LOUISE FAIRSAVE: Want to be rich?
IF YOU WANT TO BE RICH, your first step may be to define what is rich. Is it having lots of cash, having lots of income, having lots of material possessions, or is there another image in your mind? Indeed, many others may already judge you as being rich.
You can go out and get a copy of The Millionaire Next Door, the best-selling book by Dr William Danko and Dr Thomas Stanley. These two professionals are associated with the University at Albany, State University of New York. They have reported in this book on the key characteristics and behaviour common to people who are high accumulators of wealth.
Drs Danko and Stanley also provide pointers to people who may want to transform their financial situation, people who want to be rich. In their book, they provide a way of measuring the wealth or net worth of an income earner relative to other income earners in the same income and age bracket.
The two stress over and over that income is not wealth. A higher income will provide the opportunity to accumulate a higher net worth, but by itself the higher income is not necessarily wealth. These authors present a benchmark for wealth accumulation.
Their benchmark depends on the age, income and the length of time the person has earned income. They propose that you divide your age by ten, and then multiply the result by your current annual realised pre-tax income from all sources except inheritance income. This final result less any inherited wealth is what your net worth should be.
For example, for a 36-year-old man who earns $44 000 before tax annually, plus another $1 000 in bank interest income, his total annual realised pre-tax income would be $44 000 plus $1 000 or $45 000. His age, 36, divided by 10 is 3.6. Then 3.6 x $45 000 gives $162 000 which should be his expected net worth. He should then prepare an analysis of his net worth and compare it to this benchmark. Other men of similar age and income level would be expected to have similar levels of net worth.
However, the length of time working will also affect the actual level of wealth accumulation. That is, although two men may have the same age and income levels, one of them may have started working at an earlier age. It would be expected that the man who has worked for a longer period would have the higher net worth.
The authors go on to describe the man who has achieved this benchmark of net worth as wealthy for his income level and age category. If earners are then grouped by income level and age, some will fall at the expected benchmark level of wealth accumulation and others will either be above or below it.
If an earner has net worth well above the benchmark, then the author describes that person as a prodigious accumulator of wealth (PAW). For an earner who is just about at the benchmark level in term of their net worth, they are labelled an average accumulator of wealth (AAW). In cases where your net worth falls below the benchmark level, then you are an under accumulator of wealth (UAW).
To be sure that you are a PAW, your net worth should be twice the benchmark level or more. In their research, the authors found that PAWs typically had four times the expected benchmark level of net worth. On the other hand, if your net worth is less than half the benchmark level, you are a sure UAW.
So even if you cannot check how well you compare with people in your grouping, you have a means of self-evaluation. The question now is: how do you rate?
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.