Are You Wealthy?

Are You Wealthy?

How are you doing on building your financial wealth?

Are you on track? Ahead? Behind?

Today, I’ll help you answer that question.

Give me two numbers (Your Age, and Your Income), and I’ll tell you whether you’re wealthy! It doesn’t get much easier than that!

Are You Wealthy? Just enter your age & income, and you can find your answer.

The Wealth Formula is a very simple calculation to give yourself a sense of how you’re doing, and to answer for yourself the question: “Are You Wealthy?”. I’ve created a simple cheatsheet for you to run your own numbers. Before we get to that, however, I’ve got some explaining to do…..

The Wealth Formula

The Wealth Formula was developed by Thomas Stanley, Ph.D. in his classic book “The Millionaire Next Door”. To see my summary of the book, simply click on this link: 7 Factors That Millionaires Have In Common.

I was familiar with The Wealth Formula from reading The Millionaire Next Door, but decided this week to develop a quick cheatsheet for you, my reader. I recently heard this podcast on Radical Personal Finance, and it motivated me to build a simple spreadsheet for you to be able to run “your own numbers” through The Wealth Formula. (BTW, I love the work Joshua Sheats does on the Radical Personal Finance podcast. If you’re not a listener, you’re missing some great info!).

Two Numbers To Answer “Am I Wealthy?”

The beauty of The Wealth Formula is its simplicity. Simply enter your Age and your Annual Income, and the wealth formula gives you a guideline target of your net worth. I’ve done all of the math for you, so all you’ll have to do is enter those two numbers in this spreadsheet to see your results.

The Wealth Formula — An Example (40 Year Old with $100k Income)

The Wealth Formula is best explained with an example. Let’s assume Bianca is 40 years old, and earns $100k:

According to Dr. Stanley, you can calculate a general guideline of your Wealth Status by simply multiplying your Age X Income, then dividing by 10. Then, compare the results with your actual net worth. In Bianca’s case, the ranges would be as follows:

  • Wealthy: $400,000 Net Worth (40 Years X $100,000 Income / 10 = $400k)
  • Prodigious Accumulator Of Wealth: $800k
  • Average Accumulator Of Wealth: $200k — 400k
  • Under Achiever: < $200k

I’ve built the spreadsheet to show your results as following, using Bianca’s numbers as the example:

The Matrix

Using the model, I’ve run multiple scenarios to give you a quick glance at something that may be close to your situation. In a minute, you’ll have a chance to run your own numbers:

Net Worth

Ok, I lied. I said you needed two numbers to know if you’re financially wealthy. In reality, you need to know a third number: Your Net Worth. (If you need a refresher on Net Worth, click here). Net Worth is one of the most important numbers you need to track to determine your progress on your road to building wealth. If you need a spreadsheet to calculate your Net Worth, click here, then save a copy of the file to your computer to input your numbers. Alternatively, you can head over to Personal Capital, enter your info, and it’ll generate your Net Worth for you.

The Wealth Formula is better than Net Worth. It factors in Age & Income.

The limitation with looking exclusively at your Net Worth is that it excludes the impact of your age and income on any comparison you may do with others. If you’re 30, your net worth will most likely be lower than someone who’s 50. However, you may be ahead of where that 50 year old was when she was your age. Age and income matter, and The Wealth Formula factors both of those variables into the equation.

Now that you know your net worth, you’re ready to address the question, and answer for yourself:

“Are You Wealthy?”

Run Your Own Numbers

To answer the question “Are You Wealthy?”, simply CLICK ON THIS LINK. The link will take you to a spreadsheet I built for this article. Simply enter your numbers in the yellow cells, and view your results in the green cells! If you’d rather, you can simply click on the spreadsheet below to be taken to the link:


PS: If you want to see a cool “Wealth Formula” embedded into a post, check out my friend’s post @ 10! Ten Factorial Rocks. How did he do that? Wow, very cool!

Note: The guidelines are not recommended for “young folks” (let’s call it < 25 years old), or anyone who has just entered the workplace after a long and expensive education (e.g., Physician, lawyer). Make sure you exclude any inheritance money in the formula.

Inflation Adjustment: Some argue that inflation in the years since Dr. Stanley wrote The Millionaire Next Door would cause the results from The Wealth Formula to be overstated. If your wage increases with inflation, you could creep higher in the 1996 brackets and appear “wealthier” than the definitions intended by Dr. Stanley back in 1996.

I disagree, and argue that your salary is used in the formula to calculate the “wealth ranges”, so the ranges would (and does) adjust with inflation to a large extent.

To calm any critics, I’ve added this “inflation adjustment” to the 1996 bracket ranges. Choose how to view it, but showing both ranges gives you the option as you see fit.

To make the inflation adjustment, I used this link, which shows that $1 in 1996 is worth $1.57 today. I then added an “Inflation Adjustment” in column J to reflect inflation since the book was published, multiplying the ranges by 1.57. In my view, this is “double counting” inflation, since it’s already reflected in your higher “inflation-driven” salary. However, if it causes just one of you to save a bit more, I’d argue the benefits of looking at it both ways outweigh the costs of depression amongst the majority of you. Chose for yourself how you think inflation should be addressed, then use the appropriate column for your personal comparison.

Regardless of the limitations of The Wealth Index, I find the concept interesting, and felt it was appropriate to share with my readers.

Conclusion

The use of The Wealth Formula is a good guideline to give you a general answer to the question: “Are You Wealthy?”. Use it as an interesting bit of information to guide your next steps, but be careful about drawing too many concusions from the results. Folks could argue with the methodology (I suspect we’ll have some interesting comments on this post), but I think it’s an interesting analysis that provides a helpful guideline.

If you’re an “Under Accumulator”, recognize that you have some work to do. If you’re a “Prodigious Accumulator”, make sure you’re balancing your life today with your future goals. Take your spouse out to dinner, and celebrate! It’s an interesting formula to help you get a gauge on how you’re doing, and I hope you find my “cheat sheet” an interesting tool to evaluate your current position on your journey toward a great retirement! Also, don’t forget that “financial wealth” is only one form of wealth, and one which I would argue is of less importance that some of the others. Keep money in perspective, and strive for “wealth” in all areas of your life!

How Are You Doing? I’d love comments on your results from The Wealth Index. Any surprises? Do you think it’s helpful in answering the question:

Are You Wealthy?

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