Many people have contacted me since I first published the Wealth Equation in Marketing to the Affluent, aka marketing to the millionaire next door. They seek 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 surveyed began 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 the military 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 to overstate what you should actually be worth.
Perhaps an equally viable rule of thumb was developed by a reporter from U.S. News and World Report who interviewed me about The Millionaire Next Door. She wrote that in order to reach millionaire status by 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.