Blog 1: Sky High Expectations
Understanding Wealth with The Millionaire Next Door Formula
In the chilly dawn of a Maine morning, as the fog rolls in from the coast and hovers over the tarmac, Lieutenant Melissa Donovan begins her pre-flight checks. A talented pilot for the Maine Air National Guard, Melissa’s days are an orchestrated dance of precision, duty, and a relentless commitment to her country.
In this hour of the morning, it’s easy to be consumed by the romance of flight, the sheer thrill of soaring thousands of feet above the earth. Yet Melissa, like all of us, is grounded by the realities of her financial obligations. Money, as it is often said, is one of life’s great equalizers. And, like gravity, it has an undeniable way of bringing us back to earth.
In “The Millionaire Next Door,” authors Thomas J. Stanley and William D. Danko present us with a formula intended to gauge our financial health. This formula, which sets your net worth as your age multiplied by your realized pretax annual household income divided by ten, may seem oversimplified, but it offers an invaluable perspective on one’s financial state. To put it simply, it is not just about how much money you make, but also how well you manage it.
Consider our pilot, Melissa. She’s 27, and her pretax income from the National Guard and a part-time tutoring job is $65,000. By the formula proposed by Stanley and Danko, Melissa’s net worth should be around $175,500 (27*65,000/10). But she’s only just started to save and invest, and her current net worth sits around $40,000, a combination of her savings, an inheritance from her grandmother, and her modest portfolio of investments. This leaves a gap of $135,500 between her current and expected net worth.
Does this mean Melissa is behind on her journey towards financial stability? Not necessarily. It simply shines a spotlight on the landscape she must navigate. She’s not alone. Many young professionals, who are early in their careers, often have a net worth less than what the formula suggests. Melissa’s career, like the powerful jet she pilots, has just taken off.
So why do Stanley and Danko believe this formula is important? And why should Melissa, or any of us, pay attention to it? This simple equation, like the controls of Melissa’s jet, provides a set of coordinates for our financial journey. It won’t predict the turbulence ahead, nor will it ensure a seamless flight, but it can offer us valuable insight into our current financial status and guide us towards a more prosperous future.
It is necessary to consider this formula, not as an exact prescription, but more as a tool of self-assessment, much like the flight instruments in Melissa’s cockpit. It gives a perspective that might otherwise be overlooked, thereby serving as an aid to navigate one’s financial journey.
In the blogs to come, starting with Fueling Your Financial Journey, we’ll delve deeper into this formula, decoding its elements, applying it in various scenarios, and reflecting on its implications in our lives. Just as Melissa navigates the Maine skies with caution and precision, we too will navigate the world of finance. So buckle up and prepare for takeoff on our financial expedition.
References
- Stanley, Thomas J., and William D. Danko. The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. New York: Simon & Schuster, 1996.
- “Military Pay Charts.” Defense Finance and Accounting Service (DFAS). Accessed May 30, 2023. https://www.dfas.mil/militarymembers/payentitlements/Pay-Tables/.
- “How to Calculate Your Net Worth.” Investopedia. Last modified November 22, 2022. https://www.investopedia.com/articles/pf/13/net-worth.asp.
- “The Importance of Financial Literacy & Education.” Federal Reserve Bank of St. Louis. Last modified March 31, 2022. https://www.stlouisfed.org/education/importance-of-financial-literacy-and-education.
Avery Rock Financial, LLC is a registered investment adviser. The information in this material is for educational purposes only, is not intended to predict or guarantee future market performance, and is not intended to act as individualized tax, legal, financial, or investment advice. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Please consult a qualified attorney or tax professional for individualized legal or tax advice. Please contact a financial advisor for specific information regarding your individualized financial and investment planning needs.
Comments are closed