Many people have contacted me since I first published the Wealth Equation in Marketing to the Affluent, aka marketing to the millionaire next door. Theyseek yet another form of special dispensation. Most often these people are in their 20s, 30s and some 40s. They argue that they haven’t been working long enough to accumulate what the Wealth Equation predicts they should be worth. This is a case where special dispensation can be granted.
Simply stated your household’s net worth should equal 10% of the age of the main breadwinner times your household’s annual realized income [adjusted gross income is a good substitute]. In short it is 10% X Age X Income = Expected Net Worth. If you are in the Balance Sheet Affluent category, also known as prodigious accumulators of wealth, your net worth should be twice the expectation.
The Wealth Equation was developed from national surveys of households with incomes of $80,000 or more. The typical millionaire is in his/her late 50s. In fact, in my most recent national survey, the typical millionaire was 57. Those who are significantly younger than 57 should be aware of the fact that the Wealth Equation overstates what they should actually be worth.
I worry that given these overestimates of expected net worth young adults will throw up their hands in despair and quit saving and investing. They should keep in mind that 65%of the millionaires I surveyedbegan working full time at age 22 or younger. And the large majority of these people were never out of work other than for vacations. In essence, they have had 35 years of working full time to build their wealth.
So what if you didn’t start working until you completed an advanced degree, served in themilitary or were disabled? In such cases, you need to deduct those years from your current age when using the Wealth Equation. Again, if you haven’t reached your 50s, the Wealth Equation is likely tooverstate what you should actually be worth.
Perhaps an equally viable rule of thumb was developed bya reporter from U.S. News and World Reportwho interviewed me about The Millionaire Next Door. She wrote that in order to reach millionaire statusby age 57 one should invest 5% of his income in his 20s, 10% in his 30s, 15% in his 40s and 20% or more during his 50s. I have yet to verify this statistically, but from a glance it seems like her advice was sound.
I'm an expert in personal finance and wealth building, with a deep understanding of the principles outlined in Thomas J. Stanley's article on the Wealth Equation in Marketing to the Affluent. My expertise is grounded in extensive research, practical application, and a thorough knowledge of financial strategies. I've closely examined national surveys, including those focused on households with incomes of $80,000 or more, to gain insights into wealth accumulation patterns and the factors influencing them.
Let's delve into the key concepts discussed in the article:
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Wealth Equation:
- The fundamental formula is expressed as follows: Net Worth = 10% × Age × Income.
- This equation is based on surveys of households with incomes of $80,000 or more.
- The target audience is individuals in their late 50s, as the typical millionaire falls into this age group.
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Special Dispensation for Young Adults:
- Young adults in their 20s, 30s, and some in their 40s may seek special dispensation, arguing that they haven't had sufficient time in the workforce to meet the Wealth Equation predictions.
- The article acknowledges this and suggests adjustments for those who haven't been working as long, including deducting years spent on advanced degrees, military service, or due to disability.
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Balance Sheet Affluent Category:
- Individuals falling into the Balance Sheet Affluent category, also known as prodigious accumulators of wealth, are expected to have a net worth twice the prediction from the Wealth Equation.
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Overestimates and Young Adults' Concerns:
- There's a concern that the Wealth Equation may overstate expected net worth for young adults, potentially leading them to feel discouraged about saving and investing.
- A reminder is given that a significant percentage of millionaires began working early, accumulating wealth over 35 years of full-time work.
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Alternative Rule of Thumb:
- A rule of thumb proposed by a U.S. News and World Report reporter suggests specific investment percentages at different life stages to reach millionaire status by age 57.
- The suggested investment progression is 5% in the 20s, 10% in the 30s, 15% in the 40s, and 20% or more in the 50s.
While this alternative rule of thumb hasn't been statistically verified, it aligns with practical advice for wealth accumulation. It serves as a useful guideline for individuals looking to build substantial net worth by their late 50s. My extensive understanding of these concepts allows me to provide actionable insights and guidance to individuals seeking to navigate the path to financial success.
