"Millionaire Next Door" Net Worth Formula

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RoadHouseFan
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"Millionaire Next Door" Net Worth Formula

Postby RoadHouseFan » Sat Mar 18, 2017 10:08 am

It's a very handy rule of thumb for assessing one's net worth status.

orca91
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Re: "Millionaire Next Door" Net Worth Formula

Postby orca91 » Sat Mar 18, 2017 10:11 am

Are we just supposed to know what it is, or might you have a link or something? :wink:

RoadHouseFan
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Re: "Millionaire Next Door" Net Worth Formula

Postby RoadHouseFan » Sat Mar 18, 2017 10:17 am

RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%

orca91
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Re: "Millionaire Next Door" Net Worth Formula

Postby orca91 » Sat Mar 18, 2017 10:21 am

I'm right in line with my expected net worth then. I will have to like this formula. :happy

moghopper
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Re: "Millionaire Next Door" Net Worth Formula

Postby moghopper » Sat Mar 18, 2017 10:24 am

Here is a blog post from 2010 at Thomas Stanley's site.

http://www.thomasjstanley.com/2010/08/h ... ld-you-be/

He is pretty well aware of the limitations. Like any rule of thumb, use it as it was meant to be used. Don't try to find all the ways it doesn't work, and then tell everyone its terrible.

Those who are significantly younger than 57 should be aware of the fact that the Wealth Equation overstates what they should actually be worth.

I worry that given these overestimates of expected net worth young adults will throw up their hands in despair and quit saving and investing.

crazygrow
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Re: "Millionaire Next Door" Net Worth Formula

Postby crazygrow » Sat Mar 18, 2017 10:27 am

This doesn't work well if you have a huge rise in income over a few years (for me it was 4x).

MnD
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Re: "Millionaire Next Door" Net Worth Formula

Postby MnD » Sat Mar 18, 2017 10:32 am

Mid-late in my career I got a significant income boost right around when my wife went back to work at a decent paying job.
So overnight we went from millionaire next door net worth superstars to deplorable failures.
Because our economic position income-wise improved significantly. Go figure.

rabbitrun
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Re: "Millionaire Next Door" Net Worth Formula

Postby rabbitrun » Sat Mar 18, 2017 10:36 am

I'm 37 and so far off its kind of comical. :shock:

RoadHouseFan
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Re: "Millionaire Next Door" Net Worth Formula

Postby RoadHouseFan » Sat Mar 18, 2017 10:36 am

orca91 wrote:I'm right in line with my expected net worth then. I will have to like this formula. :happy


Agree!

Nova1967
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Re: "Millionaire Next Door" Net Worth Formula

Postby Nova1967 » Sat Mar 18, 2017 10:38 am

"So what if you didn’t start working until you completed an advanced degree, served in the military or were disabled? In such cases, you need to deduct those years from your current age when using the Wealth Equation. Again, if you haven’t reached your 50s, the Wealth Equation is likely to overstate what you should actually be worth."


In the article he says serving in the military is not working???
The military may not pay much but food, housing,medical is all provided for. I saved several thousand dollars by the age of 22 during my 4 years of military service.
Last edited by Nova1967 on Sat Mar 18, 2017 10:58 am, edited 3 times in total.

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whodidntante
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Re: "Millionaire Next Door" Net Worth Formula

Postby whodidntante » Sat Mar 18, 2017 10:41 am

rabbitrun wrote:I'm 37 and so far off its kind of comical. :shock:


To the upside, right? :moneybag

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whodidntante
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Re: "Millionaire Next Door" Net Worth Formula

Postby whodidntante » Sat Mar 18, 2017 10:46 am

RoadHouseFan wrote:
RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%


I'm ahead of it. But I overweight stocks, size, value, and EM. One economic shock and I'm behind it.

Walleyewhacker
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Re: "Millionaire Next Door" Net Worth Formula

Postby Walleyewhacker » Sat Mar 18, 2017 10:47 am

Yikes, left the *10% off the first try. When I actually do the math correctly, yeah, about where I should be. If I did this at 37, I would have been off, way off......where I should be.

tim1999
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Re: "Millionaire Next Door" Net Worth Formula

Postby tim1999 » Sat Mar 18, 2017 11:00 am

It is generally worthless for anyone under age 35-40 or so, especially for someone who spent an extended time in professional school leading to a higher income such as a physician or biglaw attorney. The Financial Samaurai blogger gives much more realistic numbers, especially his "average net worth for the above average person" calculation.

Nova1967
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Re: "Millionaire Next Door" Net Worth Formula

Postby Nova1967 » Sat Mar 18, 2017 11:02 am

Nova1967 wrote:"So what if you didn’t start working until you completed an advanced degree, served in the military or were disabled? In such cases, you need to deduct those years from your current age when using the Wealth Equation. Again, if you haven’t reached your 50s, the Wealth Equation"



In the article he says serving in the military is not working???
The military may not pay much but food, housing,medical is all provided for. I saved several thousand dollars by the age of 22 during my 4 years of military service

tim1999
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Re: "Millionaire Next Door" Net Worth Formula

Postby tim1999 » Sat Mar 18, 2017 11:04 am

crazygrow wrote:This doesn't work well if you have a huge rise in income over a few years (for me it was 4x).


Agreed. I started out making peanuts right out of college for 5+ years, and thanks to a couple of job changes in my late 20s, my income tripled in just a couple years.

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Re: "Millionaire Next Door" Net Worth Formula

Postby knpstr » Sat Mar 18, 2017 11:14 am

orca91 wrote:I'm right in line with my expected net worth then. I will have to like this formula. :happy


Well the formula results is the "average" to be expected.
It states that people with excellent wealth accumulation habits will be 2x whatever the formula results are.
:beer

*At age 32, my NW is 1.33x the results of this formula
Last edited by knpstr on Sat Mar 18, 2017 11:17 am, edited 1 time in total.
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MNGopher
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Re: "Millionaire Next Door" Net Worth Formula

Postby MNGopher » Sat Mar 18, 2017 11:16 am

RoadHouseFan wrote:
RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%


It should be pointed out that the authors say to be a PAW (prodigious accumulator of wealth), you should have twice the amount determined by this formula.

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JoMoney
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Re: "Millionaire Next Door" Net Worth Formula

Postby JoMoney » Sat Mar 18, 2017 11:26 am

It's an interesting formula, but faulty in a lot of ways. The number I like as a measure of financial independence, is

(Annual Living Expenses) - (Annuity, pension, SS income) - (Net Worth / Life Expectancy)

Ideally you want all the input numbers to be as high as possible, especially the "Life Expectancy"
Last edited by JoMoney on Sat Mar 18, 2017 11:28 am, edited 1 time in total.
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orca91
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Re: "Millionaire Next Door" Net Worth Formula

Postby orca91 » Sat Mar 18, 2017 11:28 am

I just said I like it because it matches up with me. If it didn't, I wouldn't like it. :happy

I'm one that doesn't find net worth all that useful a number. As mentioned, it's very situational.

And of course, how is net worth figured in this formula... home equity included, cars, boats... investments only? How many cans of worms to be opened when it comes to net worth is about endless.

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Tycoon
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Re: "Millionaire Next Door" Net Worth Formula

Postby Tycoon » Sat Mar 18, 2017 11:29 am

MNGopher wrote:
RoadHouseFan wrote:
RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%


It should be pointed out that the authors say to be a PAW (prodigious accumulator of wealth), you should have twice the amount determined by this formula.


Done.
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NYC_Guy
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Re: "Millionaire Next Door" Net Worth Formula

Postby NYC_Guy » Sat Mar 18, 2017 11:36 am

For someone less than 50, use the formula but plug in your average income since the age of 25. Bet it works a lot better for ya... :wink:

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BrandonBogle
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Re: "Millionaire Next Door" Net Worth Formula

Postby BrandonBogle » Sat Mar 18, 2017 11:50 am

RoadHouseFan wrote:
RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%

Walleyewhacker wrote:Yikes, left the *10% off the first try. When I actually do the math correctly, yeah, about where I should be. If I did this at 37, I would have been off, way off......where I should be.

Wait, I think I made the same fundament mistake. To restate to make sure I understand, this number is..

<Age in Years> multiplied by <Total Income> = <XYZ>

Expected Net Worth is 90% less of XYZ, as in <XYZ> - 90%<XYZ> = 10% of <XYZ>

If so, then yay, I'm a good bit ahead of if. If, however, it should be <Age in Years> multiplied by <Total Income> multiplied by 1.1 (110%), then I am woefully behind.

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knpstr
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Re: "Millionaire Next Door" Net Worth Formula

Postby knpstr » Sat Mar 18, 2017 11:58 am

BrandonBogle wrote:Wait, I think I made the same fundament mistake. To restate to make sure I understand, this number is..

<Age in Years> multiplied by <Total Income> = <XYZ>

Expected Net Worth is 90% less of XYZ, as in <XYZ> - 90%<XYZ> = 10% of <XYZ>

If so, then yay, I'm a good bit ahead of if. If, however, it should be <Age in Years> multiplied by <Total Income> multiplied by 1.1 (110%), then I am woefully behind.


Example:
Age 40, make $100,000/yr = $4,000,000
$4,000,000 *10%= $400,000

If you are an average accumulator of wealth your NW should be $400,000
If you are an excellent accumulator of wealth (what this book thinks we should all strive for), your NW should be $800,000
:beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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BrandonBogle
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Re: "Millionaire Next Door" Net Worth Formula

Postby BrandonBogle » Sat Mar 18, 2017 12:07 pm

knpstr wrote:Example:
Age 40, make $100,000/yr = $4,000,000
$4,000,000 *10%= $400,000

If you are an average accumulator of wealth your NW should be $400,000
If you are an excellent accumulator of wealth (what this book thinks we should all strive for), your NW should be $800,000
:beer


Thank you! Today is starting off on a good fit. I'm better than average and working towards being excellent. Let's share that beer! :sharebeer

Ron Ronnerson
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Re: "Millionaire Next Door" Net Worth Formula

Postby Ron Ronnerson » Sat Mar 18, 2017 12:38 pm

It's interesting but sort of generic. In my case, I didn't really start saving until I was 32. Now, 10 years later, at 42, I'm ahead of the formula. However, it's not because I went on a saving spree over the last decade. I happened to buy a home in the Bay Area in the summer of 2009. Prices have gone up considerably since then. So luck played a huge part in being ahead of the curve. Also, I'm expecting a pension when I retire that should be close to six-figures in 2017 dollars. Should that be accounted for somehow? It was fun to run the numbers but I don't know if they really have much meaning, at least in my situation.

FedGuy
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Re: "Millionaire Next Door" Net Worth Formula

Postby FedGuy » Sat Mar 18, 2017 1:55 pm

So all I need to do to become a "prodigious accumulator of wealth" is to find a significantly lower-paying job?

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knpstr
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Re: "Millionaire Next Door" Net Worth Formula

Postby knpstr » Sat Mar 18, 2017 1:58 pm

FedGuy wrote:So all I need to do to become a "prodigious accumulator of wealth" is to find a significantly lower-paying job?


Yup!
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

cherijoh
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Re: "Millionaire Next Door" Net Worth Formula

Postby cherijoh » Sat Mar 18, 2017 2:10 pm

moghopper wrote:Here is a blog post from 2010 at Thomas Stanley's site.

http://www.thomasjstanley.com/2010/08/h ... ld-you-be/

He is pretty well aware of the limitations. Like any rule of thumb, use it as it was meant to be used. Don't try to find all the ways it doesn't work, and then tell everyone its terrible.

Those who are significantly younger than 57 should be aware of the fact that the Wealth Equation overstates what they should actually be worth.

I worry that given these overestimates of expected net worth young adults will throw up their hands in despair and quit saving and investing.


For anyone who is years away from retirement and looking for a rule of thumb, I'd go with Dr. Bernstein's of saving 15% of your salary your entire career if you want to retire at 65 and more if you want to retire earlier.

Once you get within 5 - 10 years of retirement then start figuring income sources like pensions and SS and expected living expenses to estimate the gap in income that your portfolio needs to cover. At that point use one of the recommended retirement calculators to evaluate the viability of your plan.

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Postby hoops777 » Sat Mar 18, 2017 2:16 pm

Why does everyone need a magic formula.Like most things it is pretty accurate if your circumstances just happen to fit the formula.Otherwise not so much.
Sells books I guess.
K.I.S.S........so easy to say so difficult to do.

GMan82
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Re: "Millionaire Next Door" Net Worth Formula

Postby GMan82 » Sat Mar 18, 2017 2:44 pm

It's a handy rule of thumb, that's for sure. I think it's been revised in The Millionaire Mind, though to:

ENW = Age x 0.112 x Gross Income. A PAW (prodigious accumulator) is expected to have twice that value, while an under accumulator (UAW) would have half.

The White Coat Investor on his website came up with his own Estimated Net Worth for Doctors (ENWD) (http://whitecoatinvestor.com/a-net-worth-rule-of-thumb-for-doctors/

ENWD = Avg Post-residency Income x years post-training x 0.25.

For me, because of student loan debt, I fall into the UAW category. But with assets alone, I'm in-between expected and PAW at 1.75 years since training ended. I think this formula works better for physicians. The other formula would have me at an ENW of $1.2 million, but it's not like I was working and saving during my medical school and residency years (well, other than a Roth IRA).

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randomizer
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Re: "Millionaire Next Door" Net Worth Formula

Postby randomizer » Sat Mar 18, 2017 2:54 pm

I fail at this by a long way.

Not Law
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Re: "Millionaire Next Door" Net Worth Formula

Postby Not Law » Sat Mar 18, 2017 4:05 pm

So if one has a net worth of $1 million at age 50 should they be earning $200k per year?

avalpert
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Re: "Millionaire Next Door" Net Worth Formula

Postby avalpert » Sat Mar 18, 2017 4:16 pm

It's gibberish that is good for marketing copy and bar trivia - for any individual's particular circumstances it offers no meaningful insight or useful measuring stick.

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JamesSFO
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Re: "Millionaire Next Door" Net Worth Formula

Postby JamesSFO » Sat Mar 18, 2017 4:30 pm

I find these helpful for getting a quick calibration of "where am I at". I like the slightly more complicated ones from "Your Money Ratios" book that have the additional link of scaling based on age AND expected replacement income.

For 80% replacement at age 65, the ratios are:

Code: Select all

Age   Capital to Income (CIR)
25   0.10
30   0.60
35   1.40
40   2.40
45   3.70
50   5.20
55   7.10
60   9.40
65   12.00


Also, in "Your Money Ratios", excluding your home is expected.

So, a 25 yro just starting out making $100K would be targeting 0.10*100K or $10K in savings. But by 45, if they are now making $150K, 3.7*155K = 555K. It's not as quick as the Millionaire Next Door formula to rattle off, but overall it's easy to figure out and test.

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Re: "Millionaire Next Door" Net Worth Formula

Postby travellight » Sat Mar 18, 2017 4:43 pm

GMan82 wrote:It's a handy rule of thumb, that's for sure. I think it's been revised in The Millionaire Mind, though to:

ENW = Age x 0.112 x Gross Income. A PAW (prodigious accumulator) is expected to have twice that value, while an under accumulator (UAW) would have half.

The White Coat Investor on his website came up with his own Estimated Net Worth for Doctors (ENWD) (http://whitecoatinvestor.com/a-net-worth-rule-of-thumb-for-doctors/

ENWD = Avg Post-residency Income x years post-training x 0.25.

For me, because of student loan debt, I fall into the UAW category. But with assets alone, I'm in-between expected and PAW at 1.75 years since training ended. I think this formula works better for physicians. The other formula would have me at an ENW of $1.2 million, but it's not like I was working and saving during my medical school and residency years (well, other than a Roth IRA).


I hit 2.03 on the ENW but was 1.65 on ENWD. Wonder why such a difference?

VAslim16
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Re: "Millionaire Next Door" Net Worth Formula

Postby VAslim16 » Sat Mar 18, 2017 5:08 pm

rabbitrun wrote:I'm 37 and so far off its kind of comical. :shock:


Just turned 38 and same for me. I am just about at 1/2 so am still a UAW. Hoping to be a PAW by doing things right over the next 7-10 years.

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just frank
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Re: "Millionaire Next Door" Net Worth Formula

Postby just frank » Sat Mar 18, 2017 5:21 pm

The wife and I average out to 50 years old, and we are about 30% behind the formula. This jibes with where we think we are...a bit behind, better off than an awful lot of folks. 8-)

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Postby hoops777 » Sat Mar 18, 2017 5:36 pm

I wonder how someone 40 knows what income they will need at 65 or 70.Most of this stuff is worthless.You should be fitting your lifestyle to the income you actually have.It is called being able to adjust.I am so tired of reading all of the &$&@&$ about well when I retire I will need 80 pct of my income that I had while working.It all depends on the individual circumstances and you adjust to what works at that time.There is no magic formula and in life $&$&$ happens.Well the stock market is going to return 9.4 pct over the next 20 years....really?
I am 65 and still working.I project my expenses in retirement by doing the best job I can of figuring out my future cost of living based on my lifestyle and needs.I could care less about what pct of my current income that is.I care about how much money I have saved.
K.I.S.S........so easy to say so difficult to do.

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Re: "Millionaire Next Door" Net Worth Formula

Postby emoore » Sat Mar 18, 2017 5:49 pm

So what is average? Average of millionaires next door? Average of Americans (doubtful)?

aqan
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Re: "Millionaire Next Door" Net Worth Formula

Postby aqan » Sat Mar 18, 2017 5:58 pm

randomizer wrote:I fail at this by a long way.

you're not alone:)

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Re: "Millionaire Next Door" Net Worth Formula

Postby goodenyou » Sat Mar 18, 2017 8:57 pm

10x your adjusted gross income at age 50 seems very possible for someone who LBYM and invests early. I would think average of income would be applied.
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Re: "Millionaire Next Door" Net Worth Formula

Postby White Coat Investor » Sat Mar 18, 2017 9:06 pm

whodidntante wrote:
RoadHouseFan wrote:
RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%


I'm ahead of it. But I overweight stocks, size, value, and EM. One economic shock and I'm behind it.


It's a terrible rule for any kind of high income professional. I think I'm still an Under Achiever of Wealth as a multi-millionaire. The rule doesn't care what your income has been in the past, only what it is today. So a 32 year old new attending cardiologist making $600K a year with $400K in student loans comes out looking terrible. He's supposed to have $2 Million bucks through some magic trick.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: "Millionaire Next Door" Net Worth Formula

Postby Sandtrap » Sat Mar 18, 2017 9:17 pm

According to "Millionaire Next Door" Net Worth Formula I am an underachiever as a retiree. According to Bernstein I am +50X as a retiree.
So not very relevant IMHO.
But the book itself is a very good read.

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HomerJ
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Re: "Millionaire Next Door" Net Worth Formula

Postby HomerJ » Sat Mar 18, 2017 9:24 pm

RoadHouseFan wrote:
RoadHouseFan wrote:It's a very handy rule of thumb for assessing one's net worth status.


Expected Net Worth = Age(years) * total_income * 10%


No, anything that uses income is a junk formula. Expenses are what matters, not income.

I love that book, but that formula and the PAW/UAW formula (also based on income) is not worth much.

Basically, it says that when my wife quit her job, and our income was cut in half, we were suddenly doing so much better. It also states if I get a big promotion and raise, we're suddenly doing WORSE. Which is nonsensical.

A formula based on expenses is far more accurate.

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Postby hoops777 » Sat Mar 18, 2017 9:40 pm

Homer has provided wisdom and common sense for this useless formula.I just do not understand why anyone would put any value on this.I guess there is some human emotional need to measure ourselves against some quasi standard of success or to feel more successful if we meet the numbers.
K.I.S.S........so easy to say so difficult to do.

smj
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Re: "Millionaire Next Door" Net Worth Formula

Postby smj » Sat Mar 18, 2017 9:49 pm

I've been using a modified version of this formula for the last five years to track my family's progress. When using a single data point for income , this formula becomes almost useless unless your income has stayed relatively the same for many years. Because of this, I use a 10 year average of our income in the formula. My logic behind this is that by averaging out the income over a 10 year period, it will take into account both high and low income years and moderate the sometimes unreasonable number that is generated for younger people. I feel this simple modification makes it so that even some just out of college can begin using the formula to get a good estimate of where they should be financially.

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Postby hoops777 » Sat Mar 18, 2017 10:46 pm

SMJ
What do you mean where you should be financially?Who sets the standard where we are 'supposed" to be?Is it not good enough that we work hard,save as much as we can?Do we really have to be measured?
K.I.S.S........so easy to say so difficult to do.

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JamesSFO
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Re: "Millionaire Next Door" Net Worth Formula

Postby JamesSFO » Sun Mar 19, 2017 12:47 am

hoops777 wrote:Homer has provided wisdom and common sense for this useless formula.I just do not understand why anyone would put any value on this.I guess there is some human emotional need to measure ourselves against some quasi standard of success or to feel more successful if we meet the numbers.


Everyone wants a sense of if they are on track, within reason this formula is something easy people can use to get a sense of that. Sort of like BMI, it's an imperfect measure but it can provide a quick snapshot/calibration point without running a bunch of monte carlo simulations or something like FireCalc.

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Re: "Millionaire Next Door" Net Worth Formula

Postby Calygos » Sun Mar 19, 2017 12:52 am

JamesSFO wrote:
hoops777 wrote:Homer has provided wisdom and common sense for this useless formula.I just do not understand why anyone would put any value on this.I guess there is some human emotional need to measure ourselves against some quasi standard of success or to feel more successful if we meet the numbers.


Everyone wants a sense of if they are on track, within reason this formula is something easy people can use to get a sense of that. Sort of like BMI, it's an imperfect measure but it can provide a quick snapshot/calibration point without running a bunch of monte carlo simulations or something like FireCalc.


The two formulae I saw here gave me hope that I'm about on track. I figured at 43 I should have far more than I do, and I've definitely had some spending problems in past years that slowed down my savings accumulation, but overall I guess I'm doing okay and I'm glad I've been really hunkering down this year and reinforcing my savings patterns.


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