I just found my old copy of The Millionaire Next Door, a book which found that, contrary to popular belief, most millionaires actively live in modest neighborhoods and drive common cars like the Ford F-150 truck. Flipping through it, I remembered that it also provided a target as to what your net worth “should” be:
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.
If you don’t have any significant inheritances, this boils down to:
If you are near this target, you are an average accumulator of wealth (AAW).
If you are less than half your target, you are an under-accumulator of wealth (UAW).
If you have more than double this target, you are an prodigious accumulator of wealth (PAW).
I’ve never liked this formula. The main problem I see with this rule of thumb is that it is linear with respect to age. This makes it pretty harsh on younger people, especially those who are just starting out.
Someone who is 25 and makes $40,000 a year is supposed to have a net worth of $100,000. If you got a job at 21, you’d need to have both graduated with zero student loan debt and saved up $25,000 each of the last 4 years. That’s barely even possible after taxes. But if you went to say, law school, and just graduated at 25 making $90,000 a year, you’re supposed to have $225,000 saved up right out of the gate?
Let’s do our target, roughly: 29 x 200,000 / 10 = $580,000. Whew, we are serious under-accumulators!
By Jonathan Ping | Goals | 9/9/07, 6:23am