Author Topic: Revisiting The Millionaire Next Door formula: [Age * Income / 10]  (Read 6790 times)

vand

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Hopefully many MMMers are familiar with this book and it's infamous formula:

Take your age, multiply it by your gross annual income, and divide by 10 to come up with your expected net worth

Expected Net Worth = Age * Income / 10

- If this number is roughly in line with your current net worth (minus any inheritance) then you are an Average Accumulator of Wealth (AAW). 
- People with roughly twice this number can be considered Prodigeous Accumulators of Wealth (PAW).
- If you have less than half this amount then you fall into the Unaccumulator of Weath (UAW)

Good things about the formula:

- It attempts to adjust for both age and earnings
- It is inflation independent, so just as applicable today as it was when the book was written back in 1996
- It is currency independent and can be applied across different countries


However, there are also some pretty valid criticisms

- The linear nature of the formula tends to hits the sweet spot mid-career. For young people it tends to overstate their target wealth (this is a particularly big criticism), and for older people it tends to understate it.
- It doesn't easily account for career progression and big jumps in earnings very well
- Makes no concession for differing marginal tax rates

Despite these very valid shortcomings I do like this formula, but I think that it could be tweaked to better fit a typical career ladder. There have been various blog who have attempted to provide a better fitting formula.


ixtap

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #1 on: January 19, 2021, 11:42:36 AM »
Do you get a badge for being a PAW? What is one actually supposed to learn from plugging their numbers into this formula?

iris lily

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #2 on: January 19, 2021, 11:49:01 AM »
Do you get a badge for being a PAW? What is one actually supposed to learn from plugging their numbers into this formula?

This is a competition! If you are a PAW you win!

Seriously, tho, I’m glad the OP made this post because I couldn’t remember where that chart was, the one I remembered, , that defined accumulators of wealth.  We never made the top group,  we were in the high end of the next group if I remember correctly.

I love this book, it’s my favorite financial book.

dandarc

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #3 on: January 19, 2021, 11:49:29 AM »
Apparently we're not quite paws, but if a meeting goes well on Thursday we'll soon be after an overall pay cut (I proposed 60 percent job to an old employer who called last week, and they are actually willing to talk). Will be undoubtedly accumulating slower if that goes through, yet our metric here will improve.

So perhaps a reasonable enough metric for typical folk, but really bad for not typical.

Villanelle

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #4 on: January 19, 2021, 11:56:33 AM »
Is that pre-tax income?

HPstache

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #5 on: January 19, 2021, 11:59:00 AM »
What about married couples?  Divide household NW by 2?  Or is this formula for "household" net worth? 

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #6 on: January 19, 2021, 12:09:54 PM »
The mathematical problem with the formula is that weath is grown exponentially, so any formula that doesn't include an exponent function is just fitting a tangent to a curve, and is only "correct" at one particular datapoint.

That said, it is undoubtedly more straightforward for the purposes of a book to have a straightforward formula that can be calculated pretty much mentally. I know that I'm not too good at doing calculus in my head.

Thomas Stanley himself seemed fully aware of the propensity for the formula to overstate expected wealth for most young people.

http://www.thomasjstanley.com/2010/08/how-wealthy-should-you-be/

Quote
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.

wageslave23

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #7 on: January 19, 2021, 12:41:25 PM »
Yeah seems pretty useless. But I guess its a fun way to kill time.

rantk81

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #8 on: January 19, 2021, 12:41:48 PM »
NW is about 3.5X of the result of the formula.... I dunno, but the formula doesn't seem to be particularly telling...

vand

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Metalcat

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #10 on: January 19, 2021, 01:01:27 PM »
Yep, like most formulas like this, it's an okay starting point, but holds no actual meaning for any individual.

Tinker

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #11 on: January 19, 2021, 01:45:37 PM »
Is this taken from a book written exclusively for people aged 50+?

wageslave23

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #12 on: January 19, 2021, 02:42:35 PM »
an alternative formula given here:

https://www.thesimpledollar.com/financial-wellness/what-should-your-net-worth-be-why-the-millionaire-next-door-equation-falls-short-and-what-a-better-thumbnail-calculation-might-look-like/

Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5

This one works pretty well.  It says that I'm a super saver on my own.  It says that as a household we are super savers.  My wife would have been a decent saver before she met me, and turned into a super saver.  All of these are true in real life. 

alcon835

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #13 on: January 19, 2021, 02:50:53 PM »
I've always liked it as a "am I at the minimum". Of course, as incomes rise and fall these numbers can change wildly; and as others have said it is best for mid-life folks than for others.

I have tracked it the last several years, but I don't take it seriously anymore. It's sort of a legacy equation I've left in my spreadsheet that I look at as another bar at which to judge my overall success.

waltworks

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #14 on: January 19, 2021, 03:20:07 PM »
an alternative formula given here:

https://www.thesimpledollar.com/financial-wellness/what-should-your-net-worth-be-why-the-millionaire-next-door-equation-falls-short-and-what-a-better-thumbnail-calculation-might-look-like/

Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5

LOL, I was like, "that's about right!" until I realized I had forgotten the divide by 5 part.

-W

Loren Ver

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #15 on: January 19, 2021, 03:48:15 PM »
So, if I take my income from the last year before I retired and the age I was when I retired and plug it in to the equation.  Then *2.  I get the rough value I needed the stache to be around for retirement (which it roughly was). 

Ha. 

Wonder if that makes me a PAW....  The numbers seem less relevant now that I am retired and not saving but spending. 

lutorm

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #16 on: January 19, 2021, 03:58:45 PM »
The mathematical problem with the formula is that weath is grown exponentially, so any formula that doesn't include an exponent function is just fitting a tangent to a curve, and is only "correct" at one particular datapoint.
That's only true if you're not spending your wealth, which is kind of the point of this formula, no? If you lifestyle adapt to your wealth, then the formula doesn't seem unreasonable.

Ie, anyone who lets their wealth accumulate exponentially should definitely be classified as a PAW, no?

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #17 on: January 20, 2021, 02:15:19 AM »
It should be recognised that the book was written back in 1996 as a study of people within the $1-$10m net worth range at that time. That's equivilent to around the $3-$30m in today's money; ie, in terms of affluence it's a cut above your garden variety FIRE households of today and more like the upper echalons of FIRE,

Rather importantly I don't think they ever made any reference to the retirement status of their study group. Reading the book I was very much under the impression that these households continued to build their wealth as a lifelong process, and none of them quit when they hit exactly 25 times spending (of course, this all predates FIRE as we know it).

The book is not a FIRE manual, but a study of attitudes and behaviours of self-made millionaires, and needs to be seen in that light.

The formula obviously needs many caveats, and is probably a victim of how popular the book ultimately became it got applied to ever more generalized situations for which it became less and less suited.

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #18 on: January 20, 2021, 02:41:03 AM »
an alternative formula given here:

https://www.thesimpledollar.com/financial-wellness/what-should-your-net-worth-be-why-the-millionaire-next-door-equation-falls-short-and-what-a-better-thumbnail-calculation-might-look-like/

Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5

This one works pretty well.  It says that I'm a super saver on my own.  It says that as a household we are super savers.  My wife would have been a decent saver before she met me, and turned into a super saver.  All of these are true in real life.

The "- 27" thing is obviously trying to account for the average age at which people hit enter the workforce, plus some time spent in further education, plus a few early years where you may have nothing but student debt on your balance sheet.

On an individualised basis I think you can easily substitute it for something like

[years you have been in the workforce * income] / 6

Stanley again recognised this:
Quote
"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."
« Last Edit: January 20, 2021, 02:43:58 AM by vand »

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #19 on: January 20, 2021, 04:37:47 AM »
Thinking about it some more, one criticism of the formula that I would bring up is that it doesn't distinguish between housing wealth and non-housing wealth. 

The way residential real estate has performed over the last 25 years (which was not really foreseeable in 1996), many ordinary people will have a lot of wealth tied up in their home and not so much invested wealth. Therefore by the generally accepted definition of net worth which includes your housing equity, many people who bought houses and were just lucky enough to have ridden a huge bull market in real estate could be considered as PAWs without really meeting any of the other habits of self-made millionaires.

ROF Expat

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #20 on: January 20, 2021, 05:01:27 AM »
I agree with Malcat that the formula probably shouldn't mean much for any individual, except in the broadest terms. 

Even so, I found the formula to be very useful as an illustration of the authors' assertions that net worth is a better measure of financial health than income and that the mere appearance of wealth can be deceiving.  If I recall correctly, they suggested that someone like a 50-year-old PAW who might have never earned more than, say, $40,000 per year but who lived frugally and invested to create a net worth of $1 million (5x his expected net worth) was in a better financial position than a 50-year-old UAW surgeon who earned $500K per year but lived in a fancy (mortgaged with little equity) house, drove a fancy (leased) car, and generally lived lived large with little in investments or savings for a net worth of $250,000 (1/10 of his expected net worth). 

If I recall correctly, the authors then pointed out (decades before MMM) that if the first 50-year-old lost his job, he could maintain his lifestyle indefinitely, whereas the surgeon would be in big trouble very quickly. 


Michael in ABQ

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #21 on: January 20, 2021, 06:12:42 AM »
an alternative formula given here:

https://www.thesimpledollar.com/financial-wellness/what-should-your-net-worth-be-why-the-millionaire-next-door-equation-falls-short-and-what-a-better-thumbnail-calculation-might-look-like/

Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5

I'm pretty much dead on with this. The original formula I don't quite fall under half the target amount, but I'm nowhere near that number.

iris lily

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #22 on: January 20, 2021, 06:32:49 AM »
I agree with Malcat that the formula probably shouldn't mean much for any individual, except in the broadest terms. 

Even so, I found the formula to be very useful as an illustration of the authors' assertions that net worth is a better measure of financial health than income and that the mere appearance of wealth can be deceiving.  If I recall correctly, they suggested that someone like a 50-year-old PAW who might have never earned more than, say, $40,000 per year but who lived frugally and invested to create a net worth of $1 million (5x his expected net worth) was in a better financial position than a 50-year-old UAW surgeon who earned $500K per year but lived in a fancy (mortgaged with little equity) house, drove a fancy (leased) car, and generally lived lived large with little in investments or savings for a net worth of $250,000 (1/10 of his expected net worth). 

If I recall correctly, the authors then pointed out (decades before MMM) that if the first 50-year-old lost his job, he could maintain his lifestyle indefinitely, whereas the surgeon would be in big trouble very quickly.

You got it. This is an important lesson from Thomas and Stanley.

alcon835

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #23 on: January 20, 2021, 08:14:22 AM »
I agree with Malcat that the formula probably shouldn't mean much for any individual, except in the broadest terms. 

Even so, I found the formula to be very useful as an illustration of the authors' assertions that net worth is a better measure of financial health than income and that the mere appearance of wealth can be deceiving.  If I recall correctly, they suggested that someone like a 50-year-old PAW who might have never earned more than, say, $40,000 per year but who lived frugally and invested to create a net worth of $1 million (5x his expected net worth) was in a better financial position than a 50-year-old UAW surgeon who earned $500K per year but lived in a fancy (mortgaged with little equity) house, drove a fancy (leased) car, and generally lived lived large with little in investments or savings for a net worth of $250,000 (1/10 of his expected net worth). 

If I recall correctly, the authors then pointed out (decades before MMM) that if the first 50-year-old lost his job, he could maintain his lifestyle indefinitely, whereas the surgeon would be in big trouble very quickly.

You got it. This is an important lesson from Thomas and Stanley.

Agreed! This is the point of the formula, to help a person track their overall financial health, not to be an end-all be-all for financial wellness.

YttriumNitrate

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #24 on: January 20, 2021, 08:35:07 AM »
It should be recognized that the book was written back in 1996 as a study of people within the $1-$10m net worth range at that time. That's equivalent to around the $3-$30m in today's money; i.e., in terms of affluence it's a cut above your garden variety FIRE households of today and more like the upper echelons of FIRE,
Based on the CPI, a million in 1996 is worth about 1.7 million today.
https://www.bls.gov/data/inflation_calculator.htm

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #25 on: January 20, 2021, 08:42:55 AM »
It should be recognized that the book was written back in 1996 as a study of people within the $1-$10m net worth range at that time. That's equivalent to around the $3-$30m in today's money; i.e., in terms of affluence it's a cut above your garden variety FIRE households of today and more like the upper echelons of FIRE,
Based on the CPI, a million in 1996 is worth about 1.7 million today.
https://www.bls.gov/data/inflation_calculator.htm

But what have incomes done in that time?

Jack0Life

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #26 on: January 20, 2021, 09:25:29 AM »
I like the formula. It kinda balance out the high earners and lower earners. Although it doesn't take account in if you're the only bread winner supporting wife/kids.
I'm definitely a PAW which helped cause I've been laid-off.
I'm a $120k earner but only for the last 6 yrs. Been married for almost 10 yrs and my wife was going through school most of those yrs until she got a job right out of college last year.
$120,000 x 48/ 10 = $576,000. And we're at $1,135,000. I'd imagined if I was single this figure would be a lot higher.

Zikoris

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #27 on: January 20, 2021, 09:47:04 AM »
Oh right, the formula that told me I should have saved 150% of my income when I was a broke person in my early 20s.

Metalcat

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #28 on: January 20, 2021, 11:33:13 AM »
Oh right, the formula that told me I should have saved 150% of my income when I was a broke person in my early 20s.

Yeah, the whole thing gets a big eye roll from me.

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #29 on: January 20, 2021, 12:23:54 PM »
Oh right, the formula that told me I should have saved 150% of my income when I was a broke person in my early 20s.

You mean it told you rhat you were broke when you were broke? Yeah that'll be the one.

YttriumNitrate

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #30 on: January 20, 2021, 12:43:51 PM »
It should be recognized that the book was written back in 1996 as a study of people within the $1-$10m net worth range at that time. That's equivalent to around the $3-$30m in today's money; i.e., in terms of affluence it's a cut above your garden variety FIRE households of today and more like the upper echelons of FIRE,
Based on the CPI, a million in 1996 is worth about 1.7 million today.
https://www.bls.gov/data/inflation_calculator.htm
But what have incomes done in that time?
Roughly doubled. Median household income for a one earner household went from $27,895 to $55,293 while for a two earner household it went from $52,416 to $110,529 between 1996 and 2019.
https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html

Zikoris

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #31 on: January 20, 2021, 01:00:19 PM »
Oh right, the formula that told me I should have saved 150% of my income when I was a broke person in my early 20s.

You mean it told you rhat you were broke when you were broke? Yeah that'll be the one.

Emphasis on the "saved 150% of income", so I guess I was supposed to get paid to live somewhere, and also paid to eat, etc, rather than spend any actual money.

AO1FireTo

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #32 on: January 20, 2021, 07:25:26 PM »
That's the one part of the book I struggle with.  I think a better indicator of how you are doing is your savings rate.  Although how this applies seems to vary greatly.  In my case, I just see what percentage of my take home pay I spend.  I figure anything north of 50% is amazing.

ericrugiero

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #33 on: January 21, 2021, 02:24:21 PM »
That's the one part of the book I struggle with.  I think a better indicator of how you are doing is your savings rate.  Although how this applies seems to vary greatly.  In my case, I just see what percentage of my take home pay I spend.  I figure anything north of 50% is amazing.

I agree that savings rate is better but it also matters how you invest.  Someone saving 25% and investing wisely will end up better than someone saving 35% and putting it all in a checking account (or selling at the bottom of a market downturn). 

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #34 on: January 22, 2021, 01:26:52 AM »
That's the one part of the book I struggle with.  I think a better indicator of how you are doing is your savings rate.  Although how this applies seems to vary greatly.  In my case, I just see what percentage of my take home pay I spend.  I figure anything north of 50% is amazing.

I agree that savings rate is better but it also matters how you invest.  Someone saving 25% and investing wisely will end up better than someone saving 35% and putting it all in a checking account (or selling at the bottom of a market downturn).

IIRC the TMND alludes heavily to the investing characteristics of typical millionaires in its first few chapters  when it talks about the average holding period of an investment made - most are held for 2-5 yrs. Bear in mind too that this is in the days when indexing was much less common.

They did not jump in and out of the hot stocks du jour.

Playing with Fire UK

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #35 on: January 22, 2021, 02:38:38 AM »
Another measure is your net worth divided by total lifetime earnings. It's not as punchy as formulae based only on current income, but it addresses the issue that your score by these measures decreases as you get a pay rise and increase when you are made redundant.

2sk22

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #36 on: January 22, 2021, 02:44:23 AM »
I read the whole book TMND. It was moderately interesting but the book now has the feel of a musty relic from the ancient times, before tech really took off.

About the formula - in the case of my household at least, we had good but unremarkable salaries until about 2011 when our household income really took off. Our savings rate however, kept increasing as our household income increased. I suspect that this kind of non-linearity is fairly more common among the people on this forum.

Much Fishing to Do

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #37 on: January 22, 2021, 05:02:19 AM »
Another measure is your net worth divided by total lifetime earnings. It's not as punchy as formulae based only on current income, but it addresses the issue that your score by these measures decreases as you get a pay rise and increase when you are made redundant.
That's the one I find somewhat interesting because at least I can use it.  Having had income vary all over the place thru the years (mainly due to being a business owner most of those years with fluctuating profit) any formula where I am supposed to plug in a single income number is a non-starter for me.

KarefulKactus15

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #38 on: January 23, 2021, 12:10:58 PM »
As others said the formula is broken from age like 16-34.

However I had an acquaintance who was a PAW at age 20. He was truly prodigious at building wealth.   Last I heard he sold his 2 businesses here and bought a Serv pro franchise in Virginia.   So maybe the formula isn't broken for the early years and I was just average and in denial about it.

rebel_quietude

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #39 on: January 23, 2021, 07:07:53 PM »
There was another formula on a thread here that reflected the exponential nature of FIRE holdings . . .I'm trying to remember who posted it, might have been @arebelspy

Essentially worked out to (.15x(age-20)-1)*(income)

I've found it to be actually pretty close, in contrast to the PAW formula, and it's currently my favorite way of tracking expected vs actual NW. It'll probably  be less relevant after FIRE, but it fits the accumulation phase pretty well.
« Last Edit: January 23, 2021, 07:31:50 PM by rebel_quietude »

ender

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #40 on: January 23, 2021, 07:28:57 PM »
This is kinda silly for me since my income this year is going to be close to 2x what it was a few years ago.

YttriumNitrate

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #41 on: January 23, 2021, 07:57:00 PM »
This is kinda silly for me since my income this year is going to be close to 2x what it was a few years ago.

It's a good sign when there are some people saying the formula is too exponential, and others saying it is not exponential enough.

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #42 on: January 24, 2021, 05:31:48 AM »
It's probably true that as time has gone on and the gap in wealth distribution amongst the general population has grown (the rich have gotten richer) then such a simplified formula tells us less and less.

Comparing today to the past, college fees have never been such a large burden for the youngsters meaning that they have much more negative net worth than previous generations, and simultaneously taxes have been regressed for top earners, meaning high earners today are easier able to keep most of their income and build their wealth.


ender

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #43 on: January 24, 2021, 06:42:51 AM »
This is kinda silly for me since my income this year is going to be close to 2x what it was a few years ago.

It's a good sign when there are some people saying the formula is too exponential, and others saying it is not exponential enough.

Well, there's multiple factors why it's problematic.

Someone who say makes $50k for 10 years and then jumps to $250k - does it make sense to base their formula off of $250k?

A similar issue happens if you consider your income as $0 for your first 15 years, maybe $10k for 7 as you do high school/college jobs, then $50k after college. Should your formula at 22 really be using $50k?

Age and major jumps in income trajectory just break this formula.


arebelspy

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #44 on: January 24, 2021, 10:48:54 AM »
There was another formula on a thread here that reflected the exponential nature of FIRE holdings . . .I'm trying to remember who posted it, might have been @arebelspy

Essentially worked out to (.15x(age-20)-1)*(income)

I've found it to be actually pretty close, in contrast to the PAW formula, and it's currently my favorite way of tracking expected vs actual NW. It'll probably  be less relevant after FIRE, but it fits the accumulation phase pretty well.

Thanks for the @. Was me.

Went and dug up the old thread. Offers a better formula both for an average person and for a Mustachian:
https://forum.mrmoneymustache.com/welcome-to-the-forum/what-are-the-mustachian-milestones-for-saving/msg186849/#msg186849

Essentially it's silly to talk about age, rather than age - 20 (not going to earn much before that), and it's silly not using an exponent, as compounding means a 60-year old should have way more than a linear growth over a 40-year old.

MND formula way overestimates how much you should have when young, and way underestimates what you should have while old.
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PDXTabs

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #45 on: January 24, 2021, 11:00:40 AM »
Oh right, the formula that told me I should have saved 150% of my income when I was a broke person in my early 20s.

You mean it told you rhat you were broke when you were broke? Yeah that'll be the one.

Yup. Let's say you graduate with $0 and a really great starting salary of $80K at 24 years old:
24 * 80,000 / 10 = $192K

The formula just completely breaks down for young people.

ender

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #46 on: January 24, 2021, 12:08:20 PM »
I'm not surprised either given the fact that the book was a survey of millionaires too.

Probably not very many datapoints in the 20-30 range.

ericrugiero

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #47 on: January 25, 2021, 10:33:23 AM »
I did a slightly different formula that works out pretty close to the one Arebelspy did.  Mine is:

(Age-20)^1.4*Income*Factor=Expected NW   

The factor varies as follows:
Under Accumulator of Wealth (UAW) = 0.05
Average Accumulator of Wealth (AAW) = 0.1
Prodigious Accumulator of Wealth (PAW) = 0.2
Mustachian Accumulator of Wealth (MAW) = 0.4

I had already created it and was tweaking the exponents and factors when I saw the one Arebelspy created. Just like with his, it assumes you start accumulating at age 20 which is a decent approximation.  Some people start earlier.  If you get more education, you might start later but that "should" boost your income and make it easier to save. 

If you want to tweak the formula, increasing the 1.4 makes the exponential effect larger (like assuming more gains from your investments).  Obviously, the starting age or the factors can be tweaked as well. 

Some Examples are below:

Age    30   Income    $80,000
          Factor            NW
   UAW   0.05    $100,475.46
   AAW   0.1    $200,950.91
   PAW   0.2    $401,901.83
   MAW   0.4    $803,803.66

Age    40   Income    $100,000
          Factor        NW
   UAW   0.05    $331,445.40
   AAW   0.1    $662,890.80
   PAW   0.2    $1,325,781.61
   MAW   0.4    $2,651,563.21

Age    50   Income    $100,000
          Factor       NW
   UAW   0.05    $584,708.98
   AAW   0.1    $1,169,417.95
   PAW   0.2    $2,338,835.90
   MAW   0.4    $4,677,671.81

Age    60   Income    $100,000
          Factor       NW
   UAW   0.05    $874,689.66
   AAW   0.1    $1,749,379.32
   PAW   0.2    $3,498,758.64
   MAW   0.4    $6,997,517.27


« Last Edit: January 25, 2021, 10:36:09 AM by ericrugiero »

vand

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #48 on: January 26, 2021, 06:56:26 AM »
I like some of the alternative formulae with a exponent function, although I think @ericrugiero hurdles are pretty steep and would personally set the bar a little lower.

Here is wealth & income distrubution in the US by percentile:

https://dqydj.com/average-median-top-net-worth-percentiles/
https://dqydj.com/average-median-top-household-income-percentiles/

so $6m gets you into the 98th percentile of household net worth.
by contrast, a $100k household income only gets you to the 66th percentile of household income.

That's a tall ladder to climb.
« Last Edit: January 26, 2021, 06:59:04 AM by vand »

Metalcat

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Re: Revisiting The Millionaire Next Door formula: [Age * Income / 10]
« Reply #49 on: January 26, 2021, 06:58:10 AM »
I like some of the alternative formulae with a exponent function, although I think @ericrugiero hurdles are pretty steep and would personally set the bar a little lower.

Here is wealth distrubution in the US by percentile:

https://dqydj.com/average-median-top-net-worth-percentiles/

so $6m gets you into the top 2%. I'm guessing that $100k household income doesn't get you anywhere near close to the top 2%.

Okay, but which formula gets me the special glittery lapel pin that lets everyone know I'm a PAW???