A best-selling personal finance book proposes a mathematical formula to determine if you can be considered rich or not.
Here’s the wealth scoring formula from the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko:
Multiply your Age by your annual household income from all sources except inheritances.
Divide the result by 10.
This, less any inherited wealth, is what your net worth should be.
Let’s see its application in the Philippines.
Scenario 1: Call Center Agent
Christian is 22 years old working as a call center agent earning P20,000 per month. Including 13th month pay, his annual income is P260,000 (P20,000 x 13). This is his only source of income. If we multiply his age (22) by his annual salary of P260,000, we get P5,728,000. Divide that by 10 and his net worth should be P572,800.
Wait, what is net worth?
That’s simply assets minus liabilities. Assets include bank savings, investments, house, and anything that can produce income. Liabilities are things that cause an outflow of cash or other assets. That would include loans such as housing loan, car loan, or credit car loan and other liabilities such as payable to utility companies, etc.
In the case of Christian above, if after subtracting all his liabilities from his total assets, his net worth is more than P528,000, then he can be considered “rich.”
Scenario 2: OFW
Anna is a 35-year-old Overseas Filipino Worker earning a total of P1.8 million a year. She has a P1 million stock investment that generates yearly earnings of P50,000 on average.
Her other assets include savings of P2 million and a house which cost P5 million. This house, however, came from a bank loan whose outstanding balance is P3 million. Based only on the following data, can we say that Anna is rich?
Let’s compute:
Age x Annual Income from all sources = 35 x (P1.8 million + P50,000) = P64,750,000
Divide by 10 = P6,475,000
Anna’s net worth must be more than P6,475,000 in order to be considered “rich” based on The Millionaire Next Door formula.
What’s her actual net worth?
Assets:
- Bank Savings: P2 million
- Stocks: P1 million
- House: P5 million
- Total Assets = P8 million
Liabilities:
- Housing Loan: P3 million
Net Worth:
- Assets – Liabilities = P8 million – 3 million = P5 million
Anna’s net worth is P5 million, a bit short of the P6,475,000 magic number from the formula above.
So, are you rich?
Grab a pen and calculator now and check if you’re rich. Of course, this formula has its own flaws but it’s still a fairly good way to gauge whether you’re on the right track. Post here the results!
Speaking of net worth, it looks like some PMT members do have high net worths. Just check the discussion thread Poll: How much is your networth?
Also view this other useful, awesome article: Saving P1 million by age 30, malaki na ba yun?
