How Wealthy Should You Be?

I've just finished listening to The Millionaire Next Door - a book that covers how Americans get wealthy. There's a lot of good stuff in there and it's worth a listen (or read), but, instead of reveiwing the book, I wanted to write about a specific ideas - that of relative wealth and net worth.

You see, high income and high net worth are highly correlated - a fancy statistical term meaning that people with high incomes are more likely to be wealthy. But this is not always the case. If you drive expensive cars, live in expensive property, take lots of expensive holidays and generally live a high consumption lifestyle - what's left over at the end of the month, might not add up to a great deal.

Wealth & Weight

I've always thought the formula for wealth is very similar to the formula for losing weight: getting wealthy is about spending less than you earn and losing weight is about burning more calories than you consume. Both are simple formulas but deceptively hard to carry off consistenly and require discipline and sacrifice. (For the pedants - yes there is more to building wealth than just spending less than you earn - but not much).

Hong Kong Millionaires

Hong Kong has around 37,000 millionaires, (down 61% in this economy) or roughly 0.53% of the adult population. Given that 2.9% of households earn a monthly income of over HK$100,000, shouldn't there be more?

Which leads to the question of how wealthy should you be and are you on track to joining the ranks of the rich?

How To Calculate How Wealthy You Should Be

The smarty-pants Ph.Ds who wrote The Millionaire next door came up with a formula for determining how well you're doing on the wealth accummulation front. Using the formula:

(your age x realised annual income) / 10 - any inheritance money = your expected net worth.

Let's look at an example using the median household income in Hong Kong which is HK$18,400.

Age: 30

Annual Salary: HK$220,800 (before tax)

Investment Income: HK$17,000

Inheritance Money: HK$0

= 30 X 237,800 = 7,134,000 / 10 - 0 = HK$713,400

Now you have a basis for understanding how wealthy you should be on a relative scale. Having a US$1,000,000 is great, but if you're 50 years old with an annual income of HK$3.6M and only HK$7.75M net worth when you should be closer to HK$18M - then, in the parlance of the book, you are an underaccumulator of wealth, a UAW.

How do I stack up? I perform below average for my age and income. Bummer. It's not drastically below, but it has forced me to review certain goals and milestones and we're making changes in our life to try and close the gap. Certainly, some of it is to do with current investment values, so I'm not particularly worried at this stage. I would, however, like to prevent myself from becoming a UAW, sail past AAW (Average Accumulator of Wealth) and soar into the PAW camp - Prodigous Accumulator of Wealth.

How do you stack up?

Use the formula above to figure out where you should be and if you need some help calculating your current net worth, you can use this handy calculator.

Comments

[traineeinvestor]

Hi Andrew

The formula from MND works reasonably well for people who have had stable or slightly rising incomes for a period of time (and did not start out with a bunch of student loans to pay off). It does not work very well for people with variable income or whose incomes have risen a lot recently - I became a serious under accumulator after I got a promotion a number of years ago simply because my income jumped as a result.
Cheers
traineeinvestor