A recent newspaper headline proposed that “the best way to get rich is the stock market.” Building wealth via stocks or other investments is akin to growing trees. You can’t grow oak trees if you don’t have enough money to buy acorns. So, suggesting that the stock market leads to wealth is putting the cart before the horse. It is not just about being frugal. Frugality has its limits. Some people misread the material in The Millionaire Next Door. In the book, I mention that most Americans are not wealthy. This is especially interesting among those who earn incomes in the good to great categories: “many of these people live from paycheck to paycheck. These are the people who will benefit the most from this book.” So in essence the book is designed to help those who make better than an average living.
The probability of becoming a millionaire is quite low for those who generate low levels of income. The median household income in America is about $50,000. With this level of income, a married couple with 3 childlren would have an extremely difficult time becoming a millionaire. Remember that 90% of millionaires are college graduates, and there is a high correlation between income and education. Of the thousands of interviews that I have poured over during my career, one of the most interesting is about a multi decamillionaire who expressed how most millionaire next door types feel. He admitted making money in stocks, commercial real estate, cattle, oil fields, even high grade antiques and precious metals. Yet he eloquently summed up what most millionaire next door types believe:
. . . hard to be knowledgeable on a great many [investment] topics. The best thing that I have done has been my own business and to be as good as I can in that. That’s the mother lode that supports everything else.
In other words, the major league revenue generated from his business funded all of his other investments. The self employed in America have 4 to 5 times the net worth of those who work for others. But self employment does not automatically translate into big income and wealth. Consider the following. Of the more than 23 million small business owners who are self employed sole proprietors, their average annual net income was only $11,637.
Of course income varies considerably across industries. For the 95,369 dental offices that income was $100,603. Contrast this with the nearly 400,000 people who own restaurants and/or drinking establishments. Their net income was only $3,814 from a gross of $111,075. Selecting the right business is a major factor in explaining profitability and ultimately wealth.
In both The Millionaire Next Door and The Millionaire Mind, I list the types of businesses owned by the millionaires surveyed. These businesses run from the “dull normal” to the very unique. As an example, on p. 256 of The Millionaire Next Door, column 1, item 29 under Businesses of Self Employed Millionaires, you will find ‘”bovine semen distributor.” Interestingly this business category was recently mentioned in a Wall Street Journal article:
. . . Julio Moreno, of Oakdale, Calif., has a freezer full of the bull’s semen that sells for at least $3,000 per unit.
If asked how he became wealthy, would Mr. Moreno say stocks or bull semen?