"Wealthy" Defined

January 7, 2005

Are you wealthy? Slum dwellers will probably say that you are, but Bill Gates will probably say that you aren't. The concept of wealth, therefore, is relative. Nonetheless, at one point or another you'll probably want to know if you've finally arrived. So who's to decide if you're wealthy or not by then? Just what does the word 'wealthy' really mean?

According to the book "The Millionaire Next Door," which was authored by Dr. Thomas Stanley and Dr. William Danko, you are definitely wealthy if you have a net worth that is twice what a person of your age and household income is supposed to have. Based on their years and years of research, they have come up with a simple but fairly accurate formula for determining what your net worth should be:

"Multiply your age by your realized pretax annual household income from all sources except inheritance. Divide the result by 10. This, less your inherited wealth, is what your net worth should be."

For instance, if Mr. Adams who's 45 years old has an annual salary of $60,000 and earns an additional $24,000 per year from his web business, his total annual income would be $84,000. Multiplying that by 45 (his age) and dividing the result by 10 would give $378,000. He should therefore have a net worth of at least $378,000.

As another example, Mrs. Moore earns $260,000 per year from her various investments. If she's 64 years old, then expect her net worth to be quite a sum, since both her age and income are in the upper range. This actually translates to $260,000 times 68 divided by 10, or $1,768,000!

According to Stanley and Danko, people in the same age and income brackets can be classified into three categories: 1) the prodigious accumulators of wealth (PAW's), who are in the uppermost quartile of the group in terms of wealth accumulation (net worth, not income); 2) the under accumulators of wealth (UAW's), who belong to the lowermost wealth accumulation quartile of the group; and 3) the average accumulators of wealth (AAW's), who belong to the two middle quartiles of the group based on wealth accumulation.

You are considered well-off if you belong to the PAW group. If you have accumulated a net worth that's twice the amount expected of your age and income brackets, then you may well qualify for the distinction of being wealthy. Note that this definition of 'being wealthy' preserves the relative nature of, well, 'being wealthy.'

Thus, young people are not expected to be as rich as old people, yet they can be considered 'wealthy' if they've already accumulated enough assets to justify the title (twice their expected net worth, remember?). On the other hand, high income generators who spend their money like there's no tomorrow and fail to accumulate assets can be looked upon as 'not wealthy,' which is what they really would be the very instant they lose their source of income.

So, back to the old question - are you wealthy? Take out that calculator and find out. More than this, of course, is your honest-to-goodness assessment of how you feel in terms of what you have accumulated so far. If you lose all your sources of income today, how long will you survive on your assets and savings? Will they sustain your current life style for many years, or will you start begging for a job the next day?

Yup, it's all about what you already have, not what you'll earn next month.

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