Measure Wealth by Net Worth, Not Income: The Critical Wealth Equation Most People Ignore
Most people believe that a big paycheck means you’re wealthy, but the science and surveys tell a different, clearer story: the only measure that matters for real financial health is net worth—the value of what you own minus what you owe. A high income means little if every dollar is spent or trapped in depreciating assets like cars.
To keep things simple, behavioral researchers have distilled this into a reliable wealth equation: your age, multiplied by your yearly pre-tax earnings, divided by ten. This rule-of-thumb predicts how much you ‘should’ have accumulated for your life stage. For example, a 40-year-old making $100,000 should aim for about $400,000. If you’re well above this, you’re a prodigious accumulator; if you’re below half, odds are you’re burning your paycheck and missing out on lasting security.
The value of this formula is twofold. First, it corrects for income illusions. Two people can earn the same amount but be worlds apart financially—a frugal fireman out-saving a big-spending doctor, for example. Second, it shows whether you’re moving ahead, standing still, or trading every tomorrow for some fleeting ‘today’ moment. Regularly applying this test transforms vague goals like 'I want to be rich' into specific, achievable benchmarks, taking mystery out of money and letting you measure progress on your own terms.
Today, carve out a quiet fifteen minutes and actually run your numbers: multiply your age by your current gross yearly income, divide that by ten—that’s your target. Next, write down your true net worth, subtracting debts, and see honestly where you stand. Are you above average, or is it time for a course correction? Use the result to set a private, concrete savings goal: maybe you’ll skip a big purchase, or earmark a new amount for investing this month. Don’t stress—this is about baselines, not blame. It’s all about clarity, so you know what to do next.
What You'll Achieve
Gain a reality-based understanding of your wealth trajectory; replace unproductive spending with intentional saving and investing. Internally, take ownership of your financial status and learn to set actionable progress goals for your own life stage.
Apply the Net Worth Calculation Rule Yourself
Calculate your expected net worth.
Multiply your age by your annual pre-tax household income (excluding inheritances), then divide by ten. This gives your baseline expected net worth.
Compare your actual net worth to your result.
List your assets (excluding home value, vehicles, and furniture) and subtract any debts. Check: Are you above or below the number from step 1?
Identify your wealth accumulator category.
If your net worth is less than half your expected value, you’re an Under Accumulator of Wealth (UAW). If it’s about what’s expected, you’re Average (AAW). If it’s twice the expected value, you’re a Prodigious Accumulator of Wealth (PAW).
Set a targeted goal to move up a category.
Decide what changes in spending or saving could help you move toward the PAW group over time.
Reflection Questions
- If you’re below the expected net worth, what patterns might explain this?
- How would your financial life change if you focused on net worth, not just income?
- What small step could help you move to the next wealth category?
- What feelings come up when you see your real net worth—and how can you use them to spark action?
Personalization Tips
- A thirty-year-old software engineer earning $80,000 calculates they 'should' have a net worth of $240,000, then realizes they’re below that and adjusts their investing.
- A couple in their fifties uses the formula and sees they’re on track, deciding to maintain their current savings rate.
- A young teacher with little saved finds motivation by measuring progress against her own age and income, not peers’ lifestyles.
The Millionaire Next Door: The Surprising Secrets of America's Wealthy
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