This article is an excerpt from the Shortform book guide to "The Millionaire Next Door" by Thomas J. Stanley and William D. Danko. Shortform has the world's best summaries and analyses of books you should be reading.
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What is The Millionaire Next Door formula? What net worth is considered wealthy?
The Millionaire Next Door formula multiplies your age times your pretax annual income divided by 10 to get your expected net worth—this excludes inheritances. You are wealthy if your net worth is twice as large as your expected net worth.
Discover more on how to calculate your net worth using The Millionaire Next Door formula.
Calculate Your Expected Net Worth Using The Millionaire Next Door Formula
Here’s how the millionaire next door calculator works:
- Multiply your age by your realized (taxable) annual income
- Divide by 10
- Subtract any inherited wealth
- The result is your expected net worth, or what you should be worth, given your income and age.
For example, for a 61-year-old with an annual income of $235,000, her net worth should be $1,433,500 ($235,000 X 61 divided by 10) using the wealth accumulator calculator.
Similarly, the wealth accumulator calculator will show that a 41-year-old with an earned income of $143,000 plus $12,000 investment income, his net worth will be $635,500 ($155,000 X 41 divided by 10).
- If the millionaire next door calculator shows that you’re in the top quartile (25%) for wealth accumulation in your category, you’re a PAW or “prodigious accumulator of wealth.”
- If you are in the bottom quartile (25%), consider yourself a UAW, or “under-accumulator of wealth.”
For The Millionaire Next Door formula to place you solidly in the PAW category, you should be worth two times your expected level of wealth. Often, PAWs have four times the wealth of UAWs in their category. If you’re at half or less than the expected level for your category, you’re an under-accumulator. Here’s an example of each (both people are in the same income/age category):
- Prodigious accumulator: Richards, 50, owns a mobile home dealership and his income is $90,200. His net worth should be $451,000, but it’s actually $1.1 million. He lives a modest, blue-collar lifestyle.
- Under-accumulator: Davidson, 51, is an attorney with an income of $92,330. His expected net worth is $470,000, but it’s actually $226,511. He lives above his means, spending significantly more than Richards to maintain the lifestyle/status associated with attorneys.
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- How and where most millionaires live
- Surprising characteristics and habits shared by many millionaires
- How you can become a millionaire over time if you have the determination
