Afford Anything - The Next Millionaire Next Door, with Dr. Sarah Stanley Fallaw

Episode Date: April 29, 2019

#190: More than 20 years ago, affluence researchers Dr. Thomas Stanley and Dr. William Danko surveyed a vast number of millionaire households in the United States. What they discovered was groundbreaking at the time. The average U.S. millionaire, they found, lives a frugal lifestyle. They are disproportionately clustered in modest, middle-class neighborhoods. They drive used cars. They don’t spend money on jewelry, watches, boats or other high-ticket items. They’re self-made, meaning they did not inherit their wealth; they’re first-generation millionaires. In 1996, the researchers published their findings in a book called The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. The book became a mega-bestseller and, to this day, remains a top personal finance classic. Fast-forward to 2012. Dr. Thomas Stanley’s daughter, Sarah, followed in her father’s footsteps. She’s grown up to become a researcher, earning a Ph.D. in applied psychology and exploring the world of behavioral finance. She became the Director of Research for the Affluent Market Institute, the research company her father founded, and she launched her own research firm, DataPoints. In 2012, Dr. Sarah Stanley Fallaw and Dr. Thomas Stanley decided to update their research on millionaire households in anticipation of the 20th anniversary of the publication of The Millionaire Next Door. They wanted to see what attributes are different, 20 years later, and what qualities remain the same. They crafted another large-scale survey of millionaires. Yet before they could complete the project, tragedy intervened. In 2015, Dr. Thomas Stanley was killed in a car accident. He was hit by a drunk driver. His daughter resolved to finish the research that the two of them started together. She sent out the survey they created, gathered and analyzed the results, and published a sequel, The Next Millionaire Next Door, co-authored with her late father. The book is Dr. Thomas Stanley’s final, posthumously-published book. The book was released in October 2018, twenty-two years after the original. On today’s podcast episode, Dr. Sarah Stanley Fallaw joins us to describe what’s different about millionaires, more than two decades later … … and what’s remained the same. For more information, visit the show notes at https://affordanything.com/episode190 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, anything in your life that's a limited resource. And so the questions become twofold. Number one, what matters most? And number two, how do you apply these lessons to your life on a day-to-day basis?

Answering those two questions is a lifetime practice. There are no simple answers. That's what this podcast is here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast. One of my favorite books is The Millionaire Next Door. It was originally published in 1996, and it was co-authored by two researchers named Dr. Thomas Stanley and Dr. William Danko. One of those two co-authors, Dr. Thomas Stanley, decided that in the lead-up to the 20th anniversary of the publication of the Millionaire Next Door, he wanted to do what he had done back in the early 90s, which was,

that he wanted to do another huge survey of American millionaires to find out how they became millionaires. The original book, the one that was published in 1996, was groundbreaking in that it showed from a very research-based perspective that the majority of millionaires in the United States are self-made, meaning that they are the first generation of millionaires in their families. they did not come from wealth. Many of them had not received even a single dollar from their parents or any other family members. So as an aggregate, they were not people

who had inherited their wealth, and they were largely very, very frugal. They often worked in unglamorous jobs like pest control, janitorial services, welding, you know, the jobs that don't command headlines in gossip magazines, they didn't work those flashy jobs. but they were very, very hard workers who lived very frugal lives, and that was the profile of the average American millionaire.

So that was what he, Dr. Thomas Stanley and Dr. William Danko found in 1996. And so then a few years prior to 2016, so back in 2012, knowing that the 20th anniversary of the book was going to come up, Dr. Thomas Stanley decided he wanted to do another survey to see what was similar and what was different 20 years in the future. and so he and his daughter, who is now also a researcher, Dr. Sarah Stanley Fallah, they decided to co-author the book together. And from 2012 to 2015, they began gathering research, gathering data. And unfortunately, in 2015, just one year before the 20th anniversary, Dr. Thomas Stanley was killed by a drunk driver.

And so his daughter continued the research, after his passing, and she and her late father co-authored a book called The Next Millionaire Next Door. This book is in a very real way, a continuation of the legacy of the millionaire next door. Before we begin today's interview, I'd like to let you know that we made a transcript of this interview, and that transcript is available for free at Afford Anything.com slash. episode 190. That's afford anything.com slash episode 190 if you'd like to download a free transcript of today's interview. With that said, here is Dr. Sarah Fala, talking about the next millionaire next door. Hi, Sarah. Hi. Thanks for having me. Thank you for coming on the show. I'm very excited

to talk to you. This is great. I can't wait to talk to you. And this is obviously one of my favorite topics. Before we get into the findings that you talk about in The Next Millionaire Next Door, I want to start by asking you about your research methodology. How did you gather the research that went into the book? There are a couple of different sources. The first, of course, is all the archival data that my father had collected throughout his lifetime, really starting back in the 80s. So that was sort of a source for some of the comparison data.

So we had surveys that were conducted with millionaires in the mid-90s, the late 90s, the 2000s, and so forth. So that was included as part of what we compared data to for the 2016 study. So that study was conducted. We created the survey instrument by looking back at a lot of the old surveys that he had conducted as well as some of the behavioral finance topics, right? So some of those cognitive biases that trip us up when we invest. So we included some of those in the survey instrument as well. We really focused or targeted zip codes that.

typically included individuals who had a certain level of income or wealth and targeted affluent neighborhoods, essentially. Even in that, though, when we received the results back or the surveys that came back in, I think it was about a thousand total somewhere around there. I think we surveyed 5,000 and had about 1,000 come back in. Out of that, only about 670 or so folks were millionaires in that survey. So even though we were targeting these really affluent neighborhoods, not everyone was a millionaire. And that's typical. That's typically what, you know, you'll find. So that's the methodology we used for the main survey for millionaires. And then we had other research where we used crowdsourcing. We continue to collect data at my company

data points on wealth accumulation, financial satisfaction and things like that. So we have a couple different sources, but the main survey that we conducted was, again, in those affluent neighborhoods. I'm curious why you chose to target affluent zip codes, given that the whole premise of the book is that you can't geolocate millionaires. Right, right. In order to find individuals who typically have a net worth of one million or higher. And in our case, I think the median net worth was somewhere around 3.5 million. It's a lot easier to find them in those affluent neighborhoods. it is more difficult to find those hidden gems, those millionaire next door types. And that's where we use things like crowdsourcing, some of the qualitative data that we use, some of the data that comes in,

or like convenience samples, right? So individuals will write in and tell us about their stories and things like that. And that's more of that qualitative data. But the reason that we target those affluent neighborhoods and we want to learn what millionaires do, whether they're millionaires or Deca millionaires is to look at their behavioral patterns over time. So the millionaire status isn't really as important as kind of what those behavioral patterns are that allowed them to achieve their financial goals. And so we start by looking at millionaires because that's a kind of an easy target, if you will, not necessarily easy, but it's a nice, you know, marker, if you will, for financial success. But then we want to see if those same behavioral patterns exist in people that

are emerging affluent, they're kind of on their way. Are they doing those same things that we see that millionaire share with us that they do? So it's really just, we, for lack of a better term, sometimes we call them subject matter experts. They're subject matter experts at building wealth. And that's kind of the focus of why they're included in a book like this. I do love that you targeted the emerging affluent or the near millionaires because that added a lot of context, more color than the original millionaire next door? Yeah, so one of the criticisms, anytime you do a study like, you know, the one that we did or that was done in the millionaire next door, any survey of people that have achieved success is that you don't have sort of this

comparison group, right? So you don't have the people that really did those same behaviors, but didn't achieve millionaire status. And that's survivorship bias. And so part of the work that I've been doing, over the last several years, starting with my father when he was alive and then certainly in our company data points today, is to understand what behaviors actually predict net worth. And that's really what we're focused on. And in order to do that, you have to look at affluent samples. You have to look at high-income earners. You have to have individuals that are making maybe $25,000 a year and what behaviors are they engaging in and are they becoming prodigious accumulators of wealth for their cohort group. And so I think that that's what has been satisfying about doing this work is demonstrating

that there are these kind of clear characteristics or, again, what we call behavioral patterns, that lead to building wealth long term. How did you define emerging affluent or near millionaire? So we define that primarily behaviorally, but also using this concept of that prodigious accumulator of We, for example, surveyed a population of individuals who made at a minimum $25,000. They were at least 25 years old, and they were either responsible or jointly responsible for their financial life. That was our target sample. And then once we conducted the survey, we took that group and just like in our millionaire samples, we divided it into quartiles based on their expected net worth and that calculation that separates people based on their ability to build wealth

given that expected number. So we were looking at within that sort of emerging affluent sample, really prodigious accumulators of wealth. And so when you think about individuals who are making $25,000 a year, sort of as a minimum, I think the median income in that group was somewhere around $38,000 or $40,000 a year, they had the same behavioral characteristics as we found in our affluent populations. Now, they hadn't necessarily achieved millionaire status yet, but they were definitely on their way. And you could see those similarities across the samples. Was all of the data from the respondents self-reported, or were you able to independently verify their net worth claims? It was self-report. So that certainly is a limitation. They could be

writing lots and lots of zeros, right, and making us all feel really good. We do a couple of things when we collect data. Certainly, we look at some of the responding, we look for abnormalities in the data to make sure that we don't have someone that just basically took, you know, a pencil or a pen and selected A, for example, or made a Christmas tree like you might on the SAT or something like that. So we do look at that and throw out data that looks like there's something, you know, not quite right with it. So we're fairly confident in that data. It's also. pretty consistent with the other studies that had been conducted over time. So if some of that did creep in, it's crept in consistently, which again, we're studying human behavior and we are using self-report.

So there are some limitations to that. But that's why, you know, you're often going back to other academic research that's out there or looking at IRS data or data from the Bureau of Labor Statistics or something like that. And so that's, you know, certainly been something that we, you know, We tried to include in this book, but that definitely is a limitation. How did you survey the respondents? You mentioned the Scantron bubble sheet. Right. So we didn't use Scantron, not to scare anyone.

We included two different waves of survey data. So I'll come back up a little bit. Once the instrument, once we created the survey ourselves, again, I worked closely with my father on that. We worked with a university here outside of Atlanta that. that conducted the survey. So we gave them the names and the addresses and so forth, and then they administered that part of it.

So we had a paper survey as well as an online version of the survey. Got this about the same response rates for both. And then one other piece I should mention too is that in addition to that geo-located sort of affluent neighborhood piece, we also did include a small sample of business owners as well inside that larger data collection effort as well. So we outlined that pretty well on the appendix of the book, but it was a large-scale survey effort that took quite a while to collect. You mentioned in the book that you began gathering this information, this data, in 2012.

Yeah, so that makes me feel really old for some reason saying 2012, but that was the time when I was beginning my own business, which was data points and working with my father thinking about, hey, what's the 20th anniversary of the millionaire next door look like? You know, what does it look like today? Or, you know, what's changed? What's the same? So we began this effort to think about what the survey could look like and, you know, how do we want to do the sampling and fail out of change. Certainly we didn't have, you know, an online, or he didn't have an online version back in 1996. But that took quite some time. And then the survey and all of that administrative side of collecting the data. data was going to begin in 2015, and actually literally the week before it was to be sent out,

my father was in an accident killed by a drunk driver. So it kind of was not on hold, but it certainly was not, it took a lot longer. Obviously, things like that can change the trajectory of what you're doing. But we kept going. Obviously, had the support of my family and a lot of, you know, fans of his and folks that really wanted to see that research through, and that's, you know, how we kept going. I'm very sorry about the loss of your father. I was very sad when I learned about that. Thank you. It was a shock. He was, you know, an amazing father, an amazing grandfather, and also was an amazing teacher. And that's really what he did throughout his life, you know, starting at SUNY Albany and then at Georgia State. And through his work, you know, through his blogs and his

books, he really could make that data come alive. And, you know, certainly I miss him. for that and for many other reasons. But I think that's really often what we hear from others when they write in and share their stories with us. At the risk of asking an overly broad question, what are the biggest differences between what your father found in 1996 and what the two of you found as you embarked on this study together 20 years later? I think that what we knew was that there were tremendous changes in terms of technology, in terms of small business ownership, costs of health care and education and things like that.

A lot of that he had kept up with and sort of written about throughout his lifetime on his blog and things like that. But what we were really wanting to see was, were there some similarities in terms of some of the big picture behavioral factors that allowed individuals, regardless of the decade or regardless of really even what career they pursued, that different. differentiated people that could really build wealth from those that kind of struggled with it. So I think some of the differences obviously are in the cost of goods. And certainly one is in housing. We saw quite a bit of an increase in terms of the average cost of a house and things like that. We also saw more millionaires in this sample that had graduate degrees, for example.

I think you hear, well, grad school is the new college, right? So we do see that that has increased, at least in these more affluent samples, doesn't mean that you have to have a graduate degree, just means that those that are included in these affluent samples do. So those are some of the things that have changed. And I think, too, in terms of technology, the types of jobs that are listed and included, you know, you see a lot more in the technology space in terms of the job titles of folks that completed the survey. Those are some of the differences that we saw over time. In the book you talk about some of the questions that you are commonly asked, one that you mentioned, of course, is the question about whether or not there is survivorship bias,

and we discussed that earlier in this interview. You also mention in the book that you frequently get the question of whether or not entrepreneurship has become more important over the past 20 years due to the ease of starting a business through the internet. Right. We did see a decrease in self-employed millionaires in the a sample. And I discussed the fact that that kind of mirrors the decrease overall in terms of self-employment, mostly due to like agricultural jobs and so forth, the decline in those. But on the flip side of that, of course, is that tonight, if someone, you know, is listening to

your podcast and decides to go home and start a business, they literally can do that from their basement on a computer, find outsourced professionals around the world using different job sources and so forth, it can just, it is amazing what you can do today. But along with that, technology is this distraction of technology. And so I think that there's this blessing and curse of all of these great tools that we have at our disposal to create jobs. And that is, of course, you know, that they can be a distraction as well. So, you know, I don't have a ton of data necessarily on that and how they're using technology and so forth. But that is something that we're we're seeing certainly anecdotally and through a lot of the advice, like we work with a lot of

financial advisors and coaches and therapists and so forth. And so we're seeing that as well through what they're sharing with us. It's interesting to me that self-employment decreased overall. We had this kind of sub-sample of small business owners that were included and even with that, that did change. Did you find any notable distinction between the emerging affluent group, the near millionaires versus the millionaires? Yeah, so I think that in terms of the main differences, and this goes to actually a research study that we did in conjunction with a professor at the University of Georgia and one of his graduate students, John Grable and Michelle Kruger, we looked at kind of the responsibilities and tasks and key, almost like chores,

and that sounds like a negative word, but the kinds of things, the kinds of things you have to do when you are at certain levels of wealth, if you will, and those are different. So there are key things that individuals that are affluent tend to do more of, and those are maybe more complex investment-type tasks, tax planning tasks and things like that, than those who are really working to build wealth. They typically cite things like saving and, you know, achieving budgetary goals and things like that is more important than some of those more complex things. So those are the kinds of differences that we see. We kind of outline those in a paper that looks at kind of these tasks of households and how they're different depending on wealth. But the behavioral patterns is something, when we talk about that,

those are consistent. So we look at prodigious accumulators of wealth, both at sort of these higher levels of wealth as well as those that are just starting out. And individuals that really can rely on themselves and really believe that they can do it, that are frugal, that are able to ignore what other people are doing around them, those tend to be individuals that can build wealth over time and sustain that wealth, even if they've already made it, so to speak. Allow me to recap what I think I heard you say. Those who are emerging affluent, but who have not yet reached millionaire status, often have goals that are more directed around frugality, budgeting. They're filling the role of

chief procurement officer in their household, whereas those in millionaire status may have slightly more advanced or complex goals, and they're more filling the role of chief financial officer, CFO, in their household. Yeah, that's an interesting way to put it. It's almost like that chief financial officer might be a little more, there just might not be as much to that job, maybe for those emerging affluent folks. But again, as you as you build wealth and you're looking for that wealth to build upon itself, that's when things become more complex. That's, you know, why we see millionaires pretty consistently use some kind of financial professional, whether that's an accountant or a financial advisor or someone like that, because things become a little more

complex. You know, that's not always the case, but we do see that. You mentioned prodigious accumulators of wealth, and the formula for that is age multiplied by income, divided by 10 is your expected net worth. And if your net worth is higher than that, you're a prodigious accumulator. If it's lower, you're an underaccumulator. Is that correct? Yeah, so it's sort of a marker that my father used. There's some kind of equivalent that he created from the statistics that go behind that. we divided it a little bit differently in terms of individuals who, once you subtract your net worth from your

expected net worth, and you look at those individuals who are at the top quartile, so the top 25%, those tend to be those prodigious accumulators of wealth. So if your net worth is much, much higher than your expected net worth, then you're a prodigious accumulator of wealth. And then, of course, if you're at the bottom quartile, we refer to those folks as those under-accumulators of wealth. So it's all that kind of expected versus where you are today. And that can be a little more helpful than thinking, okay, am I above or below that number? Wow. That's even more rigorous criteria then. It's not enough just to be above that expected mark. You have to be in the top quartile above it. Well, right, right. So I think why that's important is going back to this concept of millionaires. And it's

easy. It's easy to explain. It's like, okay, net worth of $1 million. I can understand that. That's a goal I can achieve. But as we're starting out and we're thinking about, well, how can I get there? Maybe what we need to think about instead is, okay, how can I really effectively build and manage what I have today in a way that's going to allow me to reach those goals? When we compare prodigious accumulators of wealth to those under accumulators of wealth, that's where we see some of those, you know, that behavioral side of personal finance come into play where being more confident in your ability to manage your own finances, being frugal, not worrying about what your neighbor just bought, you know, that you see on Facebook, right? All of those things start really coming into play

when you separate the groups into people that are really great at building wealth and transforming their income into wealth and those that are a little more challenged at it. So one question that I have, and we chatted a little bit about this before we started recording, I'd mention that the first time I read The Millionaire Next Door, I was in high school, and I reread it in college, and I read it again several times during my early 20s. And the thing that struck me was that when you apply this formula at a young age, it doesn't really work. Yeah, so that's a great point. It's something that kind of as a psychologist and someone that likes to look at numbers and formula and data bothered me as well, is that

does overestimate often for individuals that are under, let's say, 45 or 50, kind of where you should be. It's so far out that it's hard to make it be useful for you. And I think that that's where that concept of expected versus where you are today and subtracting that and then thinking about are you being a prodigious accumulator of wealth in terms of your behaviors versus am I on track based on this formula, especially if you're younger. So I think that's why studying individuals that are really good at this can be useful. But I do agree with you that that's a tricky part of that formula, something that we're continuing to work through and try to figure out ways that we can provide that information, particularly for individuals that are starting out, thinking about two, individuals that start out with a high level of educational debt and things like that, because it's a real tricky one. So, no, I agree with you on that. How would a person look at this formula if they have a highly variable income? Typically, what my father had done was you take sort of an average.

So you're looking at an average level of income over the past five to 10 years, let's say. And that's usually how he would suggest that people use that formula. But if you're in a sales role or you have other types of commission or a bonus structure, things like that, or you own a business and your income is variable, you have to take that into account. So instead of just thinking about one number for that given year, you know, look back at an average, if you will, or maybe the past two, three years, even. If you're a married couple with combined household finances, how would you count your age? Would it be your average age?

Yeah, I would say an average, just like when we look at, for example, risk tolerance within a household, you almost have to think about it as an average across both members of the household, because especially if both members of the household can push the sell button, it would be more of thinking about that from an average perspective. When you analyze a person's expected net worth as a function of their age and their income, do you make any adjustments for the cost of living in their area, their local area? Yeah, that's a great question. Certainly, I think that's something we should look at doing as well as take into account

their job title, if you will, because I think that has a lot to do with debt and so forth. but we don't today. So it is more of a strict kind of, you know, using those three variables. And some of our other studies, we've also factored out statistically, percentage of wealth that's been inherited. So we do take that into account in a lot of our research, but we don't differentiate by location. But it's a great question. It's great research question, quite frankly. Well, thank you. And have you still found that the majority of American millionaires have not inherited money? Right. So in the latest study compared to 96, I think it was 80% in 96, 86% in 2016,

those were the percentages of millionaires that didn't receive some kind of income from a trust or inheritance or something like that. That's pretty consistent over time, which means for us that have children that even if we're amassing this wealth, there's a likelihood that that that's not going to last for generations and generations. How can we prevent that, you know, if we want to instill those kind of lessons in our children because most millionaires are doing this on their own. They're not receiving these huge windfalls and living off of some kind of trust, for example. So is it still the case now, as it was back then, that the majority of American millionaires are first generation millionaires?

First generation, yeah, yep. Are you familiar with Chris Hogan's book, Everyday Millionaires? Yeah, so I know that that came out kind of around the same time that the next millionaire next door came out, but I'm not familiar with how they did their study. I know that they had a large sample of folks, but I'm not familiar with it. I haven't read it. I was about to ask if there were any significant differences between your findings. Oh, yeah. No, you know, I probably should read it, but I don't know, I don't know if it's more academic or if it was more, We've talked to the Dave Ramsey folks before I've been on his show, but I don't know too much about their study. We'll come back to this episode after this word from our sponsors.

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slash Paula. Radiusbank.com slash Paula. Your area of expertise is in the psychology side and the behavioral finance side. What are some of the key takeaways from a behavioral finance perspective through the new research that you've done? I think from sort of this characteristic or personality perspective. I've seen, and we continue to see whether it's the study or other academic research, but this concept of being disciplined and really being able to stick to a plan, whatever that plan is that you've agreed on, you know, either with your spouse, significant other or yourself or your financial planner, is creating a plan that you can stick with and stick with for the long term. We see that, whether we're talking about budgeting and saving and spending, certainly

with investing. So one of the key challenges for folks is to watch their investments rise and fall and not be prone to make decisions that are rash or emotional, given what's going on in the marketplace. So one of the factors that millionaires rate as kind of their success factors is that discipline piece and perseverance as well. But that's absolutely critical. We see being able to kind of ride the highs and lows without veering off course. is very critical. And so from a psychological perspective, building up that ability to stick with a plan. And certainly when we think about parenting as well, helping our kids be able to do that is critical. How do you develop that discipline, the focus, the patience, the resilience, those qualities that you discuss in the book?

There are a couple of things to think about related to that. The first is kind of to understand where you are today. if you know that you're prone to make emotional decisions, it's first being aware of that and kind of taking stock of that and asking yourself, okay, when is it that I'm making decisions that are that are really not in my best interest, whether we're talking about finance or anything else, but, you know, we can focus on finance today, certainly. Once you're aware of that, it's building new behaviors around typical behaviors. There's a great book Charles Duhigg wrote called Habit. I love it as a psychologist, but I love it also from a very practical perspective because it helps you understand how to build new behaviors around things that you're really not even thinking about sometimes.

So, you know, he talks about the example he gives is the chocolate chip cookies that he's always eating at a certain time of day and all of a sudden he's gained all this weight. It's replacing some of those behaviors and you can do that with finances as well. And so I think that it's first acknowledging that maybe you have a shortcoming, you know, related to some of those things, which is hard for some of us to do, and then replacing some of those behaviors with others that are more conducive to achieving your goals long term. One of the things that you mentioned in the book is that there are many unique paths towards becoming a millionaire. And oftentimes, as you say in the book, many people assume that only

three paths exist. People assume there's the frugal path, there's the high-income path, and then there's the self-employed high-risk-taking path. But as you discuss, there's quite a bit more than just those three pathways. You do have to take into account your own unique characteristics and background in order to forge your path ahead. I think it's important to take lessons that make sense from a book like The Millionaire Next Door or any other books that are out there, but then take that and take what you can from that that applies to your own life and characteristics. For example, if you grew up in a household where money wasn't discussed or maybe you saw bad money behaviors modeled, then building new or rather acquiring knowledge from different

resources is something that's going to help you, but it may not have had to help or your neighbor or someone else may not have had that same experience. So it's really understanding, kind of looking back, and we talk about this a lot in terms of retrospective reports or thinking about critical incidents in your life related to finance, thinking about some of those, looking back on them, then applying what you're learning to your own unique situation. I think that really was the point of that particular section as well, because I'll often now get the questions around, well, you know, should I go into this job field or maybe this type of career? I often get that question. My father certainly got that question a lot. It really depends.

And it depends. And you know yourself better than anyone else. And so really thinking about your own unique experiences and characteristics can allow you to use some of this data that we supply or that you find elsewhere that's out there to help you make better decisions about how you're living your financial life. So that was really the spirit of what that portion of the book was about. What I'm hearing in that answer is that self-awareness allows you to take a look at the information, the tools, the data, and then apply that into your life so that you can strengthen your competencies and make up for your shortcomings. But how do you develop that self-awareness? I think a couple of basic responses, and I'll raise my hand and say that I'm not a clinical

psychologist, so I don't have the couch in my office or anything like that. But self-awareness starts by asking yourself questions and having the time to do so. So I think that, you know, in our fast-paced world that we live in, certainly it's only becoming faster and faster as time goes on, the ability to stop and think and contemplate is something that we're losing. But if you can find that time, either it's a quiet time or time in meditation or what have you to think about your life goals, certainly that's helpful from that perspective, where your family or your household is today. That can be the beginning of understanding kind of where you are and how things are going. And that's just a practice that it takes time. And again, it's more like a habit that you're

developing where you say I'm going to set aside this time. This is something that I'm going to do as part of my routine for my daily routine and build it that way. Are there any particular question, Sarah, that you ask yourself? Are there ways that you check in with yourself periodically? Certainly I have time in the morning when there's, we have three children, we work from homes. There's a lot of activity going on in our house. And the time that I spend in the morning from 4.35 a.m. to 6 a.m. is probably the only quiet time that I find. And that's a time of just kind of reflecting on what has gone on the day before and then what's going to be happening that day, as well as some of those more big picture, like how are we

doing with our business? We run a small business and thinking about, you know, is that still fitting into our life and our goals that we have for our family and how we want our family to run? One of the questions that I've heard people ask that I probably don't ask myself enough of is what I'm doing today fitting in with this. the values that I hold and that our family holds too. So those kinds of questions can be really thoughtful and thought-provoking, but it has to become a practice and a habit that you get into. Other than discipline, what are the other major predictors of your ability to manage your financial

life? So, you know, we talked a little bit about this early on, but the responsibility piece. So we see, and the way that we talk about that at data points and the literature that's out there is through this concept of locus of control, which that sounds real fancy. And if you ever took a psychology class, you might have heard of it. But essentially, it's a personality characteristic that really looks at how you view the world. Do I look at the world as things happen to me or that I make things happen? And what we've seen throughout the years of research and in other academic studies as well is that individuals who really view their own actions as having an impact in the future tend to do better at financial management. So they're not waiting for someone else to help them

with their finances. They're not waiting for an inheritance or they're not waiting for something like that. They're really looking at the world as, hey, I can make an impact, even if that's small, and I can do something about where I am today. So that tends to be one of the predictors as well. And then the piece that always comes up that we think about particularly related to social media is what we call social indifference. And that sounds harsh. And that sounds kind of like, okay, you don't care about other people. And kind of that, you know, in some ways, that's a little bit of what it is. But really it's, and the way that we define it is more around not caring what other people are consuming. So if you think about your ability to sort of ignore what your neighbors are doing when it comes to vacations, or you can pull up. up Facebook and high five your friends that just bought a new car or have some new gadget or something like that without feeling like, okay, I've got to go out and get this latest and greatest thing that's out there too. Your ability to do that is related to net worth regardless of your age and income. That's the one that trips us up too because we want to bid in and we want, you know, even as adults,

right? We want to be part of a community and, you know, a lot of times doing the same things that other people are doing. But if that's not conducive to our financial goals and achieving our financial goals, then that's going to trip us up every time. Given that this messaging is so subtle, how do we distinguish what we think we want from what we've been influenced into wanting? Gosh, it's so hard. So we talk about this. We have a series of questions that I've put together that you can start thinking about, you know, what am I being influenced into and what is just something, like you said, that you really want. If you think about the last major purchase that you made and think about, you know, how did I make that purchase? Where did I learn about that particular

whatever it was item, let's say a car or something like that? How did I learn about it? Who else that I know has something just like it? You can start piecing together where those influences came from. And just like that self-awareness chat that we had, you can start thinking about, okay, the next time I make a purchase, I really need to think about who's influencing me, where I'm getting my sources of information or recommendations and who else is around that's influencing my behavior here. That's one piece as well. I think also just looking at your past history of making decisions can be useful as well. So thinking about, okay, every time I've gotten a phone, it's been the latest one. Is there maybe a different way? Or do I really need that? Is that something that's

important to me? Is that a value that I have? I want to be an early adapter. I enjoy that feeling. And That's fine. There may have to be some tradeoffs for that if you're trying to achieve a certain goal. We'll return to the show in just a moment. Afford Anything is brought to you by our sponsor, Skillshare. Skillshare is an online learning community for creators. So if you've got a side hustle and you want to learn from more than 25,000 classes in design or business or any other side hustle related activities, you know, you can discover those on Skillshare. you can use those classes to fuel your curiosity, fuel your career. You can take classes in social media marketing or in mobile photography,

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That's shipstation.com. Then enter promo code Paula. Shipstation.com. Make ship happen. One of the things that you found is that there's little to no correlation between intelligence, grades, standardized test scores, and wealth. Yeah, so there are a couple of different studies that had looked at this. Not only in the research that my father did, so a lot of that came from. from the millionaire mine that he did back in early 2000, I believe, or 1998, somewhere around there,

as well as studies that have been done with a very large database of individuals. And the author escapes me right now. But it's a national study. It's been done for years and years and years since the 70s. But they looked at the correlation between standardized test scores and wealth long term. And so, you know, intelligence while plays a role in maybe college success and things like that, it doesn't necessarily translate into wealth. And I think that speaks to the importance of that discipline and self-control factor. You can teach someone financial literacy. There's a lot of debate about,

well, when should we start teaching financial literacy? And, you know, is high school too late? I think that has to be coupled with the behavioral side, which is, you know, not only am I teaching you the basics of budgeting and saving and investing, but I'm also teaching you the idea that in order for this plan to be successful, you're going to have to engage in certain behaviors or actually not engage in certain behaviors. And that becomes a critical piece of it as well. So we've all probably had bosses that were really, really smart, but weren't great at their jobs because maybe they weren't great managers, for example. It's the same with that intelligence piece where you can have this sort of cognitive ability that's off the charts, but your ability to manage your financial life is low.

Have there been any major demographic shifts when it comes to who is a millionaire? So, for example, the average age of millionaires or the location in the country, whether it's coastal or inland, are there any major shifts in what your dad found in 1996 versus what you found today? There haven't been too many shifts other than what I know from the ethnic group shifts. There are some shifts around that, particularly in Asian populations and things like that. we didn't study or didn't include ethnicity in this survey, but we know that the states that have the most millionaires continue to be those states. That's why, like in our sampling, for example, we oversampled from states that didn't include New York, New Jersey, Texas, California, Florida, Illinois, and those sorts of states, which have the most millionaires typically and continue to do so.

So we haven't seen too many shifts in terms of that or the age. The age is essentially the same over time. I think in 1996 it was, you know, 57 or 58. And in our study, it was 61. You know, we know that there's a relationship between net worth and age. So that's, that's a consistent finding that doesn't change much. But what can change are those behaviors? So yeah, from a demographic perspective, we haven't seen too many shifts in terms of location or age and so forth. Like I said, we did see some changes in terms of job titles. And if you look, I think there's a a study from Georgetown University that looked at the, this may have been a little old now, so maybe 2015, and they may have updated it, but that looked at college degrees in terms of income,

you know, we know that those who are going into the STEM fields, health care, things like that, they typically have a starting salary that's much higher than those that are going into liberal arts and things like that. And that increase in salary, starting salary continues on even at mid-level, mid-career. So to the extent that there are more technology-based jobs and things like that, that's a shift. And we certainly see that in the job titles. Now, you distinguish between, as you call it, income statement affluent versus net worth affluent. Right.

So, you know, again, income statement affluent often end up being those individuals who are living in the neighborhoods that we surveyed from that do you have an income that allows them to pay for, let's say, an $800,000 house. but yet they have very little to show for it in terms of that net worth. They're not transforming that really high income into wealth. They're instead making purchase decisions and housing decisions that aren't conducive to wealth. So we continue to see that. I was talking to a financial advisor today that works primarily with veterinarians. And we're talking about the income piece, particularly for individuals that start off with a really, really high income. And that challenge becomes the behavioral challenge. It's not that the math, it's something. there and the math works, but it's being able to take that high income and transform it into

wealth and not decide it's time to buy a house that's 10 times what your income level is that can kind of separate you from being an income statement affluent individual from one that's more of a balance sheet affluent individual. Do most millionaires track their net worth? You know, I don't, I would imagine that some of them do. We certainly see that particularly for individuals that are doing that sort of the slow and steady frugal route. You know, we see that anecdotally. We didn't ask that on the survey. For those that are higher income level and have a spouse that's sort of managing their financial life, which we also see as well, those folks may not be paying as much attention to it as those that are really working to take that, maybe more

modest level income and transform that into wealth over time. Sarah, what do you think of the fire movement. Yeah, you know, the fire movement to me is really, really interesting. I think it's great that people are expressing this new way of working, of retiring, of kind of living your life. I think from that perspective, it's really, really interesting. I think that there's a lot of hard work that goes into becoming a member, a successful member of that community. It also may not be for everyone. you know, if you love your job or you love interacting with others in a workplace and that kind of thing, then retiring early may not be for you necessarily. What I think is most fascinating, though, quite frankly, are the people that are dogmatically against it. I find that very interesting,

you know, to say, oh, these people can't retire early and why should they? I think that's been the most interesting thing to watch and kind of understand why it is that people couldn't live that way if they wanted to. Why do you think some people are dogmatically against it? I don't know exactly. I think perhaps maybe they feel like they can't do that themselves or, you know, there are some kind of mathematical, practical, practical, financial reasons why it may not make sense. You know, I think there might be some people that are, that have the vested interest in keeping people at work. So you think about the golden handcuffs, you know, okay, well, they're making this, you know, level of income. I can have them here for a long, long time. I think about that in terms of law firms.

and things like that. But I don't know exactly what it is that's kind of driving this animosity toward that movement, but it's been very interesting to see. Do you think that either the fire movement or wealth in general is a triggering topic? Oh, yeah, definitely emotional because so many of us, and I can't take myself out of that, you know, you often equate success in life with how much money you have or how much money you're making. There's a lot of value judgments about money. It's a very emotional topic. So I think that that's part of it as well. You know, one of the ways to sort of change that mindset is to adopt a different mindset of, you know, wealth allows me to do X. You know, what does that allow you to do

and really think about it from that perspective versus wealth is tied to myself being, you know, my self-worth, if you will. So coming back to the behavioral finance piece, Do millionaires as an aggregate have a stronger sense of why? Well, I think that comes back to our conversation about those different paths. I would say that for some people, money and watching money grow or achieving financial goals is really important. And for others, it isn't. For others, it's I want to start a new business and create change in the world. Or Seth Godin, the famous marketing guru, talks about, you know, I'm out there to make a different.

in the world and I want to create this business to do that. So for individuals who have decided, you know, I have a steady income, I am going to achieve millionaire status, I'm going to retire at a certain age, those folks are very thoughtful and planful about where they're going and how they're getting there. And I think that that's required for most people, for individuals with a high income and those that are starting their own businesses. Yes, they may have those goals, but it look a little bit different for them because they have a different situation and there's a different maybe desire there. Maybe they want to start their own business, like I said, to meet some goal that they have for changing the world. That sounds real grandiose. But that becomes

more of what's driving them than, okay, I want to reach millionaire status. Is millionaire status, particularly among the emerging millionaires that you surveyed, is that an aspiration? Or is it a natural consequence of the way in which they live? It depends. That's what a good psychologist would say, right? It depends. There are individuals who really focus on that as a goal. And then there are others who simply live a lifestyle that would never be wasteful, that doesn't want to set themselves apart by showing their status through what they buy and what they drive. And they just do that naturally. That's something maybe that they were born with. and they don't necessarily think about achieving millionaire status, but instead it's just a part of who they are. And then like I said, there are others who set out and have that goal, and that's how they achieve it through thoughtful approach to managing their financial lives.

You know, there isn't a single path to achieving financial success, whether that's millionaire status or some other status, some of the other goal that you want to achieve. And there's not a single way to do it. How did your parents talk to you about money when you were growing up? What were the household lessons that you learned as the daughter of the author of The Millionaire Next Door? Household lessons I learned. So I learned always to be busy and doing things. My father was always, if he wasn't working, he was creating and building and doing all kinds of things around the house. He was a woodworker.

He loved doing that. He was fishing. He would be doing something. And so I definitely learned that industrious side of hard work. And I had a job. I was babysitting. I was always, you know, I had lemonade stands. I did all of that. So that was definitely a lesson that I learned at home. My mom managed a lot of the financial side. So I would see her balancing checkbooks and would watch that with some interest. I have had to recognize my shortcomings related to financial management. Thankfully, my husband has a lot of those skills that I lack. We, compliment each other in that way. But I would see her doing things like that. My dad shopped at Costco and Walmart, you know, and certainly as he achieved success, you know, made some changes and bought a car. He always loved cars. So I, you know, I certainly saw that as well. But I think that industrious piece taught me that you have to work for the things that you get. You have to work for the goals that you set

for yourself and that no one's going to come behind and all of a sudden fly in and things are going to be successful. And certainly that lesson has helped as I've started my own business. It is not an easy road to go for sure. You mentioned that you have three children. How old are they? Yeah. So we have three girls, eight, 11, and 13. So we laugh and say we have nine straight years of girls in middle school. Wow. Yeah, it's a lot of fun here. We enjoy it. And we do talk about finances a lot. Obviously, they knew that their grandfather had this business, if you will, you know, this sort of career in life. We certainly talk about that with them. I think that the concepts that have been the most helpful, especially as we've entered middle school and now into high school almost,

is the difference between income and wealth and really the difference between consumption and wealth. A day doesn't usually pass where one of them will come home saying so-and-so has this brand new, you know, the latest iPhone where, you know, we're caring. around the old iPhones, you know, and they're 12-year-olds that are carrying these. Or, you know, this kind of car, why don't we have a new car? And we're in our 2007 Honda Odyssey. Those kinds of things come into play. But those are conversations we're having and we're having them regularly. And they're starting to, we're starting to hear some signs that they might be slipping into their mindset as well. How do you respond to that when that comes up? How do you make that a teachable moment?

Yeah, so the phones are the best example that I can think of because that comes up so much. For example, our eighth grader has a phone and is wondering why she can't have the latest version of the iPhone or something like that. And we explained to her that by not always having the latest and greatest, that's allowing us to do other things. And we talk about what those other things are in broad terms. So we're not giving specifics necessarily, but it's things like saving for college or saving for other things that you might want to buy later. We also talk about the idea that what you see isn't always what you get and that it's very easy. And that that's where the credit card debt, those kinds of conversations can come into play because explaining how a credit card works is fascinating. If you don't know, like think about not knowing what a credit card means. You know, you just get up to the counter, you give a credit card, you get your item. Well, at some point, you have to pay for that. And I think that helping them understand what that looks like and what that means has been really, really useful. It also helps them understand how

someone can come to school with the brand new outfit and, you know, in a brand new car, for example, but that doesn't mean that they necessarily had the money to pay for it. And I think that that's been useful and helpful as they're moving into this high school and more middle school-type conversations that we're having. Thank you so much to Dr. Sarah Fala. What are some of the key takeaways that we got from this conversation. Here are five. Number one, times change, circumstances change, but values and behaviors, core principles do not. Dr. Sarah described how over the course of the past 20 years, the cost of many goods have increased. Healthcare, education, more people have student loan debt, housing in many parts of the country has increased. And these

are real challenges. Yet that does not change the fact that there are core. behaviors, frugality, industriousness, resourcefulness, a strong internal locus of control, that are major predictors of whether or not a person will become a millionaire. And that core set of behaviors is what is consistent through the decades. I think that what we knew was that there were tremendous changes in terms of technology, in terms of small business ownership, costs of health care and education and things like that. A lot of that he had kept up with and sort of written about throughout his lifetime on his blog and things like that. But what we were really wanting to see was, were there some

similarities in terms of some of the big picture behavioral factors that allowed individuals, regardless of the decade or regardless of really even what career they pursued, that differentiated people that could really build wealth from those that kind of struggled with it. And so that's key takeaway number one. Times change. Principles don't. Key takeaway number two, people who have a strong internal locus of control tend to be better at money management and better creators and accumulators of wealth

than people who have a weak internal locus of control. We see, and the way that we talk about that at data points and the literature that's out there is through this concept of locus of control, which that sounds really. fancy and if you ever took a psychology class, you might have heard of it. But essentially, it's a personality characteristic that really looks at how you view the world. Do I look at the world as things happen to me or that I make things happen? And what we've seen throughout the years of research and in other academic studies as well is that individuals who really view their own actions as having an impact in the future tend to do better at financial management.

A related concept to internal locus of control, and a good way to wrap your head around this framework, comes from the book Seven Habits of Highly Effective People by Stephen Covey. In that book, Stephen Covey describes your circle of concern, which is everything in the world that you could possibly be worried about, ranging from the zombie apocalypse to whether or not your socks are clean. So everything that you could possibly worry about is in that circle of concern. and inside of that there is a smaller circle, which is known as your circle of influence. And those are the things that you can very directly influence, such as whether or not your socks are clean. He states that the more you operate inside of your circle of influence, the larger over time that circle of influence grows. So, for example, you cannot control broad macroeconomic forces outside of your control. You can't control how well the Dow Jones Industrial Average is going to perform.

But you can control your contributions to it. You cannot control market appreciation within the housing market. You can't control the rate at which houses in aggregate will appreciate over time. But you can control whether or not you buy a rental property with a strong cap rate. And you can control the renovations and other forced appreciation that you bring to the deal by virtue of the judgment that you execute. And so operating inside of your circle of influence is a way to bring this notion of internal locus of control to life. And so that is key takeaway number two.

Key takeaway number three. Before any major purchase, such as a car, a home, or an expensive trip, ask yourself a series of questions to identify if you genuinely want this, or if you only think you want it because of the influences around you. think about, you know, how did I make that purchase? Where did I learn about that particular, whatever it was, item, let's say a car or something like that. How did I learn about it? Who else that I know has something just like it? You can start piecing together where those influences came from. And just like that self-awareness chat that we had, you can start thinking about, okay, the next time I make a purchase, I really need to think about who's influencing me,

where I'm getting my sources of information or recommendations and who else is around. that's influencing my behavior here. Self-awareness is a crucial aspect of growing wealth. And often we need to check in with ourselves to understand the difference between what's authentic to us and what we're being influenced into wanting because it happens to be the flavor of the month or the trend of the month. So that is key takeaway number three. Key takeaway number four.

Distinguished between being income statement affluent versus being balance sheet affluent. there are people who have high incomes but low net worths. And there are also people with relatively high net worths despite the fact that they've only had a moderate income. Now, to be clear, if you earn a low income, then you may not have a spending problem. You may not have a behavior problem. You have an income problem.

But if you earn a high income and you are not rapidly growing your net worth, then it's possible that you may have a behavioral issue that you need to contend with. I was talking to a financial advisor today that works primarily with veterinarians, and we're talking about the income piece, particularly for individuals that start off with a really, really high income. And that challenge becomes the behavioral challenge. It's not that the math is there and the math works, but it's being able to take that high income and transform it into wealth and not decide it's time to buy a house that's 10 times what your income level is that can kind of separate you from being an income statement affluent individual from one that's

more of a balance sheet affluent individual. I am preaching to the choir, but as you know, there's a difference between income and wealth. And your approach on how to deal with this is going to be different depending on whether you make $25,000 a year or whether you make $250,000 a year. So if you have a low to lower middle income, then it may be efficient to keep living at your current standard and focus on earning more, focus on developing a side hustle. If, however, you have a higher middle to high income, then the low-hanging fruit might be to cut expenses and make your life more efficient and then invest that difference. By doing that alone, you may start to see some

rapid changes. And then, of course, once you do that, if you then want to turn your attention to earning more, I mean, wow, talk about fuel on the fire. So that is key takeaway number Finally, key takeaway number five, no matter who you are, no matter how successful you are, in whatever way you define that word, always stay productive, stay industrious, stay resourceful. And when I say productive, that doesn't necessarily need to mean earning money. As Dr. Sarah describes, that could be woodworking, it could be fishing, it could be balancing your checkbook and managing your accounts. But don't rest on your laurels.

A good life is an active life. Household lessons I learned. So I learned always to be busy and doing things. My father was always, if he wasn't working, he was creating and building and doing all kinds of things around the house. He was a woodworker. He loved doing that. He was fishing. He would be doing something.

And so I definitely learned that industrious side of hard work. And I had a job. I was babysitting. I was always, you know, I had lemonade stands. I did all of that. So that was definitely a lesson that I learned at home. I love that description of the family life that took place in the Stanley household. How did the author of The Millionaire Next Door run his own family life? Dr. Sarah gives us this beautiful snapshot of what that was. And staying busy, staying productive, using your talents and skills and personal. pursuing interests and passions, that's what creates a meaningful life regardless of whether or not you are a millionaire next door.

That was our show for today. If you enjoyed today's episode, please do three things. Number one, share this episode with a friend or family member. That is the single most important way that you can support this show. If you know somebody who's interested in learning how to grow their net worth, if you know somebody who maybe has some limiting beliefs or misconceptions about millionaires, share this episode with them. Number two, please leave us a review on Apple Podcasts, with formerly known as iTunes, or in any other app that you're using to listen to this episode that allows for reviews. And number three, hit the subscribe button or the follow button in whatever app you're using.

Coming up later this week, we have our monthly first Friday bonus episode in which I answer questions that come from you, the community. and next week, David Bach is on the show. He is, have you ever heard the expression, don't buy lattes? David Bach is the guy who came up with that line. So he joins us on next week's episode to discuss the latte factor. Make sure you hit subscribe so that you don't miss that episode. And thank you so much for tuning in. My name is Paula Pant.

You can find me on Instagram at Paula Pant, P-A-U-L-A-P-A-N-T. Have a great rest of your week, and I'll catch you in the next episode.