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Author: lazyfrog One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 220  
Subject: More on AAWs, UAWs and PAWs Date: 9/14/2002 4:38 PM
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Recommendations: 9
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
25-34   40,000        	 22,000
35-44   54,000        	 100,000
45-54   62,000        	 165,000
55-64   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)
---- 	------------------
20-29  	5,000
30-39   35,000
40-49   86,000
50-59   121,000
60-69   156,000
70-79	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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