel like since they’ve always had their money they don’t know who they are without it. Where earners have a good sense of self before the money came to be.
Heirs, sure. But most heirs as you put it don’t have much at all. most heirs are middle class and not rich. Just cause you are inheriting doesnt mean you are about to get rich.
I loved that book when I first read it, and it was a great lesson in the importance of keeping things simple in order to build wealth. Work hard, live modestly and save consistently, I’ve learned, are the three key elements in building wealth. All elements I gleaned, from reading that book. I do think it needs to be updated, though.
I haven’t read the book, but after taking multiple statistic classes I have to say this is probably biased. Pay close attention to the words alone and mostly. And also it fails to mention the variance. Most of that 69 percent could have just above 500K. I really don’t think we can call these people rich when compared to others that have millions upon millions.