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:
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:
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:
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.