Are there still ‘millionaires next door’?

By Helaine Olen
October 16, 2013

It’s time to write the elegy for The Millionaire Next Door.

When Thomas Stanley and William Danko published their best-selling book in 1996, they made much of the statistic that “80 percent of America’s millionaires are first-generation rich.” The majority, they pointed out, were entrepreneurs, many working in blue-collar professions.

Anyone could make it big, the two authors all but proclaimed; all you need is frugality and a few tax breaks. Don’t live in a pricey home. Put a cork in the Cabernet, and pop a Coors instead. But most important, open your own business. When it came to the secret sauce for scoring a million bucks, “a very big factor is self-employment,” Stanley said.

The ensuing years have not been kind to the working-class millionaire.

A little-noticed marketing report released last month by U.S. Trust contained the disturbing statistic that while almost a third of Baby Boomers worth more than $3 million claimed to have grown up in lower-middle-class homes, the number fell precipitously for younger cohorts, with 18 percent of Gen Xers and a mere 6 percent of such Millennials saying they came from working-class stock.

And when business owners were studied separately, two-thirds of the Baby Boomer group described their family of origin as lower or middle-class. Generation Y? A mere 12 percent.

In a nation that prides itself on its class fluidity and entrepreneurial spirit, this is just the latest sign that our engines of social mobility are, to borrow a cliché from the blue-collar automotive repair profession, stalling out.

How could this happen? Well, when Mitt Romney proclaimed twentysomethings should “borrow money from your parents” in order to get ahead, he gave the game away.

In the modern American economy, it takes money to make money — an obvious conclusion of anyone reading a 2012 Pew Charitable Trusts study, which found that less than 5 percent of people born into families whose household incomes ranked in the bottom 20 percent of the population earned top incomes as adults. “The rags-to-riches story is more often found in Hollywood than in reality,” the report dryly noted.

Kickstarter can’t compare to the bank, or at least The First Household Bank of Mom and Dad, when it comes to funding fledgling self-started efforts. Most beginning stage entrepreneurial endeavors need personal savings or money from friends and family to survive, since “professional investors and banks are not likely to invest in businesses until they see a strong path to profitability,” as a 2012 study on entrepreneurship in the United States by the Global Entrepreneurship Monitor at Babson College put it.

It should therefore come as no surprise to discover that any number of our most recent rags-to-riches success stories should instead be considered riches-to-even-more-riches sagas, with parents coming in to save or start the day. Chipotle’s Steve Ells, for example, was able to open and expand his gourmet burrito stand near the University of Denver’s campus into a fast causal empire thanks, in part, to an $85,000 combined loan and investment from dad.

And it’s not just money. The upper-middle classes can pass on a more elite sort of aid. Think about social capital, the doors high-powered acquaintances can open up for children of friends. Tumblr founder David Karp was no bored high school dropout. He was, instead, a connected one, whose mom was able to get him an internship at an online animation company because, as the New York Times reported, the founder’s “wife was friendly with Karp’s mother.”

Studies of Silicon Valley back up the anecdotal evidence Karp’s ascent supplies. When data outfit CB Insights studied venture funding, they found the majority of recipients were based in California, New York and Massachusetts. This should come as no surprise. The venture capital industry itself is no triumph of classless meritocracy, with the National Venture Capital Association determining in 2011 that more than half of those working in the field they surveyed had attended one of ten prestigious higher education institutions. Tied for first place? Harvard and Stanford Universities.

And if you are wondering who is attending such elite schools, all you need to know is that a calculation done by the Harvard Crimson in 2011 concluded that 45 percent of all undergraduate students then in attendance came from families where the annual household income was in excess of $200,000. So much for social theorist George Gilder’s 1990 assertion that “most of the progress in the world and Silicon Valley” comes from the “genius and sweat of the outsider.”

Finally, if a lack of parental investment won’t stop a would-be millionaire next door, it’s likely our nation’s ongoing student loan crisis will. The amount of debt per student with loans is $28,000 for graduates of the class of 2013 (Fidelity Investments claims $35,000 if you count credit card bills and loans from parents). Faced with a tab like this, at least some members of Generation Y have understandably concluded they can’t afford to take on much in the way of financial risk. A survey earlier this year by a group called Young Invincibles found 23 percent of those with private student loans claiming they would like to start their own entrepreneurial endeavor, but that the amount they need to pay back to less-than-flexible lenders is stopping them.

To be fair, it’s likely The Millionaire Next Door always underestimated the impact of parental support. Even though Stanley and Danko wrote that their millionaires did not offer their adult children homegrown financial aid, the better to encourage financial independence, they admitted that they did often pay for such extras as private schooling, something that many of us would consider both a valuable educational and networking assist. Sure, they might have neglected to mention their exact net worth to their sons and daughters, but there was little doubt the kids were getting a boost thanks to the parental kitty.

All too often, it seems, the most middle-class thing about many wealthy Americans is their insistence that they are still a part of it.

But at least once upon a time, our millionaires could at least plausibly claim to have once been part of the great middle. For the younger generations, that’s increasingly no longer the case.

The Millionaire Next Door 1996-2013. RIP.

PHOTO: Stacks of one hundred U.S. dollar banknotes, August 11, 2011. REUTERS/Jo Yong-Hak


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One significant obstacle that nobody wants to talk about is a tax code that is tilted against small business. In Wisconsin (a fairly average state in most respects) a self-employed individual who makes $100K a year faces the following marginal tax rates:

Federal – 28%
State – 6.5%
Self-Employment Tax – 15.3%

That means if this persons earns one more dollar, they will pay 49.8% in taxes on that dollar.

Compare this to someone like Paris Hilton, who might collect $5 million every year from dividends while spending her life sitting by the pool. She would pay a marginal rate of about 30%, up from about 20% a year ago.

Posted by RogerMKE | Report as abusive

OK, please let me know how many baby boomers made even $500,000 before they were 35.

I don’t think it is that surprising that almost every Gen Y that has $3+ comes from a wealth family. If you come from a lower income family it takes time to make money. The truth is that plenty of those Gen Y with huge student loan are still from upper income families. It is rare for anyone to be rich under 35 with out a ton of luck even if you have a rich family & have a good idea for a start up.

Posted by slotowner | Report as abusive

So the American Dream is slowly becoming exactly that. I think it is time for a 70% estate duty. Sure, you can get rich in your lifetime, and sure you can pass some onto your kids, but society trending towards royalty and peasants can only end badly.

Posted by BidnisMan | Report as abusive

70% estate duty? You have got to be kidding. How about eliminate the death tax. Why on earth is society entitled to what someone else earned. If you earn the money you should be able to do whatever you want with it.

The above article’s whole millionaire next store angle is severely flawed. As the author even states, the whole idea of the book is that despite what may not be a great income, if you don’t blow your money, save, spend frugally, and invest wisely, that OVER TIME wealth will accumulate.

The book never talks about how anyone can get rich within a few years. Young rich people do not get rich by utilizing the methods that book talk about.

Most millionaires are not young. 50 years from now most millionaires will be older people who spent a lifetime acting frugally, just like today.

Yes, I know that’s bad news for those who blame the “rich” for their financial hardships. It’s always easier to drum up support for ludicrous measures like a 70% estate duty than to actually make something happen yourself.

Posted by hwalrus | Report as abusive

BidnisMan – I think that the constitution prohibits the 70% estate “duty”. It protects property from people and governments who think that they have the right to what’s not theirs.

Also, as a note, if you took 100% of all of the wealth of the billionaires in the US ($5.4 trillion) you would dent our deficit by about 1/3 and still leave a structural deficit going forward. You would crash the economy and likely leave yourself unemployed as those people would likely leave the US and not bring their business back.

Ask the Venezuelans.

Posted by RmWBoston | Report as abusive

Missinginaction, there is no reason that tuition would increase if rates went down on student loans. The reason that phenomenon occurs in the housing market is that there is a fixed supply of housing in a region. In selective colleges, if applications double, the acceptance rate will halve to compensate. House pricing is affected by low rates because people have more of a budget and it is a price competitive marketplace. Colleges won’t change their tuition depending on how many people are applying or interest rates, etc…

Posted by rip214 | Report as abusive

I think the saturation/maturity of the US markets is also a contributing factor. As a market matures, there are less and larger players in it. Eventually they bump close to monopoly status and have to diversify (move into other markets too) or go international. This essentially closes that market out for entrepreneurs. Those giant players can normally crush any small startup fairly quickly. Yes, if they’re not paying attention they may have to buy it instead, making a new multi-millionaire but I think this contributes. So there are less markets that can produce millionaires. Markets that don’t have large players have so many small ones that competition is extremely tough and margins extremely low. Like a pizza shop. But even those have to worry about franchises. I guess I’m saying that the USCA’s current form of capitalism has change since the 50′s and now the entire system works against the common entrepreneur. @RogerMKE already pointed out that our system of taxation does to.

Posted by tmc | Report as abusive

Very nice post Helaine. I miss Chrystia’s writing on financial matters and hope you will pick up the torch here.

As to the crux of your piece, I agree. The American Dream has been shrinking for some time. A sign of a maturing society perhaps or just a normalization from the unnatural growth we experienced after World War II when most of the industrialized world was temporarily blown to smithereens.

I would definitely be in favor of a significant death tax as a tool to claw back capital into society for education and infrastructure. If we let let middle class die we do America’s future great harm.

Posted by ltcrunch | Report as abusive

@ltcrunch, the death tax, r inheritance tax, is really a complicated issue. I agree that something needs to stop the formation of family dynasties. We certainly do not need any more Paris Hilton’s running around. But we also don’t want to see very large corporations in jeopardy of having to be dismantled due to a death. Not all are public you know. Also, for a family run business of say 5-10 million, should the family members be forced to sell or dismantle the company just so they can pay the tax? Let’s not rush into this one. It can cause far more damage than people think.

Posted by tmc | Report as abusive

[…] and most likely weren’t swept up by Obi-Wan Kenobi.This is further substantiated by the fact that >80% of new millionaires are first generation millionaires. Nobody gave them everything they wanted, and they weren’t born with […]