Cheapskates and Millionaires: A Common Thread

In The Millionaire Next Door, Thomas J Stanley reveals the get-rich secrets of those households that have managed to accumulate over $1 million in wealth. In The Cheapskate Next Door, Jeff Yeager describes the characteristics, habits, and eccentricities of those Americans who live consistently below their means. These two groups have a surprising number of characteristics in common. After all, the key to wealth accumulation Stanley uncovers is a simple, old-fashioned value: frugality. While income plays a role in wealth accumulation, it is not the most important role. Without living consistently below their means, most millionaires would never have become millionaires. In other words, while few cheapskates ever earn enough to become millionaires, most millionaires are cheapskates.

The Millionaire Next Door

Despite the fact that it takes scores of pages to communicate a few basic points and that the author offers excruciating detail on things such as the car-buying habits of millionaires, The Millionaire Next Door is an important book that should be read by anyone who mistakenly believes that the long-term accumulation of wealth is determined almost entirely by income or that the majority of millionaires become wealthy through inheritance or pure luck.

We tend to think of the "rich" as people with flashy cars, newly built houses, and expensive clothes, but this does not describe the average millionaire, who manages to become a millionaire precisely because he does not engage in such conspicuous consumption. The Millionaire Next Door will cause some to rethink their definition of what it means to be rich and others to consider whether or not they really want to practice the self-discipline and relative austerity that is required to accumulate (rather than spend) wealth. While becoming a millionaire may ensure your financial independence and security, it does require living consistently below your means. While almost any American with a college education can theoretically become a millionaire by the time he is sixty, few will consistently choose to do what it takes to become one.

The author defines a millionaire as the head of any household that has a net worth of at least $1 million dollars. Of this group, upwards to 85 percent are self-made, "first generation rich" millionaires. The author outlines seven characteristics of this group, but essentially their "get rich" plan, which is no scheme, comes down to this: stay married, work hard, always live below your means, and invest.

The choice is yours: you can be a PAW (prodigious accumulator of wealth) or a UAW (under accumulator of wealth). If you don't have enough income, no matter how much of a PAW you are, you may never be a millionaire, but you'll be much better off than your peers in the same income group. And no matter how great your income, if you're a UAW, you will likely never become a millionaire. By Stanley's definition, whether you are a PAW or UAW is not determined by your net worth ("wealth"), but rather by your net worth in relation to your income. Basically, you multiply your income by your age, divide by 10, and you get the average net worth for someone in your age and income group. If your own net worth (minus any inheritance, which doesn't count since you didn't accumulate it yourself) is a ways above that, you're a PAW. If it's much below that, you're a UAW.

There is a very interesting chapter in the book on the positive and negative (mostly negative) effects of EOC ("economic outpatient care"). EOC is when wealthy parents give gifts to their adult kids and grandkids, which they often do in their later years to decrease the value of their estates and therefore avoid inheritance tax. Stanley says that some EOC (payment of tuition, for instance) has a positive impact on the long-term wealth accumulation of the recipient while arguing that other forms of EOC (cash gifts earmarked for consumption) have a negative impact. He compares the net worth of similar occupational groups to show that those millionaire's kids who receive EOC actually have a lower net worth than those who do not receive EOC. He suggests such gifts encourage many adult children to develop habits of consumption and to incur additional costs they would not have incurred in absence of the gifts. For example, the middle-income couple who is given cash for a down payment on a house in an upscale neighborhood will then try to keep up with the Joneses on that middle income, purchasing fancy cars and country club memberships, whereas if they had just stayed in a middle-class town house, they'd presumably feel the need to buy less stuff. I don't think he takes personality and personal priorities into account enough when drawing such conclusions about the effect of EOC, though he does concede that EOC does not always have this effect, especially on two particular groups: teachers and "Type A" housewives acquire more wealth if they receive EOC than if they don't, because these groups tend to receive the gifts without increasing consumption habits and to save some portion of the gifts.

The Cheapskate Next Door

More so than The Millionaire Next Door, Yeager's book on cheapskates is a self-help guide. Like most such inspirational books, it is replete with quotations from and references to the author's previous writing, more anecdotal than statistical evidence, and the repeated stating of the obvious. These criticisms aside, I actually found this book to be more useful than most self-help books. Because I qualify, at least by Yeager's generous definition, as a "cheapskate" myself, I already knew and already apply much of the advice in the book, but I learned a lot of little bits of information that gave me some new, if small, ideas for saving money, as well as a number of websites to look into.

A cheapskate is, for Yeager, anyone who lives below his or her means. This used to constitute the majority of Americans, but frugality is a virtue no longer. Most modern Americans are in debt and don't live by the adage "If you can't afford it, just don't buy it." Cheapskates simply refrain from buying things if they can't pay for them in full, with the exception of their houses, and even then they buy small or old, keeping the monthly mortgage and taxes to less than 25 percent of income and typically paying extra on the mortgage in order to pay it off years ahead of schedule.

He spends a lot of the book describing what cheapskates have in common, though there is great variability among them. The best he can do is say that a sizeable majority do or think this or that, or that more cheapskates do or think this or that than the general population. One example: while 60 percent of families in the general population have two income earners, only 40 percent of cheapskate families do. This may seem counterintuitive: aren't you more likely to be able to live below your means with two incomes than with one? But, in fact, many cheapskates calculate that most of their second income would go to paying the expenses (commuting, child care, clothing, working lunches, taxes, car expenses, more hired help) required to generate that second income, and they often feel it is not worth the trade off in time. They also like the "insurance" of learning to live on one income, knowing that if the primary breadwinner loses his or her job, the other can go back to work. In his research, Stanley similarly found that millionaire households did not necessarily consist of two income earners, that wives in such households were generally more frugal than their high-income-earning husbands, and that when they did work, the number one occupation was that of school teacher.

The central concept of cheapskate living--"don't buy it if you can't afford it (or, sometimes, even if you can but don't need it)"--is so obvious and simple that this book may not manage to deter "under-accumulators of wealth" from their overspending paths. Stanley has little hope for UAWs, comparing them to yo-yo dieters who end up gaining more weight in the long run. I do, however, think The Cheapskate Next Door will be enjoyed by cheapskates themselves, for the pleasure of self-recognition, for the self-esteem boost (hey, you don't always get a lot of love for being a cheapskate in today's society), and for the few money saving tips they might not have known about.

Cheapskates and Millionaires

Reading both of these books in conjunction with one another will give you insight into how the wealthy become wealthy and how the frugal remain frugal. It may inspire you to begin (or continue) living below your means. While cheapskates and millionaires have much in common, the two authors' conclusions about their populations do seem to differ in two interesting respects. The majority of Stanley's millionaires pay for all or most of their kid's college educations, while the majority of Yeager's cheapskates don't. The majority of Yeager's cheapskates don't have a specific budget, while the majority of Stanley's millionaires do. Otherwise, their books demonstrate very similar characteristics among the two groups and confirm that the road to financial security is paved with frugality.