In The Millionaire Next Door I asked:
What evidence is there that the government knows the formula for becoming financially independent in America?
Our government studies “top wealth holders.” So do I. And our findings are similar. Millionaires live on the equivalent of a small proportion of their wealth. They are heavy investors in commercial real estate, private businesses, equities of public corporations, etc.
President Obama likely knows how to build wealth in America. According to a New York Times article his household wealth in 2013 “was valued as high as $7 million last year.” Note that wealth in this case is gross wealth, not necessarily net worth. I’m not criticizing our president’s level of wealth or his wealth building characteristics, just the opposite. In 2013 his household’s adjusted gross income was $481,098 or the equivalent of only 6.9% of his wealth. What about the millionaire next doors of America, those with net worths between $1M and $10M? Their return on net worth (RON) is nearly identical to the Obama’s, approximately 6.8%.
The president’s household paid $98,169 in federal tax in 2013. That translates into the equivalent of 1.4% of its wealth. This percentage may be higher if state and local taxes were paid. For the millionaire next door, it is just over 2.0% including state and local income tax.
According to my wealth equation given Mr. Obama’s age, 52, and household income, $481,098, the Obama’s expected net worth should be $2,501,710 (one tenth of age X income). But at $7,000,000 it’s about 2.80 times higher than expected. Even if the household has $1M in debts reducing its wealth figure to $6M, the couple is still above the threshold level of net worth (2X) required to be classified as a member of the balance sheet affluent segment (aka prodigious accumulators of wealth).
Most of the president’s income came from royalties on his three books and investments made possible by the proceeds (NYT)
President Obama once practiced law. I classify most people in this vocation as hunter/gathers of income because you can’t inventory legal services. He was smart to make the transition to a cultivator of wealth by authoring three books. Unlike professional services books can be inventoried and often generate income streams long after they are written. In a way, they are a storehouse of wealth. It’s the wise author who invests these income streams to build financial security. Most Americans don’t know how to build wealth. Perhaps Mr. Obama and our government should share their considerable knowledge on this topic. “Your Government’s Guide to Becoming Financially Independent” might make a great title for a series of books.