This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Friday, November 2, 2007

Millionaire Next Door Review Pt. 2: UAW or PAW

Posted By Paul

Part 2 of my ongoing review of this great book. The book mentions this interesting little calculation to determine your wealth accumulation status. The authors believe that financial independence is not just about income, it's about increasing your wealth, and that wealth accumulation goals need to relate to your income.

Essentially they're saying: "Try to save and invest as much as you can, and the more money you make, the more you should be able to save and invest."

So they use this simple calculation:

1) Take your total income

2) Multiply that by your age

3) Divide that total by 10.

Your answer is what they suggest should be your net worth. If you are significantly below that number then you are an Under Accumulator Of Wealth (UAW). If you are significantly above that number then you are a Prodigious Accumulator Of Wealth (PAW).

Of course I think back to what this calculation would have been at various times in my life, and it falls apart a little. For example, when I was 22 and had my first job, I was making a salary but my networth was negative (since I had a car loan, student loans and hadn't started saving at all), so I would be considered a dangerous UAW, but these are probably edge cases that get lost in any 'rule of thumb' calculation.

Anyway, take a second and calculate out what the authors consider to be your target net worth (so far the book doesn't say way what to do if you're married, I would suggest using total household income in step 1, and average age in step 2), and see if you're on track by their standards or if you're a UAW or a PAW.

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