Wednesday, March 22, 2006

Are You Wealthy Enough? Equation for Determining If You're as Wealthy as You Should Be

I really love the Stanley/Danko series of "The Millionaire Next Door" and "The Millionaire Mind." Both authors provide a useful equation for people to determine if they're wealthy relative to their income.

Equation (From: page 13, "The Millionaire Next Door"): "Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be."

I forget where they mention it, but people that exceed this are considered "prodigious accumulators of wealth." While, I believe passive income is a more powerful indicator than actual wealth, I continue to use the above equation as our running benchmark for wealth.

Use of the above equation for my wife and I yields a required net worth of $400,934.60. While we're not there yet, we'll get caught up with this variable benchmark within the next 5 years. Kind of hard since I started over after a divorce in early 2003, and the wife was also starting, financially, from a low point.


Rob Walling said...

This is a great formula.

The authors of MND take it one step further and say if you have twice as much wealth as that calculation then you are a PAW (Prodigious Accumulator of Wealth), and if you have half as much then you are an UAW (Under-Accumulator of Wealth).

If you haven't read Millionaire Next Door I can't recommend it enough. Tons of insight based on years of research and scientific studies.

-- - Social Personal Finance

nschock said...

I guess that makes me a UAW, but I'm trying to get to the PAW level. I agree with both of you. Those two books are tremendous and are required reading for anyone interested in increasing their wealth.