Comments on: How to Determine if You Are “Wealthy” http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Fri, 20 Nov 2009 19:56:44 -0800 http://wordpress.org/?v=abc hourly 1 By: Financial Samurai http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-440061 Financial Samurai Sat, 17 Oct 2009 06:00:56 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-440061 Good formula. Make sense. My true net worth is about 30% higher, but closer enough. Good formula. Make sense. My true net worth is about 30% higher, but closer enough.

]]> By: Rick http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-202595 Rick Wed, 02 Jan 2008 15:58:37 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-202595 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? 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?

]]> By: AllFinancialMatters » Blog Archive » What’s Your RON (Return on Net Worth)? http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-84362 AllFinancialMatters » Blog Archive » What’s Your RON (Return on Net Worth)? Mon, 05 Mar 2007 17:23:04 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-84362 [...] How to Determine If You Are “Wealthy” [...] [...] How to Determine If You Are “Wealthy” [...]

]]> By: Wisdom from the Rich Dad » Blog Archive » How to Determine if You Are “Wealthy” http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-62986 Wisdom from the Rich Dad » Blog Archive » How to Determine if You Are “Wealthy” Sun, 14 Jan 2007 10:55:36 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-62986 [...] Here’s a simple rule of thumb formulae where you can measure how wealthy you are.  [...] [...] Here’s a simple rule of thumb formulae where you can measure how wealthy you are.  [...]

]]> By: DR. ARTFREDO C. ABELLA - ZAMBOANGA CITY, PHILIPPINES http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-53856 DR. ARTFREDO C. ABELLA - ZAMBOANGA CITY, PHILIPPINES Thu, 14 Dec 2006 07:13:00 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-53856 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." 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.”

]]> By: Anonymous http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-26717 Anonymous Sun, 17 Sep 2006 23:29:50 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-26717 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. 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.

]]> By: » Lazy Sunday Reading on Blueprint for Financial Prosperity http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-26667 » Lazy Sunday Reading on Blueprint for Financial Prosperity Sun, 17 Sep 2006 16:44:37 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-26667 [...] JLP has a way to determine if you are wealthy. [...] [...] JLP has a way to determine if you are wealthy. [...]

]]> By: Matt http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-26658 Matt Sun, 17 Sep 2006 16:22:46 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-26658 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. 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.

]]> By: S/100/30 http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-26657 S/100/30 Sun, 17 Sep 2006 16:13:55 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-26657 <i>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.</i> 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? 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?

]]> By: Mike http://allfinancialmatters.com/2006/09/14/how-to-determine-if-you-are-wealthy/comment-page-1/#comment-26583 Mike Sun, 17 Sep 2006 04:18:29 +0000 http://allthingsfinancialblog.com/2006/09/14/how-to-determine-if-you-are-wealthy/#comment-26583 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. 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.

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