Accumulation of Wealth
I've been rereading The Millionaire Next Door, by Thomas J. Stanley and William D. Danko. Briefly, the authors interviewed a number of millionaires, and it turns out most of them became millionaires by living well below their means:
- living in relatively modest homes instead of mansions
- driving American cars instead of expensive imports
- being careful and mindful of their spending and consumption
- being careful and mindful of their investments
- taking care to get very good financial advisors
The book includes a rule of thumb to determine one's expected net worth, and therefore if one is an Under Accumulator of Wealth (UAW) in the bottom quartile of wealth accumulators, or a Prodigious Accumulator of Wealth (PAW) in the top quartile of wealth accumulators.
"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be."
(I would assume any extraordinary windfalls, like receiving annual lottery winnings, would also be excluded - the idea apparently is that one should be saving at least 10% of annual pretax income.)
- A UAW's net worth is only 50% or less of expected net worth; UAWs are basically spendthrifts and unlikely to be millionaires.
- A PAW's net worth is 200% or more of expected net worth; PAWs are thrifty; the millionaire next door is likely a PAW.
A few years ago when I was concerned about buying my house I was tracking my finances through Quicken. One function calculated net worth, so I had some idea where I fell between the UAWs and PAWs (somewhere in between). Since getting my house I've stopped using Quicken, and the detailed tracking of my finances it gave me.
Where am I now? I've spent this morning adding up my assets, estimated assets, liabilities and retirement funds. I score about 90% of my expected net worth according to the rule of thumb.
Not (yet) a PAW, but doing better than a UAW.
Stanley, Thomas J. and William D. Danko. The Millionaire Next Door. New York: Simon & Shuster. 1996.