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 }