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Richie Rich or O Henry?
September 21, 2012 11:15 AM   Subscribe

How many millionaires are self-made? The commonly repeated statistic, apparently from The Millionaire Next Door, is that only 20% of millionaires came from millionaire upbringings - which is then used to argue that class privilege doesn't really exist in America, and if you only work hard enough... I can slice that argument up easily enough (many of those millionaires are doctors, for instance, who rarely come from underprivileged households). But how many millionaires really are self-made? I can't find a source with data to back it up (other than quotes from that book, which I don't have, and so I don't know if it backs up the claim or not).
posted by IAmBroom to Society & Culture (21 answers total) 9 users marked this as a favorite
 
Firstly, you might be interested in inter-generational income mobility. That is, how much our parents income determines our own. For the United States, the level is quite high, meaning that high income people are more likely to come from high-income homes. There are some great statistics out there if you search under this term, showing what percentage of each fifth (from richest to poorest) today was born in each.

Next, thinking about this rationally, there are far more millionaires toward the lower end (that is, with a little over a million) than there are at the upper. However, inflation means that a million today was worth less than it was yesterday. If we think of a 50 year old with $5,000,000 dollars, their parents would have only needed about $700,000 when they were born (1962), to have the same worth. Most millionaires are neither born with it, nor self-made, but rather made by inflation.
posted by Jehan at 11:29 AM on September 21, 2012 [3 favorites]


Please define the term "self-made."

For what it's worth, becoming a millionaire is easier than you might think. Saving $2,000/month at just over a 5% interest will get you there in 40 years, even accounting for a 3% rough historical average inflation rate.
posted by saeculorum at 11:29 AM on September 21, 2012


To clarify the inflation comment, my inflation adjustment is to become, in 40 years, a millionaire at today's dollar value (that hypothetical person would actually be a more then a millionaire, with a balance of around $3M).
posted by saeculorum at 11:30 AM on September 21, 2012


To reiterate that being a millionaire is probably easier than you think it is (and that there are many more at the lower end of the cut-off), a million dollars in assets can reasonably be expected to generate about $50K a year in income. The owner of a store that generates $50K in annual profits can probably be considered a millionaire in this sense. That store owner probably works fairly hard, and likely isn't burning up $100 bills to light his Cuban cigars.
posted by chengjih at 11:36 AM on September 21, 2012 [1 favorite]


But how many millionaires really are self-made?

Do you accept the definition of "came from millionaire upbringings" or not? If so, surveys tend to be in line with the claims made in The Millionaire Next Door.

If you're concerned primarily about class mobility, then there is plenty of data to show that the US has much less class mobility than its peer nations.
posted by deanc at 11:37 AM on September 21, 2012 [2 favorites]


This question is very unclear for many reasons.

We could argue forever about what it means for your entire fortune to be "self-made." You could argue that there's no such thing: you're always building on what you've inherited from others in a way that's not to your credit (or blame), no matter how rich/poor your upbringing was.

The definition of millionaire is controversial. The definitions vary so widely that estimates of the number of millionaires in the US range from 3 million households to 9 million households to 16 million individual millionaires.

Also, what's the geographic scope of your question? There are statistics on millionaires throughout the world.

If what you're really interested in is not so much of a parsing of the term "millionaire" and more of a reasoned analysis of the degree of economic mobility in the US as opposed to other developed countries, I recommend this blog post by Tyler Cowen, with 7 different points to think about. He gives many reasons to be skeptical of definitive-sounding claims that it's easier to move up the economic ladder in Europe. For instance, economic mobility statistics don't necessarily take into account the pre-immigration income of immigrants (point #7). Also, Cowen makes another point (#5) that's relevant to how you've framed this question:
How much of immobility is due to “inherited talent plus diminishing role for random circumstance”? Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.? What are you supposed to get when you combine genetics with meritocracy? I do not know how much of current American (or other) immobility is due to this factor, but I find it discomforting that complaints about mobility are so infrequently accompanied by an analysis of this topic.
To apply that to the original question, you seem to be leaping to the conclusion that if having millionaire parents is correlated with becoming a millionaire, then you must have become a millionaire simply through your arbitrary unearned "privilege." That doesn't follow, at least not until you do a lot more explaining of your underlying assumptions. Why would you rule out the possibility that the correlation could be explained by the fact that the millionaire parents legitimately earned their wealth through whatever combination of nature and nurture made them act the way they do, and that they then passed on their genes and values and so on to influence their children to act in the same ways that tend to lead to high earnings?
posted by John Cohen at 11:49 AM on September 21, 2012 [4 favorites]


Hmmmm ... it's kinda a difficult question.

Here's why ... I'm from Sydney, Australia, which is on dollar for dollar parity with the USA.

If I look at MR Average Middle Class at the age of retirement (65) far more than 1 in 5 are millionaires ... between their house and their retirement plans.

If we backdate this "current $1m value" by adjusting for inflation, to their parents retirement time, you know what ... so were most of their their parents.

My gut feeling is that a fair proportion of the middle class are effectively millionaires at retirement (where they are retiring in the last decade) in assets, savings, and retirement plans. It also helps that they will inherit from their parents as well, but many would be there anyways, or pretty close.

Millionaire is not such a big thing ... If you are there at 30 that is a big thing ... but a surprising proportion of the middle class will get their on their own steam thanks to inflation, savings, retirement plans, investments, the family home, and eventually, inheritance from their parents.
posted by jannw at 11:56 AM on September 21, 2012 [2 favorites]


This is somewhat of a vague question. As the economy expands, there's more wealth to go around, and the ranks of the millionaires expand. In a vague, back-of-the-envelope calculation, say that the size of the economy doubles every 20 years (economic growth of 3.7%), so every 40 years, there will be approximately 4 times as many millionaires as there were before, 1/4th are part of the "original" group from 40 years ago, and 3/4ths are "new" ones. That certainly gives a back-of-the-envelope estimate that the statistics from "the millionaire next door" are plausible.
posted by deanc at 12:01 PM on September 21, 2012 [1 favorite]


I've read TMND as well as the more detailed The Millionaire Mind by the same author. The research is starting to become dated but there are enough principles that are still valuable gems. Stanley didn't write the book as a self-help guide, so it is important to keep this in mind when reading it because so much of financial writing is done for that purpose.

The big surprise, at the time, was that the perceived lifestyle of the rich was quite different from reality. They live in modest homes, drive older cars and keep a household budget. Very few inherited a significant portion of their wealth and they generally didn't hold degrees from exceptional schools. Some of this has become common wisdom but in the late 80s there were some real bomb shells in there.

My sense is that there is a level of wealth where the self-made ethos of the study no longer apply. As others point out, a million isn't that big of a deal. It is more net worth than many will attain, but in terms of social mobility we might as well be talking about self-made thousandeers.
posted by dgran at 12:35 PM on September 21, 2012 [1 favorite]


Do you define "self-made" to allow that their fortune was created thanks to the labor of employees, associates, partners, etc?
posted by Thorzdad at 1:29 PM on September 21, 2012 [2 favorites]


"self-made" pretty clearly means "a substantial portion of the million+ was not directly inherited (as cash or in kind) from a family member", in this case.
posted by downing street memo at 2:19 PM on September 21, 2012 [2 favorites]


My dad was one of ten kids (seven boys and three girls) and his family grew up pretty poor. At some point, one of the brothers decided to become a chiropractor. One by one, the rest of the boys in the family decided that they wanted to be chiropractors too, so they went to medical school (except for one, who was deceased).

Since that time, another 9 or 10 of their kids have become chiropractors, so there are approximately 15 chiros in my family.

I don't know how many of them would qualify as millionaires if you were talking about liquid assets, but they're all pretty well-off. And they did it themselves - they chose to pursue a career that would make money.

The idea that a person can go from low-income to high-income using nothing but their own hard work is evident in my family, and I'd guess that it happens a lot more often than we think.
posted by tacodave at 2:52 PM on September 21, 2012 [1 favorite]


"self-made" pretty clearly means "a substantial portion of the million+ was not directly inherited (as cash or in kind) from a family member", in this case.

The OP seemed to discount anyone who didn't come from "underprivileged households" from being "self made", so the question became sort of ambiguous.
posted by deanc at 2:56 PM on September 21, 2012


deanc: The OP seemed to discount anyone who didn't come from "underprivileged households" from being "self made", so the question became sort of ambiguous.
No, you're misreading me. I meant, "Even though doctors make up a substantial portion of millionaires, and they have (presumably) earned their money - they are not mere trust-fund babies - they still rarely arise from the poorest families. That is, moving from the upper-middle-class to the lower-upper-class is far more common than rising from rags to riches."

As for the varying definitions of "millionaire" - any definition at all would do, if there were data available about their parents' economic status.

And before anyone adds a silly moral edge to this... "earned" means you acquired the money through your own decision-making processes, instead of merely inheriting. Investments, professional work, rental income, drug-running... You know, the usual paths to wealth.
posted by IAmBroom at 8:20 PM on September 21, 2012


Thorzdad: Do you define "self-made" to allow that their fortune was created thanks to the labor of employees, associates, partners, etc?
Obviously I'm interested in more than just counterfeiters and Treasury workers.
posted by IAmBroom at 8:22 PM on September 21, 2012


chengjih: The owner of a store that generates $50K in annual profits can probably be considered a millionaire in this sense.
Unless that person has $1,000,000 in the bank, or sells their business for $1,000,000 (after taxes), no one would consider them a millionaire. That's a ridiculous straw man.
posted by IAmBroom at 8:23 PM on September 21, 2012


tacodave: The idea that a person can go from low-income to high-income using nothing but their own hard work is evident in my family, and I'd guess that it happens a lot more often than we think.
I'm happy for your family, but the plural of anecdote is not data. In fact, it's the opposite of data in this case: misleading small samples that pretend to represent a huge quantity of unrelated events.

This is exactly the sort of "Well, X did it, so everyone else can, too! Quit your whining, loser!" argument that too many people rely on, instead of data, to make their economic arguments seem reasonable.
posted by IAmBroom at 8:28 PM on September 21, 2012 [1 favorite]


deanc: This is somewhat of a vague question. As the economy expands, there's more wealth to go around, and the ranks of the millionaires expand. In a vague, back-of-the-envelope calculation, say that the size of the economy doubles every 20 years (economic growth of 3.7%), so every 40 years, there will be approximately 4 times as many millionaires as there were before, 1/4th are part of the "original" group from 40 years ago, and 3/4ths are "new" ones. That certainly gives a back-of-the-envelope estimate that the statistics from "the millionaire next door" are plausible.
OK, that's an excellent point. I would use 20 years - one "generation" - not 40, but still that means all those children of $500k families who grow up to be about as successful as their parents were will become millionaires, de facto. And, as Jehan points out,
Next, thinking about this rationally, there are far more millionaires toward the lower end (that is, with a little over a million) than there are at the upper.
Combine this, and you have a substantial portion of millionaires who are essentially inflationary millionaires, despite having come from "non-millionaire" backgrounds. It's unlikely to be anything like 80% - a doubling implies at most 50%, since some of those $500k-aire children will lose real wealth over their lives - but a large number nonetheless.
posted by IAmBroom at 8:39 PM on September 21, 2012


John Cohen: To apply that to the original question, you seem to be leaping to the conclusion that if having millionaire parents is correlated with becoming a millionaire, then you must have become a millionaire simply through your arbitrary unearned "privilege." That doesn't follow, at least not until you do a lot more explaining of your underlying assumptions. Why would you rule out the possibility that the correlation could be explained by the fact that the millionaire parents legitimately earned their wealth through whatever combination of nature and nurture made them act the way they do, and that they then passed on their genes and values and so on to influence their children to act in the same ways that tend to lead to high earnings?
Sorry, I shouldn't have ruled that out with my phrasing. Nonetheless, I am primarily interested (for the purpose of this Ask-Metafilter question) in finding data to verify or invalidate the "80% are self-made" claim that websites seem to parrot.
posted by IAmBroom at 8:43 PM on September 21, 2012


Late to the party, but the rule of thumb from a source in Great Britain that I cannot pin point for you is that it takes 3 generations to make it big and three generations to spend it all. Not a lot of mobility in that.
posted by ptm at 2:30 AM on September 24, 2012


ptm: Late to the party, but the rule of thumb from a source in Great Britain that I cannot pin point for you is that it takes 3 generations to make it big and three generations to spend it all. Not a lot of mobility in that.
Again, a "rule of thumb" is mere anecdotal evidence. I'm looking for data.
posted by IAmBroom at 9:57 AM on September 24, 2012


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