LaCostaRacer

Here's a thread that everyone can participate in if they want because everyone has their own personal story to tell if they choose to. You compete against yourself and get a quick assessment as to where you should be regarding your networth for your age. Perhaps, people can share some of their secrets for getting to where they are now too. I'll share my tips at the bottom.

For those of you that read the 'Millionaire Next Door' you will quickly know what I'm getting to. For those that haven't, it's quite easy.

The 'Millionare Next Door' book profiles 3 categories of individuals:

-AAW or Average Accumalator of Wealth - this is the average level you would want to be- see the formula below to see what this means.

-PAW or rodigous Accumalator of Wealth - this is what most Millionaires are and is 2x that of a AAW

-UAW or Under Accumalator of Wealth - this winds up being 1/2 the wealth of a AAW and tends to be a big-spender, possibly high income but with lots of debt

All these terms are based on a simple wealth formula, which is:

nominal net worth = ( <age> * pre-tax income ) / 10 - (any inherited wealth)

Here's an example: 35yr old making 100K per year
==> (35 * 100,000) / 10
== $350,000 of net worth (Net worth = (Assets - liabilites) )

(e.g., If this person inherited 50K from Grandpa 5 years ago, then the result would actually be 300,000 instead)

In this example an AAW would have a net-worth of about 350,000. A PAW would have $700,000 or twice that of a AAW. Likewise a UAW would have 1/2 that of a AAW or only $175,000.

What makes this good for all people, is that it has little to do with how much income, education you have but more with what you do with your income. There could be distortions when someone has a very low paying job for a long time and then gets rapidly promoted the last few years- try to average your income if that fits you and you'll be good.

I'm over simplifying things a little, but that's the quick summary the book gives. In fact, the book profiles many Millionaire/PAWs that were school teachers which has been known as a lower income type of job- although very rewarding and fullfilling.

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We (family of 4) are comfortably in the PAW category and have been for a long time.

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I guess my wealth tips are:

-avoid trying to keep up with other friends, family, or neighbors in the acquisition of stuff. This is hard in the beginning, but gets easier and then you have to live through it again raising children and teaching them this important lesson. My 13yr old finally gets it, but my 11yr old is a different story. He has big-time UAW tendencies at the moment.

-defer the new-car or new-house bugs as long as reasonable- this is particularly hard for car enthusiast like most of us. I keep my cars about 8-10 years usually.

-try to do things yourself when it makes sense I stopped using a money manager 10 years ago and that was the best thing I did. I also manage my own properties for rentals to save 9% on management fees.

-avoid student loans for college whenever possible- the loan amounts are getting obscene e.g., http://twohundredthou.com/

-avoid gambling since it's a rigged game anyway and you will lose. Investing in stock is not gambling and is something I do a lot of. Noobs should simply buy an SP500 i-share if they want to match market performance and beat many money managers with little hassles.

-buying quality instead of quantity- especially true for real estate where location is very important

-being greedy in fearful times and fearful in greedy times. I did pretty well with company stock options back in the 1990's and even post-2001. Real estate has also been good to hold even when it was under-par value back in the mid-90's.

-be generous to other people and charities. It's amazing how this works and I have no facts to back it up. I tithe at church as an example of this, but we give to other charities too. I have never regretted doing this and we always have plenty of extra money to live on. This is one of those good karma things and makes you feel like you're helping the world a little bit

Anyway, I hope this thread goes somewhere and helps people in the process.

doopstr

When you get to the point that you really understand that the new car loan you are about to sign is going to cost you over $500 a month, there is hope. Realizing the impact a few months after you signed is too late.

I didn't fully grasp the concept until I was over 30 and had a kid.

thunder04

iTrader: (1)

At this point in my life, my net worth is in the red (so I guess that puts me at UAW). This is due to buying a house a year and a half ago and my student loans (I'd do things differently with school if I could do it over again). Otherwise, I'm debt free and plan to keep it that way!

LaCostaRacer

^ rest assured Thunder that there are many people like you in these times. Since homes tend to be the #1 asset of people, it's perfectly understandable that you could be underwater at this time with depressed home prices.

One tip I have if you can muster it is:

- consider adding some extra principal to your monthly home payment. This drastically builds equity in the beginning of the loan and is a good no-risk return on investment. We were underwater in our current house back in the mid-90's and it's no fun but we continued paying those extra principal payments. I like to round to the nearest $50 as a good starting point. Now our house is paid for and those early payments helped quite a bit.

good luck!

NSXNEXT

iTrader: (2)

^ (depending on interest rate) pay off loans first, then max out 401K, then liquid savings, then pay more principal.

thunder04

iTrader: (1)

I'm currently in the process of refinancing my mortgage and I'm thinking about applying the difference in monthly payment to principal. It'd be nice to pay it off in ~20 years.

Or apply it to my student loans. I'm not completely sure yet. One or the other for sure.

Pete2010

^^ I'd apply it to the one that has the higher interest rate.

thunder04

iTrader: (1)

Looks like that's federal student loans > mortgage > private student loans.

However, there is a 10 year forgiveness on my federal loans since I work in public education. Should I take advantage of that and simply pay the minimums, or pretend it doesn't exist?

NSXNEXT

iTrader: (2)

My always pay off your debt. With the economy and job market the way it is (and will be for a while) reduce the amount of debt you have in the event you are unemployed.

LaCostaRacer

^ I do understand the merits of paying off debt with higher interest as long as it helps you actually stay out of debt in the future. I know lots of people that pay off the car loan only to buy another new car a short time later and get back into debt again. The object in building wealth is to not even have the car loan in the first place and pay yourself effectively the 4-9% interest by not having payments. Of coarse student loans are a different story all together and one I'm not familiar with to comment on.


I would still pay a little extra on the mortgage anyway, since it builds equity quickly. For example if you have a payment of $1111.00, I would round the payment up to $1150.00 and pay the extra $39. Thirty years of compounding makes a huge difference at the beginning of a loan and you probably won't miss the extra $39.00 anyway. Early in the loan the extra $39 might be equal to 30 to 40% of the monthly principal applied which is pretty significant. If times get tough, you can always go back to the original payment and may even buy yourself some extra latitude with a bank if you ever get behind in payments possibly.

achenator

The "balance" is something I struggle with all the time. I max out my self employed profit sharing and 401k plans at $49k per year and also we currently provide a VERY generous pension plan to shareholders after 25 years. Is the pension guaranteed to be there in 20 years for me? No, maybe not in it's current form but I think it will be there in some form.

I like cars, toys vacations etc. and often have trouble finding the line is where I think I am saving enough and spending not too much. Any thoughts on guidelines as a certain percentage of income that should ultimately be saved? I would guess this changes as income/lifestyle goes up or down. I am fortunate enough to be able to save more than most people make, but what is enough?

LaCostaRacer

^ Regarding the saving question, I had to rescan the book (I read this 5 years ago), and find what it said regarding the average Millionaire's annual savings rate and it's 15%.

I think you might want to go back to my initial post for the 'balance' questions. Do the math and see where you match up. I'm not familiar with pension plans so I can't help you in this- I would think that there might be a 'cash value' tagged to them that you can count as a asset today though.

If you're an AAW then you're doing what most people are doing and should be satisfied. If you're an PAW, then you're doing what many self-made Millionaires wind up doing and should feel very good and not stress over taking some splurges once in a while. If you're a UAW then you might want to make some changes possibly. These are just general guidelines. My Father has a great pension so I know that helps once you retire and you'll appreciate it when you get to use it.

LaCostaRacer

Bumped for relevance to a new thread on best saving amount.

dmikon

I never really liked the MND net worth formula. It seems that it is far too unrealistic at the bottom of the age scale, and insufficient at the top.

For example, a 25 year old with a $50,000 income should have a $125,000 net worth. That seems very unrealistic for that age.

At the same time, a 60 year old with a $100,000 income should have a $600,000 net worth, which is quite on the low side considering the age and the income.

LaCostaRacer

^ Very true on the low end the age scale (since the first 16 years result in no income usually and income increases rapidly the first 10 years of career), but I think the older end is reasonable in some respects.

Note the 50K/600K numbers quoted would only be for the Average accumulator of wealth- a PAW would have 1.2M at 60 and that would not include inherited assets. I think a 25 year old with 50K of wealth would be PAW-like because it would mean than they saved about 15K a year after college which would be a good accomplishment. I think the formula has more merit once someone hits 30. Perhaps a better formula would have the number of years working instead like this:

((# years working * current salary) / 10-(age/10)) - inherited wealth

a 25 year old would work out as: $20,000 instead with a 50k salary- assuming 3 years working out of college. This would mean saving about 7k a year after college. The formula is also harder on the 60 year old (begins work at 22) who would need 950K instead of the 600k to be a AAW now or almost 2M for a PAW.

I still think the original formula as well as this revised formula meets the original goals of putting all income levels on a level playing field for gauging things better which is my main take away from the book: you don't have to have a huge income to become wealthy but you do need to save and invest your money wisely.

dmikon

$1.2M PAW using the original formula for a 60 year old with a $100K salary (assuming he/she did not just start making that much) is nothing great. Using the typical 4% safe withdrawal rate, that would produce a $48,000 a year income in retirement. Not too terrible, but considering the salary and the age, I would hardly call that person a "prodigious" accumulator of wealth.

Your formula is definitely better. However, I think the 60 year old is getting off too easy. I would say $2M would be good, $2.5M+ would be "prodigious".

gatrhumpy

iTrader: (1)

Interesting concepts.

We're paying the equivalent of $150 extra per month on our mortgage, and that amount has increased because of the reduced tax assessment on our house. We just put that extra to principle.

If I can talk the wife into, after she graduates from her Nurse Practitioner Master's Degree and if she gets a full-time job (average pay is ~$85K-$120K per year), if we put another $1,550 on the mortgage (which at that point we could handle if my wife worked full time), we would pay off our house by the time I'm 39.

Babnik

I've read this book and thought it was great. However I don't think their formula to determine whether you're a PAW/UAW is a good one, at least not for younger people, because in my experience most people my age are still very early in their careers, and still paying off their student loans, etc so they are not gonna have significant assets. Also peoples' salaries can increase greatly as they progress in their careers, suppose you get a huge raise from 50k to 80k then you would have to plug in 80k for your income but if you've only been making 80k for a short time then the formula wouldn't accurately reflect what your earning potential should have been.

LaCostaRacer

^yes- did you see my post #15- I had a new formula like below:

((# years working * current salary) / 10-(age/10)) - inherited wealth

Naturally there are adjustments that need to be made for each individual. People with loans may want to ignore the outstanding loan amount and see how things stand- much like inherited wealth is ignored.


Long term wise Student loans are a different affair and will greatly change resulting wealth depending on major. I hear about Liberal Arts majors with 100K in loans- probably not a great idea long-term for one's wealth score.