What’s Your RON (Return on Net Worth)?

March 5, 2007

While reading Thomas Stanley’s Millionaire Women Next Door, I came across something called the RON or Return on Net Worth. It’s calculated by dividing one’s household income by their net worth (assets – minus liabilities). The formula looks like this:

RON = Household Income ÷ Household Net Worth

The book gives an example of a woman who makes $125,000 per year and has a net worth of $690,000. Her RON would be calculated as follows:

RON = $125,000 ÷ $690,000

RON = .1812 or 18.12%

According to the book, this number tells us that this woman’s household realizes 18.12% of its total net worth annually.

Is this is a good number or a bad number? Would you want this number to be higher or lower? The bigger the net worth is (the bottom number) in relation to income, the smaller the RON will be. In other words, the smaller the RON, the better (as long as the income is sufficient). I would think over one’s lifetime, the RON will be big in the early stages of life and get smaller as we age since our net worth should be growing and compounding over the years.

The author then goes on to make an important point:

For those in a higher income bracket, the lower the RON, the more economically productive the household is.

The typical millionaire who is a business owner or manager has a RON of 8 – 8.3%. That’s pretty low.

Another way to look at it…

Another way to look at the RON, is to take the inverse of the RON:

1 ÷ .1812 = 5.52

This tells us that the woman in the example has $5.52 of net worth per dollar of household income, while the typical millionaire household has $12.50 (1 ÷ .08 = 12.5) of net worth per dollar of income. So, based on those numbers, this lady isn’t doing that great.

To put this in perspective without giving you too many details, our RON is 46.33%, which means that we have $2.16 of net worth per dollar of income. It’s better than nothing but not nearly as good as it could be.


How to Determine If You Are “Wealthy”

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

Analyzing Your Financial Statements with Ratios

20 responses to What’s Your RON (Return on Net Worth)?

  1. What an interesting idea. I myself was wondering about something similar recently. I’m a young worker with my first “real ” job and it occurred to me that at some point this year, my net worth (29K) will surpass my annual income (40K).

    Seems like a watershed moment, but I didn’t specifically know why. This RON percentage is a great way of expressing that — the lower your RON is, the better-off you probably are.

  2. To be blunt, I think this is a completely worthless measure. My RON would be in the low double-digits, but then I had a record year for income generation. Should I be worried – I don’t think so. If my income keeps going this way, the RON will shrink pretty fast. I don’t mind the prospect of a high RON – if it means that income is growing rapidly, as a big chunk of that income will go to building NW.

    The appropriateness of these ratios has everything to do with a variety of other factors – one size does not even come close to fitting most situations.

  3. Miguel,

    Yeah, I should have done a better job with more detail. I don’t think the measure is worthless, but I do think it needs better clarification.

    It’s like all measures in that they all need to be taken in context. For instance, if you make a lot of money one year, it’s going to make your RON look low (I mean HIGH). It’s the trend you should be looking at, not any one year in particular.

  4. We lose. Ours is something like $.60. Politely disregard the fact that we’re only in our mid 20s and own no real estate, and I will politely disregard the difference between our actual income and our taxable income.

  5. You’re right – it might not not be “completely” worthless. It’s an interesting factoid as a point for further discussion.

  6. Figures like this are probably most useful to observe over an interval. If one tracks net worth routinely an ideal outcome would be a downward slope of RON. A single snapshot is potentially useful but a trend is more so.

  7. FYI, Sorry if I tend to get briskly over Stanley’s Millionaire books – they are generally fun reading and there are some good basic ideas (like start a business or become a highly paid professional, live below your means, etc., what else is new…). But it’s mostly fiction and I take serious issue with the way he presents his half-baked, biased statistics as meaningful scientific fact.

    This RON formula is a perfect example.

  8. Miguel,

    You tossed out some pretty strong objections there, but can you elaborate specifically? The statistical integrity of Dr. Stanley’s work hasn’t been in dispute as far as I can tell. The claim that it is mostly fiction puzzles me since he publishes the hard numbers about how high net worth individuals answered his surveys and interviews. Please elaborate.

  9. As far as I know, Stanley wrote his books using information he gathered from a survey he conducted. I don’t think he would have any reason to want to lie or be dishonest since he is merely reporting what information he learned.

    I agree with Miguel in that these formulas, although fun, really should only be used as a tool and combined with other tools like the ratios for analyzing your financial statements that I wrote about a few months ago.

  10. Okay – fiction is a strong word and perhaps inappropriate. What I mean to say is that his survey’s are not statistically relevant, as his subjects are somewhat self-selecting. In other words, if you set out to find millionaires that only fit a certain profile (ex. middle class values, business owners, etc.), that is what you will find, to the exclusion of everything else.

    Stanley paints a picture that may be accurate based on the responses to his surveys and interviews, but I don’t think its necessarily representative of millionaires in general. He’s describing a very specific demographic of millionaire. I’m not saying the numbers are ficticious – but I am saying the numbers aren’t all that relevant. If you read his work carefully, there is full disclosure, but you have to read it with a critical eye.

    I think that while some of the lessons offered can be valuable, they are not entirely accurate. And that is what I mean by fiction. There are plenty of millionaires driving imported cars, living in million-dollar houses, shopping in designer boutiques, etc. the very opposite of the down-home Stanley profile. But, why talk about those people – because that does not make for a feel-good book (and it’s also not particularly instructional if you’re trying to promote certain values). I don’t object to the values – I just object to making out like it’s empirical evidence.

  11. FYI, read some of the Spotlight Reviews on Amazon – I’m not the only one who sees this flaw in his work.

  12. I may have one of the highest(i.e., worst) RON’s of any of your readers, a staggeringly high 2900%. Or, reversed it’s about $.03 of net worth for every dollar of income. Do I spend 97 cents of every dollar I make? No, I’ve been a practicing attorney in a big firm for about 18 months who’s just finished paying off the “bad” loans, still getting a financial start on life and who’s net worth is still tiny. So relatively high income and tiny net worth.

  13. LegalTherapy said:

    “…it’s about $.03 of net worth for every dollar of income. Do I spend 97 cents of every dollar I make?”

    That’s not what the RON tells you. Rather, it is just a marker as to how well you are doing. I think it should just be one of those tools you use once a year or so just to see how you are doing.

  14. I prefer the “wealth score” — derived by dividing your lifetime earnings (as reported yearly on your social security statement) by your net worth. That seems to give a better snapshot of savings, and be a little less susceptible to age-based inaccuracy.

    See for example:

  15. My RON is something like 0.8 but I have a really low income and my country does its best to help the poor.
    I hope not to remain in this category for very long; I’m only in my early 20s.
    I really liked your article! Keep up the good work!

  16. No sure if the interpretation of this measure is correct. RON is similar to ROE (return on equity), and this number is to be maximized. If you have a low RON then you are not generating income from your assets and so they are not performing. An RON of 8%, which as you say is a millionaire’s score, would mean that they are only making slightly more than bank interest from their net worth. A low RON simply means that you may have saved a lot of money, or lost your job, or be young, etc. Plus it sounds like the return that he is talking about is not from the Net Worth, but from the job.

  17. Alex – That’s an interesting way to look at it.

    FYI, as I track my own NW, I measure the growth in NW which is essentially (Annual savings from income + Annual Invmnt Gains – Invmnt Losses, divided by starting NW balance). I have been averaging in the mid-low-teens the past few yrs, and target a minimum of 10%. I think this recognizes that NW growth comes from a variety of different forms. In the early years, savings is the dominant form of NW growth (since most people are starting from scratch), and in the later years it should mostly come from investment dividends/gains, real estate income/gains, business valuation, etc.

    What I have found is that at some point, there is a cross-over where passive gains & sources overtake active income (i.e. salary-related savings) and that is when you see some very serious growth in NW.

  18. Alex,

    No, I interpreted it correctly (at least the way Stanley interprets it in the book).

    Actually, I think Stanley is using the wrong word for this calculation since it isn’t the income from the net worth that he is talking about. It’s TOTAL HOUSEHOLD INCOME, which can be derived from a number of sources (income from job, interest, investments, rent, etc.,…)

    I think Stanley’s point is that:

    1. Your net worth should be growing each and every year.
    2. Your net worth should be growing FASTER than your income.

  19. It seems this tool is most useful as an intra-person comparison tool. I can calculate my RON for each of 2004 – 2007, etc. and derive a useful insight from how my RON has changed from year to year. I don’t think it’s very helpful as a tool of comparison between individuals though. I may have a higher or lower RON than someone else and neither of us can derive any meaningful insights from it.

  20. Interesting concept. I would agree that it is a good measure to compare YOY results. I will add a link to this group in my own blog, which targets college students and 20 somethings.

    Visit at http://youngcents.blogspot.com