Hey folks, Derek Merkler here again with another tip of the week. In this video, I will discuss the concept of being an under-accumulator or prodigious accumulator of wealth. The concept itself comes from the book “The Millionaire Next Door” which I highlighted in a recent video explaining my new client reading list.
Early on in the book, the authors provide a simple formula to determine what your net worth should be based on your income and age. Take your annual household income before taxes, multiply by your age, and then divide that amount by 10. Voila! That’s what your net worth should be. If it’s less, you are an under-accumulator of wealth. If it is more, you are in good shape. To qualify as a prodigious accumulator of wealth, your net worth would have to be two times the number offered by this formula.
I’ll offer a couple of examples in a moment but, first, a few caveats. The authors admit that the formula breaks down for younger folks, especially in their 20s and 30s simply because the facts of modern life get in the way. Student debt, auto loans, credit cards, perhaps child care expenses, etc. Even with those caveats, though, don’t reject the formula out of hand. I work with plenty of clients in their 20s and 30s who exceed the number offered by this formula.
Now for a few examples. Let’s start with a single 30-year-old Army captain at Fort Hood with no special pays. The captain earns about $90,000 before taxes, multiply by 30 and then divide by 10 and we have $270,000.
Compare that amount to that same person as a 35-year-old major who makes about $109,000. Multiply by 35 and then divide by 10 and we have $380,000.
Finally, let’s look at an Army Master Sergeant at 40 years old who earns $82,000 before taxes. Multiply by 40 and then divide by 10 and you have $327,000.
Again, for each of these individuals, if their net worth falls below the respective number, they are an under-accumulator of wealth. Double that number to be a prodigious accumulator of wealth.
One final aspect that makes determining a veteran’s net worth difficult is valuing the retirement pension. Once a person is eligible for retirement, we could calculate that value and add it to their theoretical net worth. So, if you are currently active duty and intend to stay at least until 20 years, your theoretical net worth is potentially quite a bit higher than your actual net worth. However, it’s not so clear cut in that the pension does not belong to you. It’s not your asset.
To close, once you know the net worth that you should have, you might want to calculate your current net worth if you have not done so already. Need help with that? Send me a message.
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Remember, the topics discussed in this video are for informational purposes only and that past results do not guarantee future performance. If you would like to discuss your financial situation, please email me at Derek.Merkler@Parsonex.com.
Advisory services offered through Parsonex Advisory Services, Inc., 8310 S.Valley Hwy, Suite 110, Englewood, CO 80112. 303-662-8700.