Are You Wealthy? Here’s a Test
By Pinyo • Jul 27th, 2007 • Category: Personal FinanceTo many people, wealthy means having an abundance of material possessions. Wealthy people are those that own big houses, luxury cars, yachts, expensive watches, etc. But is that really wealthy?
For me, I would consider myself wealthy when income from my assets can cover all my family living expenses and a few luxuries. There is no magic number. But when both my wife and I can choose to live without working, that’s when we are wealthy. However, we do have a short-term goal of having $1 million of assets excluding home equity by 2017.
How are you measuring up?
From The Millionaire Next Door by Thomas Stanley and William Danko, you net worth should be:
Net worth (or Assets - Liabilities) = your age X your pre-tax income / 10
If you have twice that, you are indeed on your way to become wealthy! Stanley and Danko call them Prodigious Accumulator of Wealth or PAW
I did a quick calculation yesterday in my beat up 98 Ford Contour, and our net worth should be about $345,000 according to the formula. Right now, we have about $730,000 including home equity. This mean we are a pair of PAW! Here is a good post by Gather Little By Little that shows you how to determine and track your net worth.
Before I end this post, I want to leave with you a quote from The Millionaire Next Door:
“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high.”
Thanks for the link! Wish I was PAW…someday
Can’t say enough about the book though, gives you a complete different perspective on being wealthy.
Yes, the book is good and I highly recommend it. It definitely provides you with a different perspective. Nice post on your site
The formula breaks down badly at low incomes. It says a 50 year old earning $10,000 per year should be worth $50,000.
Ya really think so?
@Minimum Wage - You win the prize…I’ll let Pinyo pay you ;-).
You actually stumbled on one of two flaws with the formula. If you look in detail at the surveys done in the book, they are mostly middle-aged people. The formula really breaks down with younger people coming out of college (High Salary, no savings, home, student loans, etc) and with older/retired people with low net incomes (the problem you found).
It’s really more of a rule of thumb. A more accurate way to really gauge your net worth is to look at median and average net worths of people in your age bracket. Liz Pulliam Weston has a good article on this
Of course the problem with comparing to your peers is that in general, most people’s net worth is not where it should be, so the median numbers are really lower than I feel they should be, while the PAW formulas are probably higher than is truly realistic for most people.
Good catch
glblguy - thanks for nice link. It’s a good counterpoint. I love good counterpoints.
glblguy - actually, there’s a popular site i’ve seen linked to several pf blogs, where you can look up the median net worth for people of (a) your age or (b) your income.
That also can give perverse results. Based on my income, my net worth (the median) “should” be $1,100. For my age, my net worth should be some really huge number. Which number should I believe?
Minimum - I think the question you should ask yourself (despite what other people have to say) is do I have enough money to retire or do I have to work the rest of my life?
Another rule of thumb, if 5% of your current net worth can cover 1 year expense. You should have enough to retire assuming you will be able to invest the remainder of money and continue to grow it.
Thanks for this post! The problem with all these external measures is just that … they are external. If that’s what you want, Networth IQ has a free tool that helps you measure your own Net Worth [ here's my GENUINE entry on their site: http://www.networthiq.com/people/7million7years ] and then compare it to others.
But, the real definition of wealth is how much YOU need to live off (indexed with inflation) for the ‘life of your dreams’ … your real dreams (for most people that doesn’t require a Ferrari and a Lear Jet).
Multiply that by 40 (to be 99% sure your money will last as long as you do) … if you have that, congratulations, you are RICH. Simple and accurate … for you.
AJC