How Many Forum Members Are Balance Sheet Affluent? (Followup to Net Worth Thread)

[scfr]

To followup on the "What is Your Net Worth" thread ... Eagle commented that not only net worth, but age and income need to be taken in to consideration.

The late Dr. Thomas Stanley, author of "The Millionaire Next Door" and "The Millionaire Mind" developed a formula to determine whether you are what he referred to as "Balance Sheet Affluent."

Age x .112 x Total Annual Realized Income = Expected Net Worth

According to Dr. Stanley if you are at least 2x (double) your expected net worth, you are "Balance Sheet Affluent."

What is your actual net worth relative to your expected net worth? How many forum members have achieved balance sheet affluent status?

[corn18]

According to that formula, I am dirt poor. I am at 26% of what that formula expects. But I have a very high income relative to my past earning years. And thanks to this forum, I have gotten my expenses under control. If I use my current expenses and gross them up for taxes, I am right on schedule, but not affluent. Yet.

[disneysteve]

Total Annual Realized Income

It's been a long time since I read the book. What exactly is "total annual realized income"?

[scfr]

It's been a long time since I read the book. What exactly is "total annual realized income"?

This is an excellent question, and the book did not specify. I wrote to Dr. Stanley many years ago (when he was still alive) and asked him but did not receive a reply.

What I use is AGI (adjusted gross income) from my tax return PLUS new tax-deferred retirement account & HSA contributions. Whether or not that is a correct number I may never know, but for me it was the best number I could come up with to represent "all income actually received." Also, because our income varies (due to self-employment) I use the average for the past 7 years. Again, I don't know if that is the "correct" number of years but it is the look-period that always seems to create a good rolling average.

[corn18]

Another good measure of wealth is 25x expenses. That can be current or planned (retirement). If you are at 25x expenses, you have won the game and can retire.

I like this measure because it takes into account how much you spend. If you can retire on $25,000 / year expenses, then $625,000 in the bank makes you affluent. If you need $100,000 / year expenses, then $2.5M will do the trick.

[Nutria]

It's been a long time since I read the book. What exactly is "total annual realized income"?

As a wage earner, I'm going to assume "gross income less (taxes plus insurance)".

[phantom]

What I use is AGI (adjusted gross income) from my tax return PLUS new tax-deferred retirement account & HSA contributions. Whether or not that is a correct number I may never know, but for me it was the best number I could come up with to represent "all income actually received." Also, because our income varies (due to self-employment) I use the average for the past 7 years. Again, I don't know if that is the "correct" number of years but it is the look-period that always seems to create a good rolling average.

I like the idea of using the average of the last 7 years better than using current income. I always get annoyed at measures of wealth that rely on current income because they punish recent salary increases.

[Nutria]

To followup on the "What is Your Net Worth" thread ... Eagle commented that not only net worth, but age and income need to be taken in to consideration.

The late Dr. Thomas Stanley, author of "The Millionaire Next Door" and "The Millionaire Mind" developed a formula to determine whether you are what he referred to as "Balance Sheet Affluent."

Age x .112 x Total Annual Realized Income = Expected Net Worth

According to Dr. Stanley if you are at least 2x (double) your expected net worth, you are "Balance Sheet Affluent."

What is your actual net worth relative to your expected net worth? How many forum members have achieved balance sheet affluent status?

As wage earners, and assuming that TARI is "gross income less (taxes plus insurance)", then -- averaging my and my wife's ages -- we're at 101% of Expected Net Worth.

[corn18]

From the man himself:

http://www.thomasjstanley.com/2009/07/wealth-is-not-income-income-is-not-wealth/

"When I use the term wealth, I am referring to the net worth of a household, i.e. all of its assets less all of its liabilities. I define household income in a simple way; it is income (realized) that is or should be reported on one’s personal income tax return. " By Thomas J. Stanley on Jul 23rd, 2009 in Income vs. Net Worth

[Nutria]

Age x .112 x Total Annual Realized Income = Expected Net Worth

Note that "multiply by 0.112" is reaaaaaallly close to "divide by 9".

9 * 0.112 = 1.008

[Singuy]

Hmm, this equation doesn't take into account how many years you have worked.

I suspect a MCD worker from 18 of age is more balance sheet affluent than a MD who just graduated with a negative net worth.

Perhaps it's more accurate if you have been in the work force for at least 15-20 years?

At 32, my spouse and I are at 1.3x, not even close to being 2x.

[corn18]

Hmm, this equation doesn't take into account how many years you have worked.

I suspect a MCD worker from 18 of age is more balance sheet affluent than a MD who just graduated with a negative net worth.

Perhaps it's more accurate if you have been in the work force for at least 15-20 years?

At 32, my spouse and I are at 1.3x, not even close to being 2x.

You are correct. It's just a rule of thumb and does not cover all scenarios.

[scfr]

Hmm, this equation doesn't take into account how many years you have worked.

I suspect a MCD worker from 18 of age is more balance sheet affluent than a MD who just graduated with a negative net worth.

Probably true.

[scfr]

From the man himself:

http://www.thomasjstanley.com/2009/07/wealth-is-not-income-income-is-not-wealth/

"When I use the term wealth, I am referring to the net worth of a household, i.e. all of its assets less all of its liabilities. I define household income in a simple way; it is income (realized) that is or should be reported on one’s personal income tax return. " By Thomas J. Stanley on Jul 23rd, 2009 in Income vs. Net Worth

Yes, but reported on which line.
I jest.
In my household's case the only difference between the 1040 Line 22 (total income) and the number I use is one half of the self-employment tax (line 27). But perhaps I should just use line 22.

[Nutria]

Hmm, this equation doesn't take into account how many years you have worked.

Age is almost certainly a proxy for years worked.