How to determine if you are wealthy!

[Ima saver]

Re: How to determine if you are wealthy!

lrjohnson, that surprises me. You manage to live on such a small income. I can relate because my husband and I did too, for many years.

[lrjohnson]

Re: How to determine if you are wealthy!

lrjohnson, that surprises me. You manage to live on such a small income. I can relate because my husband and I did too, for many years.

Thanks for the confidence you have in me. But when I was earning $700 a month, even though I wasn't getting into debt, I wasn't really putting much away either!

[creditcardfree]

Re: How to determine if you are wealthy!

Looks like we are considered PAW's!!! It sure helps not to have much debt!

[Ima saver]

Re: How to determine if you are wealthy!

lrjohnson, I guess you are right, you can't save much. I always put away 10% even when that 10% was only $2 for my $20 tips night!!

[Snoopy2645]

Re: How to determine if you are wealthy!

I agree I also wondered about that in the last few years our income has went up & down I stayed at home with the kids the last 6 yrs so it went down & dh went to college & just graduated & got a different job he took a huge jump in pay just last month so its hard for me to tell now ya know

[jodi]

Re: How to determine if you are wealthy!

Wow, that's depressing. I thought we were doing better than that. At age 28 my net worth should be $56k. That seems awfully high to me for someone my age. I'd be over halfway there if it weren't for DH's (newly accumulated) student debt.
Maybe I'll try this again when I'm well into my thirties...of course, DH will be working again by then, so the formula will probably tell us we should have twice as much!

[Snoopy2645]

Re: How to determine if you are wealthy!

Glad to know I am not the only one who th0ought it was depressing LOL I am 29 so close in age to you I also thought oh my how could we have saved that much KWIM

[thekid]

Re: How to determine if you are wealthy!

I think their formula is nice as one way to measure wealth, but I think there are some serious flaws, especially for younger folks.

When you are young, your income flucutates and can grow quite rapidly--the formula really doesn't account for that.

For example, say you're 25 and make 100k per year. According to the formula, your net worth should be $250,000 (interesting, since when you were 20 you were probably making 10k a year at a part-time job). However, say in the next year you got a nice raise and your spouse began working. Now you're 26 and your income is 150k. All of the sudden your net worth is supposed to be $390,000.

I don't think even the most prodigious of PAW's could parlay an extra 50k a year in income into another 140k in net worth in just a year in any kind of "normal" context.

I find the formula interesting, but I won't be paying too much attention to it until I hit my late 30's or so.

My thoughts exactly. It is almost impossible to meet those criteria until your mid/late 30s, especially if one has gone to college/grad school and starting working a little later (particularly if one then started working at a high level of income oddly enough). I find it odd that the authors of that otherwise very interesting book never adressed this.

[greedy4chips]

Re: How to determine if you are wealthy!

At this point in time we are Under Accumulators of Wealt (UAW). However if you give me another 7 years at a ave return of 10% on our 401Ks, IRAs, etc we will be AAWs.

This is because our investments will double while the formula will only result in a 18% change in wealth. I am 38 now and will be 45 in 7 yrs.

Example
$100,000 * 38 / 10 = $380,000
$100,000 * 45 / 10 = $450,000
Only a $70,000 difference or $10,000 per yr or 18% increase in wealth.

By age 65 and a very small return on our investments we will be SPAW (Super Prodigious Accumulators of Wealth), since we will only need to have $650,000 in net worth if we maintain a $100,000 income (we don't now!).

For me a better formula would be AGE * INCOME * (1 / (100 - AGE)) * ((AGE - 20) /6)

Example AGE 25 INCOME 50000

AGE * INCOME * (1 / (100 - AGE)) * ((AGE - 20) /6) = WEALTH
25 * 50000 * 1 / 75 * ((25-20) / 6) = $13,888.89
55 * 50000 * 1 / 45 * ((55-20) / 6) = $356,481.48
65 * 50000 * 1 / 35 * ((65-20) / 6) = $696,428.57

[autoxer]

Re: How to determine if you are wealthy!

I find it odd that the authors of that otherwise very interesting book never adressed this.

For a book full of so many great statistics, you would think they could come up with a better formula, but I guess they were trying to keep it simple.

Another reason I think it is flawed, is because their ideal net worth only increases by 10% of your income each year. I think a Prodigious Accumulator of Wealth would increase Net Worth by far more than that.

35 year old x $50,000 / 10 = $175,000
36 year old x $50,000 / 10 = $180,000

Even if you didn't save a cent, you would only need a 2.8% return on your investments to match that increase.

[Ima saver]

Re: How to determine if you are wealthy!

I notice the two examples they used in the book, were ages 41 and ages 61. If I had $5000 in my late twenties, i thought I was doing pretty good!

[disneysteve]

Re: How to determine if you are wealthy!

pearl, I think you are exactly right. I think it is a lot more accurate for people in their 40's and 50's! ( I also can't imagine making $100,000 in one year)

We are ahead based on my income, but pearlieq's comment applies perfectly to us. My wife went back to work in 2005 after 10 years as a SAHM. So suddenly our income rose but our net worth didn't change - not right away at least. We are saving virtually all of her salary, but it will take a few years for our numbers to fit the formula based on our new total household income. We are pretty close, though, depending on where you value our home.

[disneysteve]

Re: How to determine if you are wealthy!

Another reason I think it is flawed, is because their ideal net worth only increases by 10% of your income each year. I think a Prodigious Accumulator of Wealth would increase Net Worth by far more than that.

35 year old x $50,000 / 10 = $175,000
36 year old x $50,000 / 10 = $180,000

Even if you didn't save a cent, you would only need a 2.8% return on your investments to match that increase.

Their formula probably factors in annual pay increases of 2 or 3 percent also.

So 36 year old x $51,500/10 = $185,400 in your example.

[AK 47]

Re: How to determine if you are wealthy!

I'm a little under, but I''m young and that formula is not good for those under 30. I'll be over in the next yr or so.

[TBH]

Re: How to determine if you are wealthy!

Another UAW pipes up. Based on my age, we're 78K behind. Based on my spouse's age, we're 158K behind.