Sunday, March 4, 2007

The Millionaire Next Door - are you a PAW?

The Millionaire Next Door is a financial classic. In it, Thomas Stanley describes how the typical millionaire is not a Porsche-driving, yacht-owning conspicuous consumer, but rather lives a dull-normal life in a modest but pleasant setting.

To this end, Dr. Stanley proposes a simple formula for determining how well (or poorly) you accumulate wealth (the Stanley Index), which is calculated as follows:

1) Calculate your net worth (Assets minus Liabilities)

2) Divide your net worth by this equation: (Your age x Your salary) / 10

For example, if you are 35 years old, make $110,000 a year and have a net worth of $500,000, then your score is $500,000 / (35 x $110,000 / 10) = 1.3

3) Find out where your score fits in the following chart

An Average Accumulator of Wealth scores between 0.5 & 2.0

A Prodigious Accumulator of Wealth (PAW) scores above 2.0

An Underaccumulator of Wealth (UAW) scores below 0.5

I have been fascinated by this formula; while it penalizes youth fairly strictly (can you imagine a 25 year old, making $40,000 a year, feeling like a failure because his net worth is "only" $45,000 and thus he's a UAW?!), it's a great temperature gauge to see where you stand as well as a strong motivator.

The first time I calculated my Stanley Index, it was a miserable 0.3. A year later, I was still at 0.3. Something needed to be done, so I got serious about my personal finances.

The next 3 years saw my scores rise to 0.6, 0.7 & 0.9 respectively. Today, I hover at around the 1.5 mark, and hope to crack the 2.0 barrier by the time I'm 40.

It's just an equation, I admit, but it's a great, quick way to determine how you're doing in the great Net Worth game.

So.... what's your score?

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