The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
by: Thomas J. Stanley and William D. Danko
This book is a compilation of research done by the two authors in the profiles of ‘millionaires’. In this case they used the term ‘millionaire’ to denote U.S. households with net-worths exceeding one million dollars (USD).
The authors compare the behaviour of those they call UAWs (Under Accumulators of Wealth) and those who are PAWs (Prodigious Accumulator of Wealth).
Under Accumulator of Wealth (UAW) is a name coined by the authors used to represent individuals who have a low net wealth compared to their income. A $250,000 per year doctor is an “Under Accumulator of Wealth” if his/her net worth is less than the product of their age and one tenth of his/her realized pretax income. Take for example a 50-year-old doctor earning $250,000, according to the formula she should have (50*250,000*10%) or about $1.25 million in net worth. If her net worth is lower, she is an “Under Accumulator”. The UAW style is based more on consumption of income rather than on the method of saving income. Prodigious Accumulators of Wealth (PAW) is the reciprocal of the more common UAW, accumulating usually well over the product of the individual’s age and one tenth of his/her realized pretax income and are usually considered to be millionaires; however, not all are.
The authors define an Average Accumulator of Wealth (AAW) as having a net worth equal to one-tenth their age multiplied by their current annual income from all sources. E.g., a 50-year-old person who over the past twelve months earned employment income of $45,000 and investment income of $5,000 should have an expected net worth of $250,000. An “Under Accumulator of Wealth (UAW)” would have half that amount, and a “Prodigious Accumulator of Wealth (PAW)” would have two times. This metric has been criticized since, for example, a 20-year-old making $50k a year should have a net worth of $100k to be considered an “average accumulator of wealth”. That makes little sense since it would take a new graduate years of strong savings and investments to accumulate that amount. The formula fails to take into account compounding interest; younger people up to age 45 or so will generally have much less as a percentage of income than older wealth accumulators due to compounded growth.
The authors go on to chronicle a few ways Prodigious Accumulators of Wealth handle their money:
1.) Spend Less than You Earn
2.) Avoid Buying Status Objects or Living a Status Lifestyle
3.) PAW’s are Willing to Take Financial Risk if The Reward is Worth It
4.) Family & Generational Wealth
I will go into the authors findings in more depth in my next few posts. The authors dig so deep into the profile of what our American millionaires really look like and what habits have led them to that status. This is one of the best reads for the young and old to get a true look at finance and what wealth really looks like. If you want to become a Prodigious Accumulator of Wealth follow my next few posts and serious….
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