Credit goes to KCLau for this article: How rich are you? Most people are reluctant to answer because there are only 1% of the population are rich! However, if you are to respond to such a question honestly, what would it be? Would you answer “I have two houses, three cars, a few FD, etc.”, or “I am worth RM300,000?, or “I earn RM20,000 a month” etc.
There are many ways to state our wealth. In fact, wealth is more appropriate to be indicated by “time”, not the amount of “asset” we have.
This is the formula:
Wealth = How long we can continue and maintain our lifestyle without working?
According to the above formula, this is how we should state our wealth:
I can maintain my current lifestyle for ten years without working. How long would it be for you? How wealthy are you? 3 months? 1 year? I read the book The Millionaire Next Door back in 2001. It is a marvelous book!
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.
One’s expected net worth (ENW) = Age X(Realised Pre-tax Annual Household Income exclude inherited income)/10
Example, Mr. Lee’s annual income is RM100,000, age 35.
Lee’s expected net worth = 35 X RM100,000 /10 = RM350,000.
According to Dr. Thomas J. Stanley (the author), there are three categories of wealth accumulator:
1. PAW – Prodigious Accumulator of Wealth
2. AAW – Average Accumulator of Wealth
3. UAW – Under Accumulator of Wealth
If Mr. Lee’s net worth is RM800,000, which is more than two times of ENW, he is a PAW.
If Mr. Lee’s net worth is RM50,000 only, which is less than half of ENW, he is a UAW.
Let’s calculate ours, which category do you belong to?
Simply, just divide your age by 10, and multiply it by your current income. This should give a rough estimate of your expected net worth should be.