To 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.
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! However, this calculation only works well if your income has been steady. For that reason, it’s probably better if you substitute “Your pre-tax income” with your average pre-tax income from the past 5 years.
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.”