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Subject: More on AAWs, UAWs and PAWs  Date: 9/14/2002 4:38 PM  
Author: lazyfrog  Number: 203 of 220  
I liked “The Millionaire Next Door” (TMND). I like the lessons it had to offer. I especially appreciate the equation it gives as a way of benchmarking how effectively I am accumulating my wealth. I think it's important to chart your progress over time. I see this as no different between measuring your return against the return of the S&P 500, or charting the progress of the lowering your blood pressure. Things need to get measured. I must agree with Felbi http://boards.fool.com/Message.asp?mid=17816502 however that the equation that TMND door offers, Age / 10 x Income = Average Accumulator of Wealth (AAW), is flawed in that it does not give enough weight to age. For equation to be useful, it must somehow come close to telling where we should be in reality. Like Felbi, I've also played around with a few equations to try and come up with something that will be more useful. I wanted the equation to approximate the net worth of the average person of median income in a particular age group. According to the June (or July) 2002 issue of “Money” magazine http://money.cnn.com/2002/07/30/pf/millionaire/rp_millionaire_networth/index.htm median income and net worth by age looks like the following Age Income (approx) Net Worth (approx)    <25 25,000 2,000 2534 40,000 22,000 3544 54,000 100,000 4554 62,000 165,000 5564 53,000 210,000 >65 25,000 185,000 In order to be sure I checked some other sources as well. On Scott Burns' website http://www.dallasnews.com/business/scottburns/alsoonline/score.html median net worth by age looks like the following Age Net Worth (approx)   2029 5,000 3039 35,000 4049 86,000 5059 121,000 6069 156,000 7079 141,000 So with these figures in mind I tried to create an equation that would give similar results based on age and income. [(Age * Age) / (22 * (100 – Age))] * Income The equation seems a little kooky at first but there was some thought put into it. I thought of the “Age squared” piece so that the equation would have an exponential component. In the denominator you can think of the “22” in the equation as the age when you begin working. I assume it could be 18 or 25 but 22 seems about right. Further you can think of the “100 – Age” component as the number of years you have left to accumulate. Over time the numerator goes up and the denominator goes down. This has the affect of giving your age more and more weight as you get older. I must admit however that the equation was created through trial and error but it seems to work well as an approximate gauge of median net worth (in TMND terms, AAW status). That's all we want. If we plug some numbers into the equation we get the following Age Income My formula NW    22 25,000 7,051 30 40,000 23,377 40 54,000 65,455 50 62,000 140,909 60 53,000 216,818 70 25,000 185,606 If you compare these figures to the ones I got from “Money” and the Scott Burns website, my results are pretty darn close. The equation above gives us the expected (or median) net worth based on current income and age. This gives us the AAW status of an individual. What we truly want is an equation that will also give us the PAW status. In TMND that equation is Age / 10 x Income x 2 = Prodigious Accumulator of Wealth (PAW) The “2” in the equation above can be viewed as the PAW multiplier. We need one for our equation. Again, through trial and error I came up with a PAW multiplier of Age / 15 Here's the test. According to TMND, the typical millionaire is 57 years old and has a median income of $131,000 or about 3.5x the median income of the typical household. The median net worth of millionaire households is $1.6 million. If we plug the age and income of the typical millionaire into the TMND equation and into my equation we get Age Income TMND My Formula     57 131,000 746,700 449,914 Different figures but I believe mine more closely represents what the median would be. If we plug in the PAW multiplier for each we'd get Age Income TMND (2) My Formula (Age/15)     57 131,000 1,493,400 1,709,675 Both figures are pretty close to the $1.6 million net worth that TMND says a PAW would have. There you have it. What do ya'll think? LF 

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