Who's Wealthy and Who's Not

I’ve been reading “The Millionaire Next Door”. It’s a good book about wealth in America. The 2 guys that wrote it have been researching this subject for decades. Anyway, they have a little formula that tells you how much wealth (net worth) you should have based on your age and annual income.

According to the book, your expected net worth should be your age multiplied by your annual income and then divided by 10. For example, if you are 30 years old and your annual income is $50,000, then your net worth is expected to be $150,000 which is (30 X 50,000)/10. If your net worth is more than $150,000 - you’re doing well. If your net worth is less than $150,000, you’re an underachiever.

Since this is just your expected wealth, the book points out that the wealthier class of people have a net worth at least double their expected level.

Interesting stuff. How are you doing? (a rhetorical question)


Not good. Net worth only around 40K and I am 26. I am really trying hard, to give an example, today I decided that a triplex REO I have had my eye on for a few weeks has been on the market long enough for me to make my offer. I like to wait a few weeks first to let the out of state guys or newbies get the offers in first so I don’t just waste my time offering what it is really worth. Bank foreclosed on it for 98K. Idiot that bought it and was foreclosed on paid 132.5K Listed at 109K on MLS. I was going to offer around 70K as rents are only 450 market and it will need a bit of work in one unit. Just flooring and a new fridge. This is in a low income latino. Anyways I call my broker to make the offer(why not use him he’s free when it’s on the MLS), he calls the listing agent first to talk about what is needed for the bank on my offer, and she informs him that she already has two offers at full price and they are taking back up offers only. I say bummer, and i’m back to square one. This is pretty much how it works in raleigh right now. I think the market has gotten hotter here now, as out of town investors in bad markets hear the “gold rush” is here. I have found only ONE good deal in the past 6 months, and by good deal I mean on that simply cash flows. I guess I need to move

Sorry Mike, I am not trying to steal your thread, just letting off a little steam…i’m interested in how others are doing!!!

I’m not sure I completely buy into that formula.

If I’m 60 and making $50K per year, with hopes to retire in five years, I should aim for a $300K net worth at the present time?

While I am sure that’s better than 50% of people that age, it’s probably not the kind of net worth that will allow me to keep my quality of life.

Although I will read that book based on your recommendation, I’ve read some reviews that claim the author is speaking to a group of people that certain criteria has to be met?


I don’t think I explained the formula too well. Using your example, what they are saying is that someone that is 60 years old and making $50K would be expected to have a net worth of $300K. They are not saying that this makes you wealthy, they are saying that is what you should have if you are average. They are certainly not saying that this will allow you to retire in 5 years. In this case, if you have a net worth of more than $300K, then you are doing better than average. If you have a lower net worth, you are not up to par. The formula is a way to compare your wealth to others with similar age and income.

They define “wealthy” as someone with a net worth of $1 Million Dollars or more.

I think it’s a good book, but my explanation is not doing it justice.

I've read some reviews that claim the author is speaking to a group of people that certain criteria has to be met?


I don’t even understand that?


The formula basically states if you are making X income, and did not invest it well, then you are an under achiever. Making money and spending it does not make you wealthy. I am short few hundred thousands to be an achiever :slight_smile:

The premise of the book is that most millionaires in this country got there by modest living and everyday careers. These might include plumbers and dry cleaners. The key is living modestly. No Ferrari’s or McMansions. Doctors & lawyers must keep up with the Joneses. Your local exterminator is under no such pressure.

You probably know more millionaires than you think. It’s a great and inspiring book.

What is the point of wealth if you don’t enjoy it? A millionaire next door to me would be living same life as me. What is the point of the money then?

I think the point is that people are too busy “enjoying” their income to ever build any real wealth. Heck, these days you don’t even need an income to live as if you have one thanks to the good people at Visa and Mastercard.

I would submit that a millionaire living next door to you is not living the same life as you. Yes, he may have the same house, car, social circle, etc., but he goes to sleep at night knowing that he’s financially secure and is capable of taking care of himself in the future.

Of course, you can take this to an unhealthy extreme, the desire to accumulate assets. Here’s an example.

My mother had a long-time friend who was a government worker his entire life. He lived modestly, spending the last thirty-plus years of his life in the same apartment in a part of southeast Washington, DC, called Anacostia.

This part of town underwent a major transformation, primarily in the wrong direction, over those thirty-plus years. Major crime was and is a real problem. Open-air drug markets are common. Murder is a daily part of life. Robberies go unreported because the police really don’t have the time.

My mother’s friend was the last white person living in the 400-plus unit apartment complex. Clearly, he didn’t have a racist bone in his body, and he didn’t move to “greener pastures” when others had long since fled.

Towards the end of his life, my mother was making more and more trips to Anacostia, either to bring him food or take him to the doctor or to bring him back to our house for a day to spend time together. For years my mother had asked him, “Would you ever consider perhaps buying a little place closer to us? It would be a good idea for us to be closer to you in case something happens.” (He lived about 30-40 minutes away.)

He would always respond, “How can I buy something? I am on a pension. I can not afford it.” At the time, a little townhouse near us would cost about $75K.

The back-and-forth to Anacostia went on for years until he died. When he passed away, my mother learned that her friend had left half of his money to his church and the other half to her. Her share of the estate would be worth about $250K.

Even though he had lived for about 20 years beyond retirement, and even though he was a moderately paid government employee all his life, he still had a half-million dollars in cash in the bank when he died.

My mother was just about in shock. She had no idea he had that kind of cash, which was fine as it really wasn’t her business. The thing is, while most people would have been happy to walk into a quarter-million dollars, she was actually miffed with him for having been so obsessed with saving his money. She gave up many, many hours of her life during the preceding ten years to help him in his old age, and her life could been made easier has he not wanted to squirrel away every last penny.

Some could argue that the $250K was payment enough for those years, but it’s really not accurate. My mother was not a particularly young woman at the time, either, and all of that driving back and forth took a toll on her, too, not to mention she was not thrilled about being in that part of town so often.

In my opinion, this was a case where working so hard to save money didn’t work in everyone’s best interest. And actually, buying that house would have only increased his net worth, especially compared to wasting it on rent for thirty-plus years.

What is the point of wealth if you don't enjoy it? A millionaire next door to me would be living same life as me. What is the point of the money then?

Wealth is what allows you to continue making the income to maintain your lifestyle while retiring (or at least being able to set your own schedule). Without wealth, you MUST continue to work to generate the income to live your lifestyle.

Also, you certainly don’t have to live like a miser to become wealthy. One of the things the book talks about is automobiles. Many people trying to keep up with the Joneses spend a fortune buying a new car every two or three years. The vast majority of millionaires don’t do that. A millionaire may still drive a Mercedes S Class, but they might have bought a 3-5 year old (or older) Mercedes, when someone else has suffered the big hit on depreciation. The point being that the apparently rich lawyer might seem to be living the good life with all the toys, but may never be able to retire in comfort. The auctioneer that lives next to the lawyer could have the same toys (that he bought used), with the difference being that the auctioneer is a millionaire and could retire comfortably (or only work when he wants) at any time.

The bottom line is that wealth is your ticket to freedom from the rat race.

BTW, I’ve heard Robert Kiyosaki define wealth the same way. He defines it in “months” of freedom that your wealth will provide. By this definition, if a person needs to $3,000 per month to live and his wealth will provide that, he is infinitely wealthy, because he never has to work again to sustain his lifestyle.


Why stop at having a high net worth but living the average person’s lifestyle? Is it not possible to bump it to the next level and buy the fancy car in cash (preferably used)?

I tried that…I couldn’t get 10 sheets of sheetock and 2 pails of mud into the wife’s Benz. It fit into the BMX X3 but I got yelled at for making a mess.

Paul and Mike put it well. Barney Zick’s explanation is along the same lines, you aim to replace your earned income with passive income as your first step. After that, you work on increasing your passive income and thats how you increase your welth.

So if you are making $20k/year, work on buildig $20k/year in passive income as your short term goal. From there, you can work on increasing it to $40k…etc. This is common sense approach since your path to $40k/year goes through the $20k/year, but it keeps you focused.

There are those who are compulsive savers like the one paul spoke of. His cash was saved money that once spent, it is gone which explains why he might be reluctant to spend it.

I love that book. I read it several years ago and it is a major part of my views of wealth. I realized that being a millionaire has no bearing on a person’s lifestyle. I say all the time it is not about the money it is about the lifestyle. I can take my current income and move to New York City and live like a clerk. It costs the same to be poor everywhere. You can find a place to live for $300/month, you can find hamburger meat on sale for 89 cents a pound, and 5 pounds of rice for a dollar in ever city in the USA. But were is it cheap to be rich? I want to live like a rock star. In order to do that I can move to California where it cost rock star money to live like a rock star or I can move to a place where I can afford to live like a rock star on money that I can actually earn.

I used this book to help me develop my philosophy of rich. I asked myself what is the difference between someone who is upper middle class and someone who is rich? I say that rich people live right next to people who are upper middle class. The difference is that the upper middle class people have to get up and go to work to afford to live there. The rich people wake up and do what they want to because they want to. For example a CEO makes a lot of money from his job as an employee to be able to live in his neighborhood, but the rich guy next door doesn’t. You say but what about the doctor? Well the doctor is self employeed. That means he is his own boss. If he is his own boss then he is an employee still. I don’t want to be self employed or upper middle class. I want to be rich. In order to do that I have to use Robert Kyosaki’s strategy (which I read on a flight to Europe a few yers back) understand my lifestyle needs and adjust my income to deliver it. I looked at my expenses and calculated how much “passive” income I would need to get me out of the employee game. That is why I am in real estate.

Great book. Living below your means is something that is fast becoming extinct in this country. I paid my dues for many years, watched my friends buy new cars, new houses, take vacations to warm oceans. I didn’t. I lived in dumps, fixed them, sold them, moved on to the next one. SAVED MY MONEY! Spent a lot of time learning how money is made and lost.

Looking back I wouldn’t change a single thing. I live in a $500,000 home that’s paid for. Built up a nice business that generates regular cash with very little work on my part. My friends are all on the treadmill, paying off debt, then going in for more, paying it off, you know the story. The book is a good read because it shows you the sacrifice needed to achieve lasting wealth. Anyone can live like millionaire for a short period of time, not many can live a lifetime like that.

The next step in your progression as a builder of wealth is to learn how to make money with money. Not real estate, but stocks. This maybe the single most important thing I have ever learned. I believe that if you can learn to recognise value in destressed real estate you can do the exact same thing with stocks. A lot of people think it’s too risky. It can be, but spending a few years just watching things, just observing, can pay off for you big.

I love companies that get beat up for reasons that can be fixed.
A few years ago Hasbro purchased a computer game company. It was a disaster. The stock went from $30 to $8. They sold the game company and got back to making toys. While at $8 Hasbro announced the signing of a 10 year deal with Disney to produce all the toys for their movies. If you have kids you could have seen this coming from a mile away. 3 years later Hasbro stock tripled in value. A 300% return will do wonders for your net worth, believe me.

Keep your eyes open this stuff is happening all the time. Pfizer is in the low $20’s now. It pays a 4% dividend and has for over 50 years. Take a look around us, people are living longer, getting fatter, taking more meds, and the baby boomers are moving into their drug maintainance years, it all adds up to a beautiful investment that will never call you at 3 am to tell you the pipes burst. This type of investing is very boring, it takes years for these things to play out, but I don’t invest for excitment, I invest to build wealth.

Real Estate changed my life, it built my foundation. Learning to watch what is happening, and prudently investing in things that occur over and over, made it infinitely richer and more enjoyable.

I have never really considered myself rich, but by this definition I am infinitely wealthy.

I have met some people who carry being frugal to an extreme. I second Fadi’s point and Paul’s point that sometimes people place monetary wealth over lifestyle, and that’s pretty pointless since, the last time I checked this life is not a dress rehearsal. In my experience, when a person inherits a large amount of money, they squander their lives, so what is the point in leaving huge amounts of money to your children? I think it’s better to provide a good education and demonstrate the rewards of an ambitious body and an ambitious mind.

In our consumer society, we have brainwashed our entire culture to believe that if we just bought that car the size of a 747, and that big house, and that plasma screen TV, and those diamond earrings, we would be grinning from ear to ear without a care in the world because of a low down and easy monthly payments. In my opinion, this is why people claim to “love what they do!” when their jobs are shoveling wet cement in 110 degree heat or sitting at a cubicle answering the telephone or operating a forklift down at the plant. They subconsciously realize that they will never get out of debt, so they tell themselves that their lives are happy.

Most people will have to work during their 20’s and 30’s; many during their 40’s and the point that I took away from this book is that when people live a specific lifestyle during those years, they can be millionaires after that, without obligation to work, but with the freedom to do whatever they choose.

Big hat…No cattle

The next step in your progression as a builder of wealth is to learn how to make money with money.

I thought about becoming a professional poker player but I really don’t like the environment. Besides…I’m a basket case at the card table.

-Mike <sticking with my pickaxe and REI for now…with an eye on stocks for the future.

Living frugally should just be up to a point until the person can relax and splurge responsibly from time to time.

There is one more major advantage to being financially independent that not too many people talk about (notice I didn’t say rich. Financial independence, in my view, is a state where if your income stopped you could service all your financial obligations for many many months). When you are financially independent your whole state of mind and attitude toward life and people changes. Your attitude, manner and confidence in handling business situation changes. You know it when you see people who are in that state. They cannot be pressured. They are calm, collected and firm which ultimately makes them even more successful. Financial confidence shows…

In my view this one reason, by itself, makes the whole thing worthwhile.