Are you a Prodigious or Under Accumulator of Wealth?

Question

I am reading the book "Millionaire Next Door" which had been rec'd by a few podcast guests if I recall.

They discuss the following formula as a guide to what your net worth should be:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

These two terms I really like -

Prodigious accumulator of wealth (PAW) = twice (or more) the level of wealth expected

Under accumulator of wealth (UAW) = half (or less) the level of wealth expected

The expected number as well as the actual can be shared. This can be kept anonymous as you need not share your age or income. Based on whether you fall into the average, under, or prodigious accumulator of wealth category, we can see how we are doing relative to the average. Although, I suspect their may be a bias toward the PAW category for those on BP, but who knows!

Andrew Johnson · Answer

@Andrey Y. My very unscientific estimate has me very safely in the PAW category. The fun of BP is that you get to have everyone estimate what their property portfolio is worth! Since most of us think that our babies are the cutest (read: properties are valuable) it wouldn't surprise me if our numbers skew more PAWish than most. It's amazing the number of posts I see where someone bought a property for $40K last year, put $5K into it, and it's now "worth" $80K. Maybe it has doubled in value but I'd imagine that cute-baby-syndrome sweetens up that PAW status somethin' fierce!

My big takeaway, I'm over 2, it's time to ditch the Lexus and blow some cash on a sweet sports car...

Where the heck is your number? Don't tell me the person asking the question won't answer it...

My big takeaway, I'm over 2, it's time to ditch the Lexus and blow some cash on a sweet sports car...

Where the heck is your number?  Don't tell me the person asking the question won't answer it...

Todd Dexheimer · Answer

Haven't read the book, but it seems like an odd calculation. Your net worth requirement to me should be determined by your goals. If you want to leave a legacy, retire young, make major donations, spend loads of money on toys, etc, then you need a high net worth, possibly $25M or more. If you want to live frugal, keep your money, work until an older age, etc then having a small net worth of less than $1M is just fine. I along with many investors/business owners are in the PAW category many times over, but with that said, many of us - me included have much bigger goals and dreams.

Andrey Y. · Answer

So my net worth is higher than would be expected that for someone of my age and annual income, but it is not twice the value. Makes sense. I feel that this value is probably artificially low due to my income increasing significantly (more than 50%) only in the last year. So I feel that, at this new income I would need a few years for things to equalize.

I am definitely not thrifty. I do spend a lot on travel, experiences, food, and self-experimentation. I don't spend much on clothing or cars. And I currently rent.

So far I'm about half way through the book.. they discussed two common characteristics of PAWs being "Frugal frugal frugal" and "spend a significant time budgeting and planning out investments and savings".. something to that effect. I would say I am/do neither of those. However, they devote entire sections of the books to describe how physicians are very likely to be in the UAW category and are terrible with money. Of course, I already knew that ;)

Andrey Y. · Answer

I will answer it very soon.. last time I calculated my net worth was July '16, I need to do an updated one. That was on my agenda for this week :)

Your post had me smiling. I also suspected that their would be some sort of selection bias with BP vs. the regular population. I remember medical student forums discussing taking the USMLE Step 1 and 2 (medical license exams).. so the average score is somewhere around a 218-222 nationwide. A score of 250 would be like 1 in 50-100 examiners, a 260 would be one in 500-1000 examiners. I swear, on that forum the average score must have been a 255!!

It could be the fact that forums such as this select for the best performers out of a given field (investing or real estate or M.D.s), or perhaps those getting lower scores are less likely to share? Beats me

I think when calculating property equity for net worth purposes, actual comps should be used and we should be very conservative and set properties on the low end of these comps.

Are you a Prodigious or Under Accumulator of Wealth?

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