I have recently been reading an American book called the Millionaire Next Door it was released in 1996 and was written by Thomas J. Stanley and William D. Danko. The book is based on research carried out by the two authors over several years. It looked at how millionaires became millionaires and what they did to accumulate this wealth. It also looked at deciding how you can identify if a person has a high net worth compared to their current wages. I though we would look at deciding if we have a high net worth and at a later date I will look and doing some more posts.
They came up with two types of behaviour that they called UAWs (Under Accumulators of Wealth) and those who are PAWs (Prodigious Accumulator of Wealth). The authors also came up with on other behaviour called a AAW (Average Accumulator of Wealth) The way the authors decided if you were one of these behaviour types was through a simple formula, they took your current age multiplied by 10% of your pre-tax income. For example, a 50 year old earning the average annual salary of £26,150 would be expected to have a net worth of £130,750. If the person had less than this the they would be classified as a UAW and if they had significantly more they would be classified as a PAWs and if they had approximately this amount they would be an AAW.
I think we should all look and see how we measure up against this crude formula. Please remember that if you are young you are very likely going to have a lot less than this amount unless you are a high earning individual at a young age and have managed to save a large amount of your income.
Personally, I would probably not be looking at being any where near what this formula calculates at a younger age and therefore would wait until you are at least in your thirties where you would have had chance to finish your education and settle into your working life. Let’s look at what a 30 year old earning the average salary of £26,150 should have as their not worth. 30 x (26150 x 0.1) =£78,450. To have a net worth of this amount at thirty is probably quite realistic.
If we look at a 22 year old earning the same we would see a net worth of 22 x (26150 x 0.1) = £57.530. As you can see for a 22 year old to have this amount of net worth is quite unlikely as they will just be setting up to start their life after finishing their education and will just be starting in their working life.
In a future post I will look a producing a table which will show a list of potential net worth at different ages using different wage estimates to see where people should be aiming to be on the journey to having a high net worth. Maybe we could also have a look at adjusting the formula to provide so better results at a younger age that are more realistic.
Let me have your comments and let me know what you think maybe you could give an idea of your net worth and whether you are a UAW a AAW or PAW.
The Normal Person