The Millionaire Next Door

Avoiding The Money Pit

In my interview on The Dave Ramsey Show yesterday, I discussed the relationship between where one lives and the ability to accumulate wealth. Here is a continuation of the discussion from my new book, Stop Acting Rich.

Most of the self-made millionaires I have studied have one thing in common: They were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth. And building wealth begins and ends at your home address.

There are just over 4 million millionaire households in the United States. There are over 54.5 million existing homes in America (or more than 70 percent of the total) that have a market value of under $300,000. About 2 percent of these homes are owned/occupied by millionaires. Nevertheless, there are more than 1.1 million millionaires (or 28.3 percent of the total) residing in homes and neighborhoods that would not likely be classified in the high-prestige category.

In contrast, consider the numbers for those who live in homes valued in the $1 million or more category.  Four in 10 (41.41 percent) are high income producers (i.e., having annual realized household income of $200,000 or more).  Yet only 27.09 percent of those who reside in homes valued at this level are millionaires.  The ratio of millionaires who own/occupy homes at this level in contrast to the percentage of high-income-producing households who own homes at this market value is .65. In other words, it takes the equivalent of 100 high-income-producing homeowners who live in pricey homes to produce just 65 millionaires. But the ratio of those who reside in homes in the less-than-$300,000 market value range is 2.11, meaning that it took the equivalent of only 100 high-income-generating homeowners to produce 211 millionaires. 

There are nearly three times more millionaire households (1,138,070 versus 403,211) living in homes valued at $300,000 or less than there are millionaires living in homes valued at $1 million or more. The data strongly indicate that this ratio of “wealth-building productivity” is inversely related to the market value of one’s own home as well as those of one’s neighbors. Once the market value begins to move up beyond the $500,000 level, wealth-building productivity moves into the unproductive range (i.e., less than 1.00).

To enhance your chances of becoming financially independent, you should live in a home and neighborhood environment that has high wealth-building productivity characteristics. You need to be surrounded by neighbors who have lower incomes than your household generates.

18 thoughts on “Avoiding The Money Pit”

  1. Okay, so I get the fact that many millionaries don’t live in million-dollar homes.

    But are you saying that by surrounding ourselves (at home) with people who make less, we will be driven to overcome our living situation?

    Couldn’t the answer be that these millionaires are so active at work and socially that they use a home as merely a place to rest and recuperate for the next day?

    Or perhaps they are choosing comfort over glitz and showiness of the high-dollar houses.

  2. It isn’t the numbers I find the most interesting, but rather, the discrepancy. Are your findings the same for other items? ie High end vs Low end for automobiles, and “toys?”

    Great interview on Dave Ramsey yesterday.

  3. Loved listening to you on Dave’s show yesterday. Plan on getting your book, or perhaps the audio version, later this month when I have a commission check. (I currently don’t have an envelope for books!) 🙂 Keep up the good work, Dr. Stanley and Dave!

  4. I enjoyed listening to your segment yesterday with Dave Ramsey. At least three of my family members (uncles) are multi-millionaires and live in paid for homes and drive paid for cars. I can remember where they started out and have seen their wealth grow over the years. I am working towards a debt free goal and who knows, maybe one day I can have a life-style like them. But for now, my husband and I are a one income family living in a house that is worth less than 200k and I am able to raise my boys at home and pay off debt. Thank you for giving encouragement to the “little” man that we can make it in the “game” of life even though we don’t always look like it.

  5. That’s interesting, albeit a bit confusing. What’s astonishing to me is that someone who earns an annual income in the $200,000 range could manage not to be a millionaire.

    Also amazing is that people think that living in a home valued at $1M makes them millionaires. Fat chance.

  6. This is an interesting article. I enjoyed your appearance on The Dave Ramsey Show.
    I have read your books and look forward to reading Stop Acting Rich.
    Sincerely…Phillip James

  7. This sounds like it would be really neat to see on paper. I am such a visual person, it is hard to picture this without some sort of chart.If you could post one, it would be helpful for this visual learner. Thanks.

  8. Dr. Stanley, I’ve loved all of your books so far and look forward to reading this one. TMND was the first money book to change my financial outlook on life so many years ago when I read it for the first time. The concept of “wealth-building productivity” declining as home values increase beyond $500K is really interesting. Your findings continue to motivate me to keep my eye on frugality and maintaining PAW status.

  9. My husband and I have been debt free for years live in a financially mixed neighborhood…meaning that the home values vary greatly. We have found it’s a great place to live since we don’t feel any pressure to keep buying more material things. We just enjoy having extra money to donate to the causes most important to us…church, grandchildrens college funds, etc. …life is good and God is great!

  10. I already have the book on cd, having preordered. I considered it worth the money.

    It certainly makes living like a lot of people think rich people do seem silly. This is the fourth book of his I have.

  11. DH & I read “Millionaire Next Door” in college. It complete revolutionized our thinking. We now live in a house valued at 0.6x (moved up from .4x) our household income in a perfectly safe 1920s-era neighborhood which my sister (now in foreclosure) tells her children is “the ghetto”. We just laugh…all the way to the bank!

  12. >> That’s interesting, albeit a bit confusing. What’s astonishing to me is that someone who earns an annual income in the $200,000 range could manage not to be a millionaire. << If that person has a million dollar mortgage, then that $200,000 a year gets eaten up pretty quick...

  13. “That’s interesting, albeit a bit confusing. What’s astonishing to me is that someone who earns an annual income in the $200,000 range could manage not to be a millionaire.”

    Also, depending on where you live, that $200K may not be much money. We live in the SF Bay Area. Housing and other necessities are SIGNIFICANTLY more expensive here than elsewhere in the U.S. Same with NY, LA, San Diego, etc.

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