"Millionaire Next Door" Net Worth Formula

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MikeG62
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Re: "Millionaire Next Door" Net Worth Formula

Post by MikeG62 » Sun Mar 19, 2017 7:38 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 think this is not very meaningful nor likely to provide enough of a nest egg for one to live off of in retirement.

50 year old should have 5 times annual income
60 year old should have 6 times annual income

Those amounts seem very light to me. A 60 year old making $150,000 need only have $900,000 to sustain a 25-35 year retirement. As a general rule, I don't think that works.

randomguy
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Re: "Millionaire Next Door" Net Worth Formula

Post by randomguy » Sun Mar 19, 2017 8:40 am

MikeG62 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 think this is not very meaningful nor likely to provide enough of a nest egg for one to live off of in retirement.

50 year old should have 5 times annual income
60 year old should have 6 times annual income

Those amounts seem very light to me. A 60 year old making $150,000 need only have $900,000 to sustain a 25-35 year retirement. As a general rule, I don't think that works.


It about right
100k of salary
15k of savings
25k of taxes
60k of income that needs replacing
30k of SS leaves 30-40k (depending on taxes). Having 600k at 60k gives you great odds of having enough in 5 more year

It is a rule of thumb. It isn't going to be accurate for the very high earners (150k+ is the top 5-10%) or low earners (they can use SS) or people with odd income ramps (you start making 500k at 35).

There is little point for these type of rules of thumb anymore. Take 2 mins and put your numbers into simulator and you can get a much better idea of where you stand.

Traveler
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Re: "Millionaire Next Door" Net Worth Formula

Post by Traveler » Sun Mar 19, 2017 8:54 am

I remember when I first read this book right out of b-school at around age 30. I had a decent income but a negative net worth due to student loans and few assets. Now, 15 years later, I'm at 1.32 of "average" but am not satisfied that I can truly retire in ten years like I want to. I agree with those who criticized income-based formulas. If I read something about retirement planning that even mentions pre-retirement income, I typically stop reading it or highly discount it. What matters is how much I spend. If a formula says I need 80% of my pre-retirement income for retirement, I ask why is it that I now live on 33% of my gross income now, so what makes them think my retirement needs will more than double that? Silliness

investingdad
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Re: "Millionaire Next Door" Net Worth Formula

Post by investingdad » Sun Mar 19, 2017 9:09 am

We are 43 and 44...and I agree that the formula has many limitations.

That said, we meet the criteria to be PAWs...just barely though, coming in at exactly 2x.

BW1985
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Re: "Millionaire Next Door" Net Worth Formula

Post by BW1985 » Sun Mar 19, 2017 9:39 am

Seems to me that if you used average income over say over the last 5 or 10 years instead of current income that would resolve a lot of people's issue with the formula.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

bluebolt
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Re: "Millionaire Next Door" Net Worth Formula

Post by bluebolt » Sun Mar 19, 2017 9:52 am

Ron Ronnerson wrote: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.

Unless you plan on moving/downsizing in retirement, I wouldn't count your home equity in your net worth calculation (for your retirement number anyway).
Sure, you could take out a HELOC or do a reverse mortgage, but those come with their own trade-offs.

As far as the pension, depending on how confident your are that you will receive it, there's no reason you can't figure the NPV of the income stream (or a discounted NPV) as part of your net worth. I find it easier to figure out what amount of investable assets are required to generate the income stream you need in retirement. You can then just figure out what income you need over & above the pension and what level of assets you need to generate that additional income.

qwertyjazz
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Re: "Millionaire Next Door" Net Worth Formula

Post by qwertyjazz » Sun Mar 19, 2017 9:55 am

It is a great formula as it shows an easy way to obtain it. Just like if you want to pay less taxes - get fired and do not work
Or if you have to work get a lower paying job
G.E. Box "All models are wrong, but some are useful."

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

Post by Ron Ronnerson » Sun Mar 19, 2017 9:59 am

bluebolt wrote:
Ron Ronnerson wrote: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.

Unless you plan on moving/downsizing in retirement, I wouldn't count your home equity in your net worth calculation (for your retirement number anyway).
Sure, you could take out a HELOC or do a reverse mortgage, but those come with their own trade-offs.

As far as the pension, depending on how confident your are that you will receive it, there's no reason you can't figure the NPV of the income stream (or a discounted NPV) as part of your net worth. I find it easier to figure out what amount of investable assets are required to generate the income stream you need in retirement. You can then just figure out what income you need over & above the pension and what level of assets you need to generate that additional income.


Fair points. However, the formula the OP posted says to do this: Expected Net Worth = Age(years) * total_income * 10%

It doesn't say to ignore home equity (which is part of net worth) or factor in the pension. My point was that the formula is too simplistic/generic.

seamonkey
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Re: "Millionaire Next Door" Net Worth Formula

Post by seamonkey » Sun Mar 19, 2017 10:06 am

To those who find this depressing, I propose a new formula. Instead of calculating expected net worth, we should use our actual net worth to back-calculate our expected financial age.

Actual NW / 0.10 / Income = Expected Financial Age

I'm apparently 13 years old. The fountain of youth!

BW1985
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Re: "Millionaire Next Door" Net Worth Formula

Post by BW1985 » Sun Mar 19, 2017 10:10 am

Ron Ronnerson wrote:
bluebolt wrote:
Ron Ronnerson wrote: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.

Unless you plan on moving/downsizing in retirement, I wouldn't count your home equity in your net worth calculation (for your retirement number anyway).
Sure, you could take out a HELOC or do a reverse mortgage, but those come with their own trade-offs.

As far as the pension, depending on how confident your are that you will receive it, there's no reason you can't figure the NPV of the income stream (or a discounted NPV) as part of your net worth. I find it easier to figure out what amount of investable assets are required to generate the income stream you need in retirement. You can then just figure out what income you need over & above the pension and what level of assets you need to generate that additional income.


Fair points. However, the formula the OP posted says to do this: Expected Net Worth = Age(years) * total_income * 10%

It doesn't say to ignore home equity (which is part of net worth) or factor in the pension. My point was that the formula is too simplistic/generic.


Right. Net worth is net worth. You can look only at your investible assets but that's not your net worth and not what the formula says. It seems like you're trying to use the formula for more than intended.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

bluebolt
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Re: "Millionaire Next Door" Net Worth Formula

Post by bluebolt » Sun Mar 19, 2017 11:01 am

Ron Ronnerson wrote:
bluebolt wrote:
Ron Ronnerson wrote: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.

Unless you plan on moving/downsizing in retirement, I wouldn't count your home equity in your net worth calculation (for your retirement number anyway).
Sure, you could take out a HELOC or do a reverse mortgage, but those come with their own trade-offs.

As far as the pension, depending on how confident your are that you will receive it, there's no reason you can't figure the NPV of the income stream (or a discounted NPV) as part of your net worth. I find it easier to figure out what amount of investable assets are required to generate the income stream you need in retirement. You can then just figure out what income you need over & above the pension and what level of assets you need to generate that additional income.


Fair points. However, the formula the OP posted says to do this: Expected Net Worth = Age(years) * total_income * 10%

It doesn't say to ignore home equity (which is part of net worth) or factor in the pension. My point was that the formula is too simplistic/generic.

We are in violent agreement. I was pointing out to Ron Ronnerson (not OP) why a home-equity-heavy net worth is not very useful as a gauge when planning for retirement under most scenarios. The formula OP presented doesn't work well for him.

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JamesSFO
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Re: "Millionaire Next Door" Net Worth Formula

Post by JamesSFO » Sun Mar 19, 2017 12:07 pm

Again, it's a bit like BMI (body mass index), which is horrible... But also one of the easiest quick tools for assessing obesity and related health risks which is why it stays around.

If folks don't want to try and use Firecalc (awesome but a bit unintuitive, http://firecalc.com/) or a similar monte carlo simulation tool, these types of formulas provide good check in points to start a longer discussion.

The "Your Money Ratios" version of a Millionaire Next Door-like formula is particularly good by excluding home equity from capital ratio and for having ratios for other activities like long term care insurance, etc.

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Post by hoops777 » Sun Mar 19, 2017 12:27 pm

Yea but I still do not need some guy determining how much my net worth SHOULD be when he has no idea what my life's circumstances are.People's lives are not neat little packages.
K.I.S.S........so easy to say so difficult to do.

fatlever
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Re: "Millionaire Next Door" Net Worth Formula

Post by fatlever » Sun Mar 19, 2017 12:35 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%


I am doing better than a few years ago since I took a 25% pay cut to a less stressful job. If I take another 50% pay cut, then I am going going to be a Prodigious Accumulator of Wealth :beer

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Post by hoops777 » Sun Mar 19, 2017 12:56 pm

I would say home equity is very much a part of net worth.My home is paid off and worth about 750K.I believe that could be quite useful down the road if I wanted to sell it and rent or move to a low cost area.
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

Post by JamesSFO » Sun Mar 19, 2017 1:00 pm

hoops777 wrote:I would say home equity is very much a part of net worth.My home is paid off and worth about 750K.I believe that could be quite useful down the road if I wanted to sell it and rent or move to a low cost area.


I've debated this internally, the book "Your Money Ratios" has a good discussion of why not to include it that mostly boils down to "you've gotta live somewhere" and I too live in a HCOL and my place is probably around $1M (paid off) and I most likely would move to a LCOL, but what if I don't? If I don't then that money in the house will likely not be available for spending. If I do move then I get a bonus surprise pot of gold so to speak.

YMMV, either way all of these formulas again are guideposts to lead you to having a longer look at where you stand.

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Re: "Millionaire Next Door" Net Worth Formula

Post by travellight » Sun Mar 19, 2017 2:06 pm

seamonkey wrote:To those who find this depressing, I propose a new formula. Instead of calculating expected net worth, we should use our actual net worth to back-calculate our expected financial age.

Actual NW / 0.10 / Income = Expected Financial Age

I'm apparently 13 years old. The fountain of youth!


I am 111! Depressing but at least it is a symmetrical number.

jrtexas
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Re: "Millionaire Next Door" Net Worth Formula

Post by jrtexas » Sun Mar 19, 2017 3:19 pm

Nova1967 wrote:
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


Thats cause he never served. It takes special people to serve. He's not special.

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jharkin
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Re: "Millionaire Next Door" Net Worth Formula

Post by jharkin » Sun Mar 19, 2017 3:50 pm

HomerJ wrote:A formula based on expenses is far more accurate.


... more accurate for calculating what you need to retire, yes.

But that was not the point of Stanley's formula. He was trying to create a measure at how good you are at converting income into wealth. Its meant to be an indicator of how much you should have been able to accumulate with you income assuming a reasonable saving rate. People living below their means and saving more score higher even if their absolute wealth number is not that high. People spending all their income to "live the lifestyle " score lower even if their absolute numbers are higher than the average American.

I agree that its not very accurate for younger people, especially when you are in your early years having just started saving and still rapidly rising income. It might be better if it where reformulated and figured based on something like:

weighted average of your annual earnings over your entire working years * # of working years * some %


When I first found out about this formula in my mid-30s I was a serious UAW. Now at 40 Im within 15% of the target. My wife is about to go back to work full time now that out kids are in school and I expect to massively ramp up our savings rate and will probably start shifting into the high end of the range, and probably graduate to PAW status by 50 if all goes right.


---
For those who dont want to pull out the calculator, Hugh Chou has an online version: http://www.hughcalc.org/wealth.cgi

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Post by hoops777 » Sun Mar 19, 2017 4:15 pm

So it is a personal choice.You can drive the same car for 20 years,not take your family on vacations,give your kids second hand everything,put an antenna up and not have cable,maybe put your kids into a public school that you do not care for but save all your money,and you get a gold star :D
As far as home equity is concerned,common sense tells you it depends on what your home is worth.If you have 100K equity vs 800 K that certainly changes things financially if you need money toward the end of life.The more your house is worth,the more net worth you have which translates into more options.
K.I.S.S........so easy to say so difficult to do.

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Re: "Millionaire Next Door" Net Worth Formula

Post by KarenC » Sun Mar 19, 2017 8:45 pm

tim1999 wrote:
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.

Instead of the most recent income, I use the SS AIME number and multiply it by 12.
"How much you know is less important than how clearly you understand where the borders of your ignorance begin." — Jason Zweig

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willthrill81
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Re: "Millionaire Next Door" Net Worth Formula

Post by willthrill81 » Sun Mar 19, 2017 9:27 pm

I admire much of Stanley's work, though his sampling methods for millionaires were VERY biased, and his own books illustrate the problem. I've not seen anyone else discuss that issue.

But this formula leaves me wondering "What's the purpose?" I think that there are many formulas and measures that are more useful than this for assessing one's position.

jharkin wrote:Its meant to be an indicator of how much you should have been able to accumulate with you income assuming a reasonable saving rate.


How much you should have been able to accumulate based on what? A biased group of individuals with high net worth, usually impacted strongly by very high incomes?

Very few of Stanley's millionaires got that way with anything close to a 'typical' American income. Yet most of us know well that you can become a millionaire relatively simply on such an income with a decent savings rate and time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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knpstr
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Re: "Millionaire Next Door" Net Worth Formula

Post by knpstr » Sun Mar 19, 2017 9:34 pm

willthrill81 wrote:How much you should have been able to accumulate based on what?


Income.
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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willthrill81
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Re: "Millionaire Next Door" Net Worth Formula

Post by willthrill81 » Sun Mar 19, 2017 10:08 pm

knpstr wrote:
willthrill81 wrote:How much you should have been able to accumulate based on what?


Income.


I'm aware of that. My question was in regards to the formula as a whole. On what basis is someone a PAW? A small, biased sample of very wealthy people? How does being a PAW fit it with the rest of your financial goals, or should it be a goal itself?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Millionaire Next Door" Net Worth Formula

Post by Barefootgirl » Sun Mar 19, 2017 10:26 pm

I'm so glad that I did not take the formula seriously, ever. I recall not long after the book came out, I applied the formula and became very discouraged.
As time went on, it became clear to me that it was flawed.
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.

clown
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Re: "Millionaire Next Door" Net Worth Formula

Post by clown » Sun Mar 19, 2017 10:33 pm

As I understand it, the formula says that being in the military is not working -- essentially that being in the military is a waste of time. Two observations:
1. Send the author to USMC boot camp, and see if the opinion changes.
2. There are things bigger than self and wallet. Serving the Stars and Stripes is one of the biggest honors one can have. The authors are full of hooey. I would use a stronger word, but the mods would get me

Do the formula's authors and proponents think that the Seal who got Bin Laden was not working, not doing a good thing for our freedom? Both ludicrous and unpatriotic. Hang 'em from their toes.

rbaldini
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Re: "Millionaire Next Door" Net Worth Formula

Post by rbaldini » Sun Mar 19, 2017 11:48 pm

Seems like a simple fix would be something like

(age-20) * income * 0.15

Under the assumption that one should save 15% of one's income, starting in working years. "Income" should really be replaced with "mean income over career", but whatever. Perhaps lower 0.15 to 0.10 to account for this.

A big part of the book's shtick is, I believe, misleading. They spill a lot of ink over how frugal millionaires are - how most of them don't have fancy cars or fancy clothing or expensive houses. Well, that's true, and no doubt frugality is important. But guess what: poor people don't have expensive consumer items either. I'll bet a million dollars that the frequency of $500k+ homes and fancy foreign cars and golf club memberships is a lot higher among millionaires than among non-millionaires.

That said, I appreciate the book's overall message of practicality and frugality.

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whodidntante
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Re: "Millionaire Next Door" Net Worth Formula

Post by whodidntante » Mon Mar 20, 2017 12:13 am

White Coat Investor wrote:
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.


Complexity doesn't sell books. :happy

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Re: "Millionaire Next Door" Net Worth Formula

Post by basspond » Mon Mar 20, 2017 3:25 am

So if I am 70, make $50k a year, my net worth should be $350k? At 60 it would have been $300k? Just at a 5% return (and no other contributions) my 70 number would be over $500k. The number at 30 would be $150k. Again just a 5% return, my 60 number would be over $600k.

This simple formula exposes the powers of compound interest. :)

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knpstr
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Re: "Millionaire Next Door" Net Worth Formula

Post by knpstr » Mon Mar 20, 2017 6:53 am

willthrill81 wrote:I'm aware of that. My question was in regards to the formula as a whole. On what basis is someone a PAW? A small, biased sample of very wealthy people?

Yes

willthrill81 wrote:How does being a PAW fit it with the rest of your financial goals, or should it be a goal itself?


No, not necessarily.
It is just an observation they made and perhaps if you think you're doing really well and you don't meet this metric, try to figure out how you could become a PAW.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

lazydavid
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Re: "Millionaire Next Door" Net Worth Formula

Post by lazydavid » Mon Mar 20, 2017 7:43 am

Agreed that this formula is stupid. At 40, we have about half the NW we need to retire with 99%+ success per firecalc, and our NW has increased by more than half of our gross household income each of the last two years. So far in 2017, our NW has increased by MORE than our total gross income. We barely make the cut, but would instantly be PAWs if one of us stopped working.

likegarden
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Re: "Millionaire Next Door" Net Worth Formula

Post by likegarden » Mon Mar 20, 2017 8:33 am

worked for me.

orca91
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Re: "Millionaire Next Door" Net Worth Formula

Post by orca91 » Mon Mar 20, 2017 9:12 am

It's sort of funny how worked up people get over a formula!

As shown by the many other examples and tweaks in this one, someone can make up about any NW formula they want. And, how useful is a NW number anyway? Relax people! :happy

RoadHouseFan
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Re: "Millionaire Next Door" Net Worth Formula

Post by RoadHouseFan » Mon Mar 20, 2017 9:58 am

likegarden wrote:worked for me.


Agree! It's a highly accurate indicator of one's spending problems.

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DaftInvestor
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Re: "Millionaire Next Door" Net Worth Formula

Post by DaftInvestor » Mon Mar 20, 2017 10:19 am

Does his (the author's) definition of Net-Worth include primary-home equity?

hoops777
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Re: "Millionaire Next Door" Net Worth Formula

Post by hoops777 » Mon Mar 20, 2017 10:56 am

Why not use common sense and your brain instead of trying to plug in someone's formula.The whole concept of a formula like this when no 2 people have the same circumstances is just ludicrous.
I will give you the Hoops formula for free!
Save as much money as you can while you and your family enjoy life.Be responsible and use common sense.Do not compare yourself to others because it is pointless.
K.I.S.S........so easy to say so difficult to do.

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Re: "Millionaire Next Door" Net Worth Formula

Post by travellight » Mon Mar 20, 2017 11:00 am

DaftInvestor wrote:Does his (the author's) definition of Net-Worth include primary-home equity?


I believe there is one definition of net worth: all assets minus all liabilities. Someone with a paid off two million dollar house has a different net worth than someone who does not and would therefore pay rent for such a house. How one wants to define accessible resources may be different for each person but net worth is one definition so there can be an apples to apples comparison.

orca91
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Re: "Millionaire Next Door" Net Worth Formula

Post by orca91 » Mon Mar 20, 2017 11:02 am

hoops777 wrote:Why not use common sense and your brain instead of trying to plug in someone's formula.The whole concept of a formula like this when no 2 people have the same circumstances is just ludicrous.
I will give you the Hoops formula for free!
Save as much money as you can while you and your family enjoy life.Be responsible and use common sense.Do not compare yourself to others because it is pointless.


Because common sense ain't so common. :happy

LiterallyIronic
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Re: "Millionaire Next Door" Net Worth Formula

Post by LiterallyIronic » Mon Mar 20, 2017 12:18 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%


I'm only halfway to where I should be? :(

Age 33 * $60,000 * 0.10 = $198,000 and I only have $100,000.

But I think it's fair to consider the fact that I only finished university four months ago.

Steve723
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Re: "Millionaire Next Door" Net Worth Formula

Post by Steve723 » Mon Mar 20, 2017 12:46 pm

I'm sure I'm not alone in saying that this book was a very early influencer on my financial habits. Love this book!

As for the formula, I came out to 1.7x - close but no cigar in terms of being a PAW. I think where it is really flawed is where there have been any swift uplifts or downshifts in income. It's efficacy is highly reliant on a fairly steady and smooth income trend.

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DaftInvestor
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Re: "Millionaire Next Door" Net Worth Formula

Post by DaftInvestor » Mon Mar 20, 2017 12:52 pm

travellight wrote:
DaftInvestor wrote:Does his (the author's) definition of Net-Worth include primary-home equity?


I believe there is one definition of net worth: all assets minus all liabilities. Someone with a paid off two million dollar house has a different net worth than someone who does not and would therefore pay rent for such a house. How one wants to define accessible resources may be different for each person but net worth is one definition so there can be an apples to apples comparison.


The inclusion or exclusion of Primary-Home equity has been debated on other threads here - thus my question - what is the AUTHOR'S definition? Does it include Primary-Home equity? (I haven't read the book so don't know).

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DaftInvestor
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Re: "Millionaire Next Door" Net Worth Formula

Post by DaftInvestor » Mon Mar 20, 2017 1:07 pm

I was way off last year on this rule of thumb but since my income is MUCH LOWER this year I am now on track! Good news! :? :oops:

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Ice-9
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Re: "Millionaire Next Door" Net Worth Formula

Post by Ice-9 » Mon Mar 20, 2017 1:24 pm

NYC_Guy wrote: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:


Using the original formula, I'm average. Using your formula, I'm a PAW. Thanks! :sharebeer

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Re: "Millionaire Next Door" Net Worth Formula

Post by sreynard » Mon Mar 20, 2017 4:31 pm

RoadHouseFan wrote:
likegarden wrote:worked for me.


Agree! It's a highly accurate indicator of one's spending problems.


I always thought the formula was pretty reasonable.

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Re: "Millionaire Next Door" Net Worth Formula

Post by hoops777 » Mon Mar 20, 2017 4:51 pm

This is interesting.If one reads the posts just on this tiny thread with maybe 20 posters,and you see how inaccurate the formula is,think how great it is for all working people in America.I am certain the author is a really smart guy and has many worthwhile things to say,but this formula is not one of them.To those whose financial circumstances just happen to fit nicely into his formula and you feel validated and good about your future,just hope that salary doesn't change the wrong way :mrgreen:
K.I.S.S........so easy to say so difficult to do.

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Re: "Millionaire Next Door" Net Worth Formula

Post by HomerJ » Mon Mar 20, 2017 5:20 pm

DaftInvestor wrote:
travellight wrote:
DaftInvestor wrote:Does his (the author's) definition of Net-Worth include primary-home equity?


I believe there is one definition of net worth: all assets minus all liabilities. Someone with a paid off two million dollar house has a different net worth than someone who does not and would therefore pay rent for such a house. How one wants to define accessible resources may be different for each person but net worth is one definition so there can be an apples to apples comparison.


The inclusion or exclusion of Primary-Home equity has been debated on other threads here - thus my question - what is the AUTHOR'S definition? Does it include Primary-Home equity? (I haven't read the book so don't know).


Net worth ALWAYS includes home equity.

People here argue sometimes if one should factor home equity into their investing decisions.

In my opinion, one should only factor in home equity into your retirement planning if one plans to downsize in retirement. So I mostly ignore it.

But the definition of "net worth" is clear. Assets minus liabilities. The author definitely would allow one to include home equity into the equation.

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Re: "Millionaire Next Door" Net Worth Formula

Post by jharkin » Mon Mar 20, 2017 5:28 pm

willthrill81 wrote:
knpstr wrote:
willthrill81 wrote:How much you should have been able to accumulate based on what?


Income.


I'm aware of that. My question was in regards to the formula as a whole. On what basis is someone a PAW? A small, biased sample of very wealthy people? How does being a PAW fit it with the rest of your financial goals, or should it be a goal itself?


Of course its biased.. Its limited to people who took his survey.

I dont take it all that serious, and I doubt anyone else here does... we are just all presenting opinions.

I think the overall message (and I have read the book) is a simple one that most bogleheads would agree with: LBYM and you can become "affluent" on a wide range of incomes. Notice I dont say "any income" as there are many people in this country living on very low incomes who will never become wealthy no matter how much they scrimp due to the basic minimum costs of food, healthcare and shelter.

But the point is that people with the median $50k or so household income in this country could have a lot more than the median near-zero net worth if we where not such a conspicuous consumption obsessed culture.

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Re: "Millionaire Next Door" Net Worth Formula

Post by willthrill81 » Mon Mar 20, 2017 5:35 pm

jharkin wrote:Of course its biased.. Its limited to people who took his survey.


That alone does not necessarily bias the results of a survey. A completely random sample is, by definition, not biased in any way whatsoever. Obviously, this is very difficult to do with most populations of interest to social scientists because it requires that every member of the population have a known and equal chance of being selected for the sample, and this is impossible to do without a list. Even the U.S. Census does not provide such a list, so most samples of humans are indeed biased.

But the problem is deeper than that with Stanley's research. In order to keep their research costs down, they used a geo-demographic sampling techniques to sample areas with a high proportion of millionaires and succeeded in that regard. However, the millionaires in Stanley's study are not representative of all American millionaires, and this is easily discernible from Stanley's own book, The Millionaire Mind. I don't have it in front of me, but the median household income of his sample was about three times higher if I recall than what the IRS said was the case for its estimates of millionaires. Taken together, it seems that the millionaires in Stanley's study were more affluent and successful in wealth building than most millionaires. That's not necessarily a fatal flaw to the research, but it certainly 'colors' his results.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Millionaire Next Door" Net Worth Formula

Post by knpstr » Mon Mar 20, 2017 5:50 pm

willthrill81 wrote: Taken together, it seems that the millionaires in Stanley's study were more affluent and successful in wealth building than most millionaires. That's not necessarily a fatal flaw to the research, but it certainly 'colors' his results.


It has been a while since I read this but, wasn't that his point though? to study those were more successful in wealth building?

His formula attempts to relate income to net worth to demonstrate that:
the person who is 50 with income of $100,000 and has $1M net worth is a PAW
while someone who is 50 with income of $250,000 with a net worth of $1.25M is NOT a PAW. (despite being a millionaire)
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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Re: "Millionaire Next Door" Net Worth Formula

Post by willthrill81 » Mon Mar 20, 2017 6:01 pm

knpstr wrote:
willthrill81 wrote: Taken together, it seems that the millionaires in Stanley's study were more affluent and successful in wealth building than most millionaires. That's not necessarily a fatal flaw to the research, but it certainly 'colors' his results.


It has been a while since I read this but, wasn't that his point though? to study those were more successful in wealth building?


The book was purported to be a profile of American millionaires (who are all clearly successful in wealth building), not just millionaires who were much more successful than most other millionaires.

Don't get me wrong; the books are good and so is the message. But the formula and several other aspects of the book overreach the research methods used.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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