The Millionaire Next Door

Millionaire Rule 1.49

The original title of The Millionaire Next Door was That’s Why They’re Wealthy. One of the main reasons that they are wealthy is that they live in an easily affordable home.   I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median].  And today they have seven times more wealth [median] than their non millionaire neighbors.  In Stop Acting Rich I mentioned that:

There are nearly three times more millionaire households [1,138,070, or approximately 28.3% of the total, versus 403,211, or about 10% of the total] living in homes valued at $300,000 or less than there are millionaires living in homes valued at $1M or more.  The data strongly indicate that this ratio of wealth building productivity is inversely related to the market value of one’s home. . . .

Over the years I have discussed a variety of reasons why millionaires tend to live in modest homes.  One of these reasons is that in comparison to their non millionaire neighbors, they are significantly more sensitive to the variations in the actual life cycle costs associated with operating homes of different sizes and market values.  Often non millionaires, the income statement affluent, judge the “affordability” of a home based only on the purchase price, mortgage payments and property taxes.  However, this is an unrealistic view. 

Often the costs of operating and maintaining a home are either ignored or grossly underestimated by the income statement affluent.  Ron Leiber highlights some of these costs in an article in The New York Times.  He recommends that first time buyers recognize the life cycle costs of operating a home and factor these into the overall price of the home.  He argues that prospective homeowners should estimate the monthy equivalent costs for eventually funding a new roof, painting, driveway repair, new central air and heating, etc.  Mr. Leiber predicts that:

. . .you’re looking at roughly $900 each month on average.  Ignore it in your home shopping budget at your peril.

Again, that’s $900 in addition to your mortgage, taxes, and utility payments.  Otherwise, without maintaining your home, it will deteriorate over time and so will your net worth. Even a deeply discounted foreclosure is not really a great deal if you cannot afford to maintain it. 


4 thoughts on “Millionaire Rule 1.49”

  1. We were 1.89 on our house. Question: what is the average age that the millionaire next door buys a home? Is there any information on living style pre-home ownership? I ask this in order to provide guidance to a niece moving out of her parents house. Is the there a ratio of annual rent to annual income? Would be interesting to learn more about the millionaires next door before they were in the mature cycle of their lives.

  2. Just purchased our first home, with cash (The 100% down plan). Prices are so depressed in Arizona that we were able to pick up an excellent condition, well constructed newer home for a fraction of the cost it would require for the same home. Ratio was .63 cost/income.

    Well done, Mr. Zelen!

  3. I just did the calculation and our cost/income ratio when we first bought our house was 1.75. We were comfortable there and now, we live in a much bigger (but paid for home). However, we are naturally gravitating toward downsizing and our target home has a cost/income ratio of about 1.78. Interesting after 21 years, we are most comfortable at a similar ratio! We can certainly afford our big home but don’t like all the ‘expectations’ that come with a bigger home in a “nicer” neighborhood.

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