Most people just want to be rich. It takes more than want. You must be a prodigious accumulator of wealth as opposed to being an under-accumulator of wealth. There is even a formula that can help you assess your progress in accumulating wealth. It is a formula for wealth acquisition that was first developed in a book called The Millionaire Next Door.
Perhaps you are asking what exactly is a prodigious accumulator of wealth. Or, an under-accumulator of wealth? How can a wealth accumulation formula aid you in achieving wealth? To answer all of these questions, we must first talk about the book from which these ideas sprang.
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy is a book about realistic wealth acquisition. Its authors are Thomas J. Stanley and William D. Danko. Even though this book was originally published in 1996, it still contains relevant information for people looking to generate wealth.
Consider: the average American aged 35 to 44 makes about $67,756 per year, or $1,303 weekly. The average price of a home was about $412,300 in August 2024. Most homeowners pay over $2,390 a month for their mortgage payments. That’s over $28,000 annually for mortgage payments, and that’s not counting other bills.
Over 25% of Americans worry about their personal finances all of the time. About 70% are optimistic that their financial situation will improve within a year.
Still, many Americans feel like they can’t get ahead financially in life. One reason is that most people have severely misguided ideas about what it takes to become and stay rich.
The Millionaire Next Door
To better understand Stanley and Danko’s wealth accumulation formula, also known as the millionaire next door formula, let’s first explain the basic premise of their book.
The Millionaire Next Door is based on a 20-year study of the behaviors and mindsets of over 1,000 millionaires.
Stanley and Danko interviewed over 1,000 millionaires to understand how the mind of a millionaire ticks. The basic premise of the book is that people like you and me, average people with average finances, have no idea how wealthy people really live their lives.
This is partly due to misguided fantasies about wealth and the mental invasiveness of pop-culture stereotypes.
When we think of rich people, we think of movie stars, rock stars, celebrities, and lottery winners. Such wealthy people flout their status at every opportunity, unlike most millionaires.
The 7 Factors of Wealth Acquisition
According to Stanley and Danko, the millionaire next door has seven factors they follow to build wealth.
The average millionaire lives way below their means. They spend a lot of time strategizing how to build wealth. To a millionaire, financial independence is always the priority over flaunting status.
They were never financially supported by parents as adults and won’t do so for their own kids.
Millionaires conduct business in strategically relevant markets. They possess the right skills for their chosen profession. Most millionaires are dentists, restaurant owners, laundromat owners, auto body shop owners, and so on.
That is why the book is titled, The Millionaire Next Door.
According to an article by The Motley Fool, millionaires hold about $810,000 in retirement accounts and $743,000 in home equity. Millionaires have a median net worth of about $1.6 million. As of October 2023, the median net worth of a typical American household sits around $192,900.
Stanley and Danko’s Wealth Accumulation Formula
A PAW, or a prodigious accumulator of wealth, takes every opportunity to build wealth, save money, and think about the future.
They never mistake income for wealth. And they live below their means as much as possible. PAWs have investments, bank accounts, properties, and most importantly they budget like it’s a religion.
A PAW has a weekly, monthly, and annual budget. PAWs keep to these budgets, stay apprised of new income coming in, and debts going out, and adjust accordingly.
UAWs, or under-accumulators of wealth, never think about their financial futures and always mistake income for wealth.
UAWs spend money like it’s water. They usually have high debt-to-income ratios, meaning that usually owe more money than they earn every month. UAWs usually don’t have bank accounts, savings, investments, or property, and never consider their financial future.
So, what exactly is a wealth accumulation formula? Also known as a wealth index, this is a formula that helps you understand if you are a PAW or UAW. You simply take your age, multiply it by your pretax annual income, and then divide it by ten. That’s it.
Or (age*pretax annual income) / 10.
Here is a calculator based on the book you can use yourself.
A PAW has a net worth that is at least twice its formula index or more. Likewise, a UAW has a net worth that is ½ of their index, or less. Some critics say that since the millionaire next door formula was completed in 1996, and formulated with the incomes of middle-aged millionaires, it may not be congruent in modern times.
If anything, Stanley and Danko’s wealth formula can at least tell you how far you have to go to achieve wealth.
Again, some critics of the formula have noted that it might be better suited for middle-aged people. After all, a 20-year-old would have to earn over $50,000 annually and be worth well over $100,000 to be considered an average accumulator of wealth under this formula.
Most Americans aged 20 to 24 barely make $38,194. Americans aged 35–44 in 2024 bring in around $67,756 annually, while the average annual salary for people aged 55–64 is $64,688.
Take Charge of Your Wealth Ambitions
This book has more sound financial advice for you beyond this time-tested wealth formula. For example, in the second chapter titled “Frugal Frugal Frugal” Stanley and Danko pose questions to the readers to help them self-assess the efficiency of their wealth acquisition ambitions.
Here are some things to consider. Do you plan, execute, and follow a budget? Do you keep exacting records of all family expenditures? How often do you ever set or realistically plan out goals for yourself, such as buying a house or starting a business? Do you ever spend time contemplating the future of your personal finances?
It takes more than wants to achieve financial security. You need goals and a plan. Also, you must develop the mindset of a millionaire. Live well below your means. Treasure the prospect of achieving financial security. Be acutely aware of the state of your finances and how to improve them.
A serious point that Stanley and Danko made in their book is that anyone can be rich. It’s the misconceptions of how wealth is attained that usually stop most people. Most people believe that wealthy people are lucky, or that society prevents average people from acquiring more.
According to recent research, income inequality in the United States, and in the greater world, has returned to levels not seen since the Great Depression.
It is hard to get ahead in life for most people. But the choice to become wealthy can only be determined by you if you plan for it realistically.
Read More
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- How Much Interest Will I Earn On $1 Million?
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.