Avoiding Poverty and Creating Wealth in America

America is still the land of opportunity. Over the past thirty years, I have consistently found that 80 to 85 percent of millionaires are self-made. There is great pride, joy and satisfaction to be derived from building one’s own fortune. Countless millionaires have told me that the journey to wealth is much more satisfying than the destination.

The Millionaire Next Door, Thomas J. Stanley Ph.D.,
and William D. Danko Ph.D., 2010

Several decades ago, Drs. Thomas Stanley and William Danko wrote the seminal book, The Millionaire Next Door. More than four million copies of the book have been sold, and it continues to sell well today. Why? Because it not only debunks the myth that most wealth in the U.S. is inherited, but it also shows how wealth is created. The authors did comprehensive research on who the wealthy actually are in America and how they got there, surveying many thousands of high-net-worth households and conducting many focus groups.

This book should be required reading in schools, but sadly it isn’t. So do yourself a favor and get a copy and have your kids and grandkids read it. Before laying out the steps of wealth creation in America as presented in this book, let’s first look at how to avoid poverty in America.

Avoiding Poverty

According to official U.S. statistics in usafacts.org, 11.4% of Americans lived in poverty in 2021 — that is, 37.2 million people. The Great Society program, introduced by Lyndon Johnson’s “war on poverty” in the 1960s, has not achieved its goal of eradicating poverty. There are many reasons why some in America are poor, but one of the reasons, which is rarely mentioned, is that more than 59 million immigrants have come to America legally since 1965. Of these, only 45 million remain due to death or departures from the country. These immigrants represent over 13% of the U.S. population. Many of these people came to the U.S. with few assets and limited education, which led them to start their lives poor, in the lowest quintile of household income in the U.S. And even with the great social and income mobility in the U.S., some of these immigrant families still live in poverty. Regardless of the reasons, the fact nevertheless remains that more than 37 million people live below the federal poverty level.

Following are the three steps:

  • Graduate from high school.
  • Get a job (any job) and stay employed.
  • Get married (and stay married), and wait to have kids until you are past 21.

How does one avoid poverty in the U.S.? Two think tanks, with very different political worldviews, have come up with the same solution. One of the organizations is the left-leaning Brookings Institution, and the other is the right-leaning Heritage Foundation. The steps they outline, which are empirically based, almost guarantee that individuals who follow them will avoid living in poverty. This applies regardless of race, ethnicity, sex, and religion.

There are obviously many people who are able to overcome the daunting obstacles of dropping out of high school, or being raised in a single-parent family, and do well. But the odds are against them. These three rules will help almost everyone who follows them to avoid poverty in America.

Creating Wealth in America

According to recent statistics, there are approximately 22 million millionaires in the U.S. (In this definition, a millionaire is a household with a net worth of $1 million, not an annual income of $1 million.) These millionaire households represent approximately 9% of adults in the U.S. And, roughly 5.6 million U.S. households have a net worth of over $3 million. How did they achieve this? As mentioned in the quote at the beginning of this commentary, more than 80% of millionaires did not inherit their wealth; they are first-generation rich. What is the single biggest factor in creating this wealth?

The single best way to build wealth is to live well below one’s means. This translates into a lifestyle of saving and investing, rather than one of conspicuous consumption. Frugality is the cornerstone of accumulating wealth. The authors of The Millionaire Next Door provide a portrait of the typical millionaire:

  • 57 years old, married, with three children
  • Twothirds of the millionaires are selfemployed or entrepreneurs who have created their own businesses
  • The majority of spouses do not work outside the home
  • 97% are homeowners
  • 80% did not receive an inheritance nor did they feel disadvantaged by this
  • Drive inexpensive, older cars (often preowned)  
  • Welleducated (over 80% have a college degree, and many have graduate degrees)
  • Work more than 50 hours a week
  • Save and invest nearly 20% of household income annually
  • Invest in the stock market (often have more than one brokerage account)
  • Spend heavily on education for their children

Self-Made Millionaires Live Frugally

The authors of The Millionaire Next Door label those who live frugally and whose behavior reflects economy in the use of resources Prodigious Accumulators of Wealth (PAWs). Their neighbors often are not aware that these PAWs are millionaires, because they appear to be nondescript, middleclass, hardworking folks. They have been married to the same spouse for decades and live in relatively modest homes. They wear offtherack, inexpensive suits, not custommade clothes, and they shop at places like JCPenney and Jos. A. Bank. They rarely spend more than $200 on shoes, and their watch of choice is a Seiko — not a Rolex. Often, PAWs continue to clip coupons from local newspapers even after they have accumulated significant wealth. They do not have a multitude of credit cards — usually just Visa, Mastercard, or American Express. They budget and plan, and they save and invest a high proportion of their income. Living this way for several decades, PAWs become millionaires.

What is the Lifestyle of Under Accumulators of Wealth (UAWs)?

Popular culture, Hollywood, and the media glamorize a lavish lifestyle: large houses, flashy new foreign cars, designer clothes, and expensive watches and jewelry. In short, conspicuous consumption to project an image of social prominence by appearing to have a high income and significant wealth. In The Millionaire Next Door, these people are labeled Under Accumulators of Wealth (UAWs). Most UAWs need immediate gratification. 

UAWs are often those who have worked hard and succeeded in their chosen career. Accordingly, they earn a relatively high income but spend almost all of it. They own a nice home in an upscale neighborhood, but it is usually financed by a large mortgage. They are typically members of several socially prestigious clubs. They drive classy cars, leased or purchased new every few years, and everyone in the family wears expensive clothes. Their children often attend private schools which the UAWs have difficulty affording. The result: UAWs save little. They have few investments. In fact, many own no stocks or bonds. UAWs are possessed by their possessions, according to the authors of The Millionaire Next Door. Their motivations are focused on things — on symbols of success rather than on accumulating wealth for a rainy day or passing it on to their kids. They generally do not budget or have a financial plan. They will not become the millionaire next door. And, in fact, they have difficulty even contemplating retirement. The motto of the UAW is: I earn to spend. Based on their interviews with many UAWs, the authors offer a number of case studies of UAWs. The most common profile is a very competitive person who has grown up in a family with very modest means and who needs to demonstrate his or her success to others. Hence the pattern of conspicuous consumption and the absence of accumulated wealth.

What Do the Self-Made Millionaires Do?

According to the authors, Drs. Stanley and Danko, most millionaires are business owners, including self-employed professionals. Twenty percent of affluent households are headed by retirees. Of the remaining eighty percent, more than two-thirds are headed by self-employed owners of businesses, including professionals such as physicians, attorneys, engineers, architects, accountants, and dentists. The types of businesses which are owned by these PAWs are varied, but many are in industry, construction, maintenance, and retail. As The Millionaire Next Door was written several decades ago, the book does not capture the many successful businesses in the fields of technology, computers, and software programming, which also spawn millionaires. The important takeaway here is that the chances of accumulating significant wealth are best as a self-employed owner of a business or a professional in an association. It is certainly possible to become a millionaire working for a fast-growing corporation which showers employees with stock grants and options, but this generally only happens when one works for a company at a favorable moment in the industry’s lifecycle.

How to Achieve Wealth for the Retirement Years

Albert Einstein once said, “Compound interest is the eighth wonder of the world.” The classic example of this is the $24 which Peter Minuit paid for the island of Manhattan in 1626 in what is often seen as a one-sided trade in favor of the Dutch. Compounded at an interest rate of seven percent, the current value of this $24 over the 397 years since Manhattan was purchased is over $8 trillion. Not such a one-sided trade after all. How does compound interest play out in accumulating wealth for retirement? The annual total return of the S&P 500 Index since it was created in 1926 has been approximately 10%. In other words, the compound annual growth rate of this broad index of the U.S. stock market is 10% over the 96 years since the Index’s inception.

If the S&P 500 Index can maintain its growth rate of 10% in the future, it will double every 7.2 years. What does that mean for those seeking to accumulate a nice nest egg for retirement? Invest $20,000 in a 401(k) by the age of 30, and this sum will exceed $1,280,000 in 42 years, if invested in an S&P 500 Index fund. Naturally, this assumes that the Index continues to compound at 10% annually for many decades. Or, even better, invest in a Roth IRA, which allows withdrawal over the age of 59½ without the payment of income taxes. Another way of achieving a similar result is to invest $1,000 a year in the S&P 500 Index for 50 years, starting at age 21. At age 71, the nest egg will exceed $1,000,000 (assuming the S&P 500 compounds at 10% for this period).

Is it likely that the S&P 500 Index will achieve a compound annual growth rate of 10% for the next 50 years? It is true that we have many challenges facing us today. Every day, America appears to be more bitterly divided. Almost every issue is the subject of extreme debate. Social media increasingly divides us rather than connects us. Another Cold War may be around the corner, with China, Russia, and Iran aligned against the U.S., Europe, and our other democratic allies around the world. War rages in Ukraine, and perhaps there will soon be armed conflict over Taiwan. But from 1926 through 2022, despite two World Wars, the Korean, Vietnam, and Middle East Wars, the Great Depression, 9/11, the Financial Panic of 2007-2009, COVID-19, and the resignation of one president and the impeachment of two others, the S&P 500 Index had a compound annual growth rate of 10%. As long as America remains a democratic nation with a free market economy, there is every likelihood that the future will resemble the past. It has never been wise to take a short position on America. At Bradley, Foster & Sargent, most of the stocks that we hold for our clients are in the S&P 500 Index. And owning these quality stocks for the long haul will continue to be our approach, as we believe that this is a tried and true way to accumulate wealth.

Robert H. Bradley

Rob serves as chairman of Bradley, Foster & Sargent. He is a portfolio manager and member of the firm’s investment committee and its board of directors.

Rob founded Bradley, Foster & Sargent with Joseph D. Sargent and Timothy H. Foster. Earlier, he was president and CEO of Boston Private Bank & Trust Company, which he founded in 1985, and he spent 14 years with Citicorp, including 12 years in Europe, the Middle East, and Africa. Previously, he served as an officer in the U.S. Navy in Vietnam.

Rob served for seven years on the board of governors of the Investment Adviser Association, the national not-for-profit association founded in 1937 that exclusively represents the interests of federally registered investment advisory firms.


Sign up to receive our latest insights

Back to all posts
Next post