What does your net worth mean? How do you measure it? A good way is to look at your net worth vs your Accumulation of Wealth Goal.
Average Accumulator of Wealth (AAW) is defined as having net worth equal to one tenth of age multiplied by annual income (current annual income from all sources). These terms are popoularised by Thomas J. Stanley, the author of The Millionaire Next Door.
Wealth Accumulation Goal = Age * Annual Income / 10
Income (montly): 5,000
Income (annual): 5,000 * 12 = 60,000
Wealth Accumulation Goal: 30 * 60,000 / 10 = 180,000
Net Worth vs Goal: 200,000
Goal Achievement: 111% (AAW)
Accumulator of Wealth Categories
- UAW: Under Accumulator of Wealth: <100% goal (<1x)
- AAW: Average Accumulator of Wealth: 100-199% goal (1-2x)
- PAW: Prodigious Accumulator of Wealth: >200% goal (>2x)
Pros and Cons of Using an Accumulator of Wealth Calculator
Pros: A good way to gauge where your net worth is in relation to your income levels. Thereby indicating whether you have been saving & investing your funds well.
Cons: The numbers may appear too high if you are just starting out in your career OR if you have a very big chance of income levels very recently
Thought Question: Are You Balance Sheet Affluent OR Income Affluent?
Balance sheet affluent is on having a high net worth VS an income affluent who has a high income but may have very little net worth.
One would want to be balance sheet affluent & there are many people with low incomes who are prodigious accumulators of wealth!
- Spend less than you earn (but spend on what is important for you)
- Avoid buying status objects (doodads) or maintaining a status lifestyle / keeping up with Joneses
- Take financial risk if it’s worth the returns