How to Determine if You Are “Wealthy”

Have you ever wondered if you were “wealthy?” There is a rule-of-thumb formula used in The Millionaire Next Door for determining whether or not you are wealthy. For those who are interested, their simple formula is:

Multiply your age by your pretax income from all sources (except inheritances).

Divide that number by 10 to arrive at what your net worth should be.

So, if you are 35 years old and your household income is 60,000 per year, your networth should be $210,000 [(35 X $60,000)/10 = $210,000] in order for you to be considered wealthy.

If you are 9 years old and you get an allowance of $468 per year, you would be considered wealthy if your net worth was greater than $421.

The theory behind this formula is that the older you are and the more money you make, the more wealth you should have. So, the number is relative for each person’s situation.

Now, what I can’t figure out is why they chose the number “10” as the divisor. The book does not say. But, like anything, this is supposed to be a rule-of-thumb formula that is simple and easy to use.


Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

25 thoughts on “How to Determine if You Are “Wealthy””

  1. So if I’m 40 and jobless (i.e. income = 0), then 40 x 0 = 0. Then if I have 10 bucks, I’m right where I should be!

    In reality, I have about a quarter of what my net worth should be according to this formula. But I expect I’ll catch up in the next few years.

  2. So the more you make, the less likely you are to be wealthy according to this formula. A 30 yr old making 50k a year is wealthy @ 150k, whereas a 30 yr old living next door making 100k isn’t considered wealthy until her net worth reaches double that!

    I don’t buy it. 🙂

  3. Jeff,
    I think the point is that the 30 yr old making 100k (and spending like it) is going to need a lot more to “feel wealthy” than a 30 yr old making who is only 50k (and used to spending at that level). Whether he needs exactly twice as much isn’t really the point, since it’s just a rule of thumb and not an exact formula. At least it gets us thinking about whether we have saved up enough for our income level and our age.

  4. It is also a but unrealistic for those just starting out – If a 25 yr old has just started working last year making $55,000 their net worth should be 125,000 – over twice their pre-tax income. It’s not possible even if they managed to live on $0 b/c they still have to pay taxes.

  5. I totally agree with Edenz…I just turned 25 and make around $50,000 per year, meaning I would need a net worth of about $125,000 to be considered wealthly. In reality, my net worth is just under $60,000 and way of my “targeted” net worth. However, given my age and financial situation, I believe I am in a great financial position. In short, I would not put a lot of weight into this formula.

  6. Millioanire Next Door is fun reading, but absolutely nothing in that book is grounded in any real research or methodology. When you look at it closely, the author talked to some retired, small-time millionaires and is presenting the feedback as scientific gospel.

  7. We’re behind according to the “formula” as well. If my husband made less money, then by the formula we’d be on target. So, yes…it’s a guideline, but certainly worthless when you’re “penalized” for making a decent buck (esp. later in life. Gee boss, can you give me a paycut so I can hit my formula target?!!!)

    I own this book, as well as The Millionaire Mind and Millionaire Women Next Door. In most books, there are nuggets that make reading it worthwhile. I appreciate the distinction made by the authors of playing great “offense” and playing great “defense.” My husband is certainly the “offense” player, and I’m the epitome of “defense”–guess that’s why we’re a great team (financially and otherwise!)

  8. I think the issue is that he defines wealth as a proxy for security, so I don’t think this is really a contradiction:

    It is also a but unrealistic for those just starting out – If a 25 yr old has just started working last year making $55,000 their net worth should be 125,000 – over twice their pre-tax income. It’s not possible even if they managed to live on $0 b/c they still have to pay taxes.

    I think that’s intentional. I don’t think it should be possible, in most cases, because most 25-y-os aren’t financially secure, and therefore aren’t “wealthy”. Even those with 50k in the bank are just a year or two of unemployment away from having nothing.

  9. Stacey, sounds like you and your husband are our twins. The sports analogy is applicable. I play great offense (good at making money), she plays great defense (good at saving money). I focus on the strategic issue of how are we going to retire someday, she focuses on the day-to-day where is our money going. Most importantly, we’ve come to respect the other’s strengths and recognize our own blindspots. I would not have a clue where my salary was going if I did not have her, and she would not have a clue as to how to invest for retirement without me.

    Regarding the formula, according to the MND formula, I am hardly wealthy (despite being well into the top percentiles for income & NW). That’s because my income is fairly lumpy. If I average it out over a number of years, I do much better on the formula.

    In all fairness though, I think the formula was intended not so much as an absolute determinant of wealth, but as a measure of how well people convert income into wealth. If you fall short on the formula, you are not a prodigious accumulator of wealth, if you exceed the formula, then you are a prodigious accumulator (i.e. basically a good saver). Kinda silly, but it’s the concept, rather than the actual numbers that is important.

    I have a lot of issues with how the material is presented (it’s really more or less the author’s opinions only barely grounded in fact). Still, it’s a good read so long as you take it with a grain of salt.

    BTW, I know lot’s of millionaires who don’t fit the MND profile.

  10. I’m 25 and about halfway to where I should be according to this formula. Yet I feel financially secure because I live on much less than I make, contribute the max to retirement accounts, and save the rest. The formula doesn’t work well for those under 30, or for those who’ve recently had a pay adjustment up or down.

  11. The formula isn’t perfect, but gives everyone a target to aim for. Each person will then have to decide whether they feel comfortable above or below that target. If anything, it serves as a good discussion starter, as seen in these comments. I’m a younger person making roughly $50k but have been working for only a few years, so there’s no way I could have the amassed the $120k target with my lifestyle. But like I said, it gives me a good target to aim for.

  12. This formula, when I first read in MND, seemed rather ad hoc to me. But in the many years since I have read the book, I have understood it better, and now I consider it to be revolutionary.

    IMHO, this formula, along with the Rule of 72, and the 4% withdrawal rule in retirement, form the 3 great rules of thumb in Personal Finance.

    JLP, since you wondered where the factor 10 came from, consider the following:

    If you are already wealthy according to this formula, you will stay wealthy as long as you continue to save 10% of your income.

    For those who say that this formula doesn’t work for those just starting out, I beg to differ. If you don’t have the expected net worth, it tells you that you need to save a lot more than 10% of your income if you ever hope to be wealthy.

  13. WOW! Lots of good comments on this one. It seems as though Thomas Stanley ruffled a few feathers with this one. FYI – According to their formula, my wife and I are about 50% where we need to be.

    Like I said in the post, it is only meant to be a rough estimate at one’s ability to build wealth. I’ll go more into detail about the formula in a follow-up post.

    Thanks for all the comments. I love to read the discussions.

  14. I reran the formula based on an estimate of my AVERAGE income over the past 5 years (to smooth out the ups & downs) and what do know: I’m ahead of the curve! I also ran it at what I conservatively estimate my future 5 year average income will be, and I’m still at least right on the mark. Whew! [big sigh of relief].

    I would attribute this to three things: (1) Recent increases in earnings (past 5 yrs) that have allowed me to put put away significant portions of income; (2) Employee Stock options over the past 5 years that have done really, really well; and (3) R.E. gains.

    Much before all that, I would have probably been well-below the curve. Which goes to show you that it is possible to catch up – and also that good offense (making the money) is at least as important as good defense (saving the money).

  15. JLP –

    When you say you and your wife are you counting each income and net worth separately? Are you combining your ages? Taking the average? How are you applying that?

    Second, I think the 10% is partly what Matt Says, but more so as a wealth gauge it is implying whether the returns on your assets would replace your income (assuming 10% long term returns.)

    Frankly, I won’t feel wealthy until my net worth is at least 20x my annual income (inflation, other unexpected turns happen.) I don’t need to divide by anything after that, but the Millionaire method lets you gauge progress more steadily.

  16. The examples shown over-estimate net worth.

    Why is the value of tax deferred funds such as a 401K treated exactly the same as a Roth IRA? When you withdraw money from a 401K, you will have to pay taxes on it. 401K and traditional IRA balances should be adjusted downward to account for taxes — either that or taxes should be added to the liability column.

    What about the capital gains taxes you’ll have to pay on investments? What about the real estate commissions you’ll have to pay to sell your property? Can you realistically expect to get that much if you sold your personal property at a garage or estate sale? Yes, it might cost that much to replace it at retail prices in a department store, but you won’t get that much if you sell it

    As far as a target value for net worth, it should be based on your spending, not your income. I don’t feel that the promotion and salary increase suddenly put me behind — since I didn’t increase my spending the added income will increase my relative net worth.

    A simplistic formula based on age is ridiculous. Is a 20 year-old just entering the work force supposed to have suddenly saved 2 years’ worth of income? Silly.

    A better formula would be based on actual spending. For a younger person be weighted by how long the participation in the labor force has been. For an older person, it would be weighted toward how close retirement is and how long is the expected time in retirement. A young person could adjust spending to fit savings, and an older person could adjust spending and planned retirement date.

  17. A simplistic formula based on age is ridiculous. Is a 20 year-old just entering the work force supposed to have suddenly saved 2 years’ worth of income? Silly.

    Again, although the formula is hardly perfect, I’m confused as to why so many people think this particular example is its death knell. A 20-year-old isn’t “supposed” to have suddenly saved 2 years’ worth of income because 20-year-olds aren’t usually wealthy. So, yes, the bar for being wealthy is much less obtainable for 20-somethings… which is what we’d expect, right?

  18. It’s amazing how this simple formula causes such misunderstanding. No, the 20-year old isn’t “supposed to have suddenly saved 2 years’s worth of income”. Instead, it says that the 20 year old will not be considered *WEALTHY* until he has done so. Why is it so hard to understand that most 20 year-olds aren’t wealthy?

    Mathematically, what MND gives you is a necessary condition for wealth, which can be stated simply as follows:

    Net worth > Income * Age

    where Age is expressed in decades. There you have it, a simple, elegant, objective relation between the three most fundamantal numbers in your (financial) life: age, income and net worth.

    What’s impressive is that this works regardless of a lot of factors: which country/currency/tax laws you are subject to, your investment/risk profile, cost-of-living/inflation considerations, other subjective/emotional factors people often associate with wealth.

    Yes, there are many exceptions to this rule (such as those who lead super-frugal lifestyles); that’s why it is called a rule of thumb.

  19. I measure wealth in terms of how well funded my future expenses are. If my retirement and my kids’ college tuition were already completely funded, I would be very happy. I’m not going to retire for about 20 years, and my kids have a few years to go before college. So I have to consider whether I have funded the portion of those expenses that I already need to have funded. That’s what formulas like this are all about. Unfortunately, to make them simple, it is necessary to bake in all kinds of assumptions about rate of return, inflation rates, salary increases at various times in one’s career, etc.

  20. To determine if you are wealthy or not is like asking the proverbial question which came first the egg or the chicken. However, if a person has taken some commerce subjects it is quantifiable to determine if you are wealthy or not. Let me explain, if your assets exceed the liabilities that you incur you will have what we call equity or owner’s equity and equity is always equated to capital or wealth.
    Let me therefore determine if a layman is wealthy or not with the following reasonings:
    A)A PERSON IS WEALTHY DEFENDING ON HIS ECONOMIC KNOWLEDGE ON THE LAW OF SUPPLY AND DEMAND. What does the law of supply and demand states: when the supply is low and the demand is high, prices will go up while if the supply is high and the demand is low, prices will go down. So if you want to determine whether you can become wealthy or not simply follow the law of supply and demand. Create products in the market where the demand is high and see to it that other businessmen do not have the same product that you have so that you can command the price in the market.
    B) A PERSON IS WEALTHY IF HE COULD APPLY THE CONCEPT OF TOTAL QUALITY MANAGEMENT (TQM). Simply what does TQM stands for, it simply means – doing things right in the beginning of an undertaking and doing it right at all times. A person who can apply TQM in his business or even in his own personal life will become wealthy and successful. World leaders are now following the concept of TQM because of its saga to succeed.
    C) A PERSON IS WEALTHY FOR AS LONG AS HE CAN HANDLE AND SUPERVISE THE WEALTH AND ASSETS OF HIS ENVIRONMENT FOR THE BETTER USE OF HIS FELLOWMEN. The wealth of the nation is better accepted in the norm that the common men do adhere to the principle that the assets, wealth and even taxes of the nation is being supervised in the good hands of economist and technocrats for the better usage of the nation and its environment. A person can be wealthy on the ground that there is that implied financial morality and ethics provided to him impliedly by the people to manage their funds, assets, cash and even taxes for their own benefit and for their better investment opportunities and such privilege would make that person wealthy.
    D) A PERSON IS DETERMINED TO BE WEALTHY IF AT THE END OF THE DAY WHEN HE HAS ACCUMULATED SURPLUS AMOUNTS OF WEALTH HIS MAIN FOCUS IS TO HELP THE UNFORTUNATE BROTHERS THAT HE HAS. In the end after all the science of accumulating money has been achieved, the only purpose of wealth is to help the unfortunate ones who are still poor and helpless. There is always a saying: “The true test of a man’s strength is in how he treats the poor and the helpless.”
    E) A PERSON IS DETERMINED WEALTHY IF HE EARNS MORE THAN HE CONSUMES. Earn more than you spend will make a person become wealthy. Remember the formula of 85/15, 85% for expenses and 15% for savings. Save as what the Richest Man in Babylon advocates: ” Part of what you earn is yours to keep.” Remember to save 15% of your income since spending 85% of it will make you realize later on that you actually did not need those stuffs or goods that you bought after all.
    F) A PERSON IS DETERMINED WEALTHY IF HE IS HEALTHY. Remember the saying health is wealth is indeed true. A person is not wealthy even if he owns all the wealth in world if he is sickly and indispose.
    G) A PERSON CAN BE DETERMINED TO BE WEALTHY AND RICH IF HE HAS THE IRON WILL AND DETERMINATION AND MUST BURN THE BRIDGES BEHIND HIM. This is equivalent to the story of a warrior going into a war with far greater number of foes and armaments but the leader of that great army told his men to burn the bridges that they just passed by and reminded them that they can no longer come back to their home land and so therefore they either have to win or vanish. So because of the will and determination of that great warrior to win they overpowered their enemies and became victorious. It is victory or be vanquished. This must also be the will and determination for a person to become wealthy, he must burn his bridges behind him. It is a do or die stance. He must have the will to be financially successfull and become wealthy. Remember what William Shakespear once said in his nobel Julius ceasar: ” There is a tide in the affairs of men , which taken at the flood, leads on to fortune, omitted, all the voyage of their life is bound in shallows and misseries. On such a full sea are we now afloat and we must take the current when it serves or lose our ventures.”

  21. I prefer to look at the income number as my desired income in retirement number. In that context, it provides a better informational foundation for what I need to do in order to retire someday. I currently earn more than I figure I’ll need as income in retirement. If I want to retire on $100,000 a year then I should have net worth of $250,000 at 25 years of age, and $650,000 at age 65. Admittedly, $250,000 for the average 25-year old is not realistic and some adjustment should probably be made but it at least gives you an idea of what you need to do to “catch up”. Once you catch up to the number, it is not particularly difficult stay up with it, simply through compounding.

    It is interesting to note how this number compares with an article I read once that said that in retirement if you assume your mortgage was paid off, your costs decline (except health care), you no longer save, and you start receiving social security and pension payments, that one needs assets of only 7 times the desired retirement income. In this case it is $700,000 of financial assets (not including your home).

    As for rules of thumb that an earlier poster mentioned (rule of 72, 4% withdrawal rates, etc.) one of my favorites has been to point out to young people that $100 saved per month at age 25 and placed in the small cap value stock asset category has consistently grown to more than $1 million over a 40-year career. Who can’t save $100 per month?

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