There is a book entitled The
Millionaire Next Door by
Thomas J. Stanley and William D. Danko. In this book, Stanley
and
Danko did a study of who millionaires really are, where they really
live, and how they really live. Believe me, the way
millionaires
live is far different than most people think. If you enjoy
reading, and are serious about becoming wealthy, I strongly recommend
that you read this book. Do you need to read this book in
order
to become wealthy? No, but it sure does give you some
interesting
perspective on the whole concept of wealth.
In this book, Stanley and Danko give a formula for determining if you
are wealthy; but, before we can apply their formula, we have to first
determine our net worth.
Net worth simply means what you would be worth, financially, if you
sold everything you own
and paid off all money you owe.
In other words, add up the value of everything you own, and
subtract the total of everything you owe. Here's an example
of
how to calculate net worth:
What you own:
Your house is worth $120,000
Your car is worth $12,000
You have $3,000 cash in the bank
The total of your personal possessions (TV, stereo, clothing, etc) is
$4,000
What you owe.
You owe $80,000 on your house.
You owe $10,000 on your car loan.
You owe $8,000 in credit card debt.
You owe $15,000 on a student loan.
Total of what you own:
$120,000
+$12,000
+$3,000
+$4,000
-----------
=$139,000
Total of what you owe:
$80,000
+$10,000
+$8,000
+$15,000
-----------
=$113,000
Your net worth is what you own
minus what owe
which is $139,000 (what you own) minus $113,000 (what you owe).
$139,000 - $113,000 = $26,000
So in this example, your net worth would be $26,000
The formula given in Stanley and Danko's book says that, in order to be
mathematically wealthy, your net worth needs to
be greater than (Age x Gross income) ÷ 10
Let's say that in our example you are 35 years old and earn $40,000 per
year gross income. We have already calculated that your net
worth, in our example, is $26,000
so, we have to see if (Age x Gross income) ÷ 10 is
greater than $26,000
35 x 40,000 = 1,400,000
[Age x Gross income]
and
1,400,000 ÷ 10
= 140,000
[Divide the results by 10]
so
(35 x 40,000) ÷
10 = $140,000
Since $26,000 is less than $140,000 you would not be
considered wealthy in this example.
In other words, at age 35 earning $40,000 gross income per year, you
would have to have a net worth of $140,000 or more to be considered
mathematically wealthy.
Do this same calculation using numbers from your own life to determine
if you are mathematically wealthy.
Don't be surprised if your net worth is a negative number.
Many
people owe more in debt than what they own is worth so their net worth
is actually negative.
Now, let's
talk about wealth.
Keep in mind, that this calculation merely reflects financial
wealth. It is possible to have financial wealth but poor
health,
a family that is falling apart, no friends, and so forth.
Would a
person like this be considered wealthy? Financially yes, but
they
are lacking in the kinds of wealth that really matter--health and
relationships.
Also please notice that this calculation takes into account your age
and income level. The older you are, the more time you have
had
to accumulate wealth, so the more you would need to have to be
considered wealthy. Also to be considered wealthy, if your
income
is $20,000 per year, you would need far less in net worth than someone
making $400,000 per year. In other words, you may not have as
much money as someone else, but you may still be considered wealthy for
your age and income level. That's why it is impossible to say
something like "if you have a million dollars, you are wealthy."
It depends on how old you are and how much you have to work
with.
What this means is that anyone can become mathematically
wealthy
for their situation.
So, if someone who is say 26 years old and only earns a poverty wage of
$12,000 per year has a net worth of $32,000 then they are
mathematically wealthy!
But, someone who is 46 years old and earns $50,000 per year who has
$32,000 in net worth would not be considered wealthy even though they
have the same net worth. Why? Because at their age
and
income it is reasonable to expect them to have accumulated a higher net
worth. In fact, at this age and income, they would need to
have a
net worth of $230,000 to be considered wealthy!
What this all means is don't compare your situation to someone else's
to see how well you are doing. You don't need to have
everything
someone else has in order to be doing well financially. What
I'm
trying to say is always
compare yourself to yourself to see how you are doing.
Don't worry about the guy who has a million dollars in the
bank.
If you have saved up $1,000 in emergency savings and have
gotten
yourself completely debt free,
you
are doing great compared to where you were when you started.
That's how you need to look at it. If you are going
to
compare yourself to others to determine if you are well off, than you
would need to have more money than the richest man in the world;
otherwise, there would always be someone else better off than you are!
Look at where you are now, look at the things you need to accomplish
financially and start working on them. As you make
improvements
in your life and accomplish each goal, you can feel great about
yourself. It
doesn't matter what others have--it only matters what you've
accomplished in your own life.
If your goal is to become mathematically wealthy, then use
the
Stanley Danko formula to figure out what your net worth would need to
be. If your goal is to be debt free and better off than you
are
now, then ignore that number and ignore what other people have.
Follow the techniques and strategies you are learning here on
Eclecticsite.com's Financial Page, and the wealth will take care of
itself. Worrying about keeping up with what other's have will
not
make you wealthy. You don't need to keep up with others to
become
wealthy, you need
savings and you
need a plan to
become wealthy. And never forget that financial wealth is
important, but it is not the most important kind of wealth.
"What good is it if a man gains the whole world, but loses his eternal
soul?" Mathew 16:26
To
learn a lot more about saving, investing,
eliminating debt and
becoming wealthy, please read the articles
on the Financial Page.
There, you will find a veritable treasure of what to do and
how to do
it.