How Do You Define Wealth? Hope for the Little Guy.

by Joe Plemon on November 1, 2010

Owning a huge home does not necessarily signify wealth


Which of these two families would you consider to be wealthy

1. Mr. and Mrs. Charles Bobbins. Charles is a forty one year old fireman. He and his wife, a secretary, have a combined annual income of $55,000 and a net worth of $460,000. Their low consumption lifestyle would enable them to sustain themselves for ten years without working. 

2. Mr. and Mrs. John J. Ashton. John is a 56 year old M.D. with an annual income of approximately $560,000 and a net worth of $1.1 million. His high consumption lifestyle would allow him and his family to sustain themselves for two, or perhaps three years if he were unemployed. 

It is possible for a firefighter to be wealthier than an M. D.


Many of you recognize these scenarios from Stanley and Danko’s classic book, “The Millionaire Next Door”, a refreshing and eye-opening look at millionaires in America. So…how did you answer the above quiz? Is it possible that a non-millionaire can be wealthier than a millionaire? As you might suspect, true wealth is more than simply one’s net worth; standard of living and age are also factors. The Bobbins family, because they could sustain themselves for ten years if unemployed, would be considered wealthier than the Ashtons, who could only make it for two to three years with no income. 

A Wealth Formula

Rather than stating net worth simply in terms of current assets, Stanley and Danko have developed the following formula which gives a more accurate definition of wealth by factoring in age, income and (indirectly) standard of living: 

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be. 

Example: A 41 year old making $143,000 a year, with investments earning another $12,000. 

$155,00 x 41 = $6,355,000. Dividing by ten, his net worth should be $635,000. 

Stop now and figure yours. How did you do? 

How Am I Doing?

I would be reluctant to share my net worth with the world anyway (the whole world DOES read my blog…right?), but my situation is a bit convoluted because I draw three pension checks every month, meaning I have a good income, but comparatively little nest egg.   Anyone know the net worth value of a pension?  Hmmm. 

Are you a PAW, an AAW or a UAW?

Of course our authors are not content to stop with a formula; based on your numbers, you could be a PAW (Prodigious Accumulator of Wealth), an AAW (Average Accumulator of Wealth) or UAW (Under Accumulator of Wealth). Simply put, if your net worth/wealth is twice that of the formula, you are clearly a PAW; if it is half that of the formula, you are an UAW. 

A Surprising Comparison

To demonstrate the difference between a PAW and a UAW, Stanley and Danko share the following scenario: 

Mr. Miller “Bubba” Richards, age fifty, is the proprietor of a mobile-home dealership. His household income last year was $90,200. Mr. Richard’s net worth, as computed via the wealth equation, is expected to be $451,000. But “Bubba” is a PAW. His actual net worth is $1.1 million. 

His counterpart is James H. Ford II. Mr. Ford, aged fifty-one, is an attorney. His income last year was $92,330, slightly more than Mr. Richards’s. But Mr. Ford’s actual net worth is only $226,511 compared to his expected net worth (as computed by the formula) of $470,883. Mr. Ford, by definition, is an under accumulator of wealth. 

The obvious question is, “How can an attorney have less wealth (only about 20%) than a mobile-home dealer?” The answer could be in these two simpler questions: 

  • How much money does it take to maintain the upper-middle-class lifestyle of an attorney and his family?
  • How much money is required to maintain the middle class or even blue collar lifestyle of a mobile-home dealer and his family?

Which one would feel compelled to drive a luxury car? Which would wear a different high quality suit to work each day? Who would belong to one or more country clubs? Which would need expensive Tiffany silverware and serving trays? 

A logical conclusion is that UAWs have a higher propensity to spend, consume and live above their means than their counterparts in the PAW group. 

Concluding thoughts

Many of us assume that those who drive luxury cars and live in huge houses are the wealthy, but looks can be deceiving. It may be quite possible that ordinary folks with moderate standards of living can be the truly wealthy. Your own neighbors could be the Millionaires Next Door. Or…you could be! 

Readers: what concepts of wealth did you have before reading this post? Any changes? What would you change with Stanley and Danko’s formula?   What could you do to become a PAW?


{ 15 comments… read them below or add one }

Jake Stichler November 1, 2010 at 5:18 am

Using that calculation, my wealth is $46,000 (20k * 23 years old / 10). That is, frankly, a poor formula, and the result for me is total bullocks, all things considered. Though, you did say “should,” which does change things, as I “should” not be $47k in debt…


joeplemon November 1, 2010 at 7:51 am

Hmmm. The word “should” does make a huge difference. If you had that $47,000 in hand instead of in debt, you would be right on target (according to the formula).


Dr Dean November 1, 2010 at 1:27 pm

Joe, great post! I think these stories need to be retold over and over as they really get the word out on the dangers of a consumption lifestyle.


retireby40 November 1, 2010 at 3:11 pm

I did the calculation for my household and we have about 40% over the result. This is a little disappointing, but that’s ok. Our income went up quite a bit the last 3-4 years because my wife finished grad school and went back to work. They should put house hold debt in the formula somehow.


joeplemon November 2, 2010 at 7:25 am

@Dr. Dean,
Thanks. Although Millionaire Next Door was written in the mid 90s, these concepts have stuck with me. Thinking in terms of PAW instead of simply gross net worth is an encouragement that one can be wealthy without ever making huge income.

If you are 40% over the result, you are doing well. I think that household debt is indirectly part of the equation because achieving a decent net worth is very difficult if you have much debt.


Steven and Debra November 2, 2010 at 3:13 pm

The Millionaire Next Door is a great book. The timing of this book’s release, in the mid-90s, was perfect, but it is too bad more people didn’t take it to heart. Far too many of the truly great books are not fully appreciated until many years after their initial publication.

I haven’t checked yet to see if they’ve updated this book, in subsequent editions, but something tells me the authors would probably be inclined to revise their formula to reflect a significantly more aggressive posture, in the accumulation of wealth, than that represented in their initial offering.

Joe, you asked how one places a value on pensions. Pensions are a promise no better or no worse than the entity making them. In this stage of the trust cycle, promises have become suspect. The government provides partial backstops (via the taxpayer) for bankruput pensions, on a piece-meal basis, but a systemic default might be another matter entirely. And, at some point, the political finger of fate may influence the outcome as the politics of envy comes into play. Those with pensions will be envied by those who have little hope of having a pension in the future and they will not be inclined to support unfunded or underfunded pensions relying too heavily on continuing contributions rather than existing assets.


Save Money November 2, 2010 at 8:21 pm

I’m a younger guy and I would have to agree that the formula doesn’t take into account younger workers. Let’s say you graduate and make $40k at age 22, then your net worth should be $96,800 (40k x 22 / 10). On top of that, let’s say you add about $20k in student loans and you’re actually in the hole about $116,800 from your goal.

It takes money to make money, so taking on debt in this case was crucial for the college graduate to earn $40k a year and repay it back later. I like that calculation for older workers but not for people starting out.


Dave@50plusfinance November 2, 2010 at 10:32 pm

I don’t like the formula for wealth. The resulting number is meaningless. By the numbers, net worth is the only thing I would go by. What you have saved for your future gives you a “Comfort Factor”. I wish they could measure that because the family with 10 years worth of expenses has a comfort factor higher than the one with two or three years of expenses.

I do like how consumption is the deciding factor in the accumulation of wealth.


joeplemon November 4, 2010 at 8:13 am

@Steven and Debra,
Yes, and update of The Millionaire Next Door would be very much welcomed. And it would be interesting to see if the authors came up with an updated and more aggressive formula.
Thanks for the thoughts on the pension. Agreed that it is only as good as the source of payments. Still, I wonder if there is a good way to equate, for example, a $2000/month pension to “X” net worth.

I don’t think Stanley and Danko’s numbers from their formula are meaningless; they do give a benchmark to let people know how, for their age and income, they are doing. But I agree that a formula that shows “comfort factor” would be very helpful. The eye opener for me is that the millionaire Doctor can have a much smaller comfort factor than the non-millionaire fireman and his secretary wife. This “comfort factor” as you call it would be a true indicator of wealth.

Why don’t you develop that formula?


Dave@50plusfinance November 4, 2010 at 5:25 pm

This post has drawn me back into the discussion because according to the formula I am right on the money so to speak. But my net worth is almost completely in the equity of my house, not my money. Would a cashless net worth even be applicable to this? I am definitely a UAW.


Steven and Debra November 4, 2010 at 9:21 pm

“Still, I wonder if there is a good way to equate, for example, a $2000/month pension to “X” net worth.”
One way to equate the value, strictly on a mathematical basis, would be to determine the number of dollars, in the form of treasuries, along with a given interest rate that would generate $2000 a month. In our low interest rate environment, that would be a substantial sum.

A person could likewise perform the same calculation to determine the networth value of their employment income. That number would also be a substantial figure given our low interest rate environment.

Unfortunately, the above forms of income may not be sustainable and therefore should not be counted in one’s personal networth, but it can be a useful exercise or tool to help us better appreciate and have the appropriate level of gratitude for what we are receiving. The more gratitude we have for our incomes, the better we manage it.


joeplemon November 5, 2010 at 7:02 am

Hmmm. I can see why you say that a “comfort factor” formula would be more meaningful. I still think you ought to develop one. But, based on your circumstances, it would need to somehow include liquidity. This is getting complicated.

@Steven and Debra,
Thanks for helping me think this through. I realize that that assigning a net worth number to a pension is simply a mathematical exercise with very little actual meaning. But, as you said, the usefulness may be to help me appreciate what I am receiving.

Great last sentence: “the more gratitude we have for our incomes, the better we manage it”. I am very grateful for my pension and strive to manage it accordingly.


joeplemon November 8, 2010 at 3:07 pm

@Save Money,
Sorry for the delayed reply…I just fished you out of my spam folder.

I hadn’t run the scenario for younger people, but you make your point well. Stanley and Danko’s formula seems to have some holes in it, but still is good for those who have been in the work force a while.


Evan November 8, 2010 at 7:15 pm

Not that it is your fault, I don’t really understand “the formula” it seems like it is attempting to zero everyone out, but who cares!

If someone has $22mil and $21 of it is from inheritance and he is spending less than the investment account giving off who cares? I just don’t get it.


Khaleef @ KNS Financial November 10, 2010 at 8:41 pm

I definitely see wealth as being tied to these ratios. Income is irrelevant if you fail to consider liabilities and expenses. I like to look at net cash flow, because even net worth can be flawed.


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