Find Out If Your Wealth Building Is On Track Or Behind Schedule, And Learn How To Make Your Money Grow Faster.
Are your plans for wealth and financial freedom on target or behind schedule? Below is a quick and dirty self-test that will show you at a glance how your wealth building measures up. Also, I include a few tips so that you can improve your future results.
In order to determine how you measure up at building wealth, we must first agree on which measuring stick to use. The obvious answer is net worth, but it’s not that simple.
After all, is a 30 year old with a $50,000 net worth necessarily less successful at building wealth than a 60 year old with $200,000? The 60 year old has a lot more money but a lot less time. How do you take into account age differences, inheriting money, lifestyle differences, and lifetime earnings differences?
In “The Millionaire Next Door” by Stanley and Danko, the authors provided a reasonably workable formula for judging your success or failure at building wealth. The formula is as follows:
“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”
This formula is hardly revolutionary because it is little more than a twist on the classic 10% savings rule. It is a tried and proven formula based on sound mathematics. While it isn’t perfect because there are many additional considerations such as inflation, taxes, and interest rates to factor in, it does provide a useful approximation that serves as a quick, simple, and easy-to-calculate snapshot of how well you are progressing toward financial freedom.
For example, if you were a 35 year old earning $100,000 per year with no inheritances then you should have a net worth of $350,000 because 35 times 100,000 divided by 10 equals 350,000. A person in this situation would be considered “on track” for reasonable wealth accumulation. He is not a super achiever, but he isn’t lagging either.
Now it is time for you to calculate your number using your age and earnings. Have you calculated it yet? If not, please do it now before reading on.
Are You An Exceptional Wealth Builder?
Stanley and Danko then went on to create two variations to their basic formula. People whose net worth is twice as large as the formula would indicate are prodigious accumulators of wealth (PAWs), and people whose net worth is less than half their expected number are considered under-accumulators of wealth (UAWs).
These two benchmarks are as good as any at cutting right to the chase and telling you at a glance how your personal financial management skills and investment skills are measuring up. Remember, judging by results is often harsh, but always fair.
“It is the sign of a weak mind to be unable to bear wealth.”
So how are you doing? What are your results? Are you a PAW or a UAW, or are you stuck somewhere in between?
This is your wake up call. You are being given a health check-up on the journey to retire early and wealthy. Is your financial strategy sick or are you looking like a world class sprinter? Are you on track or behind schedule?
I’ve run quite a few scenarios using Stanley and Danko’s formula, and I’ve concluded being a PAW is a very realistic, if not conservative, standard for satisfactory progress toward building wealth. I encourage you to test this formula yourself and run your own scenarios. It doesn’t take long to figure out how anything less than a PAW is living on financially shaky ground.
Why? Because true financial freedom results when your passive income exceeds your expenses. If you look at the results of PAW status and apply current interest and inflation rates you will quickly see that for many situations and assumptions you would not want to retire with anything less than PAW status.
For example, a 60 year old, married couple with $100,000 annual income would need to have $1.2 million or greater to be PAW’s. Not a bad sum, but take out home equity and multiply the remainder times current interest rates and you are getting pretty thin for someone accustomed to living on $100,000 per year. (See How Much Do I Need To Retire ebook for a complete analysis) They aren’t going to starve, but abundance wouldn’t accurately describe their situation either.
In other words, PAW status is a reasonable minimum threshold of wealth building you should aspire to.
“Early to rise and early to bed makes a male healthy and wealthy and dead.”
So how are you doing? You are being given a sneak preview into your future while you still have time to take corrective action to improve your situation.
If you are a PAW then congratulations – you are doing great. If you are less than a PAW, then how are you going to play the wealth building game smarter in the future and improve your status?
How To Accelerate Your Wealth Building
Avid readers of this site already know I will diverge from the traditional approach taken by the “Millionaire Next Door” authors and most other financial experts when teaching you how to accelerate your wealth building. The reason is simple – the traditional approach rarely works.
Stanley and Danko make the classic mistake of immediately focusing on the “how-tos” to help people understand what it takes to get wealthy. They teach you how the millionaires became millionaires. That is the focus of the bulk of their book.
In fact, that is what most wealth educators focus on. They teach you how they achieved financial freedom and which particular path to wealth worked for them. The focus is on the mechanism – not the cause. Below are some common wealth building themes taught by popular gurus…
(1) Leverage is the key to building wealth.
(2) Wealth exists within the tax code.
(3) You must develop your competitive advantage.
(4) Find your niche and your passion: your wealth will follow.
(5) Invest in the stock market.
(6) Invest in real estate.
(7) Build your own business.
The assumption in most wealth building courses is that the path is the key – not the person. Teach any student how you did it and they will duplicate your success. Give them the tools and they will have what they need to put them to good use. Sorry, but I have coached many clients one-on-one to financial success over the years and that is a fatally flawed assumption. It just doesn’t work that way.
The reality is humans aren’t computers where you input X and get a predetermined output of Y. Just because one person followed a particular path to wealth doesn’t mean anyone else can duplicate his success using the same strategy. Humans aren’t that simple.
“All prosperity begins in the mind and is dependent only on the full use of our creative imagination.”
If they were that simple then everyone who wants wealth would already have it because the internet and your bookstore are filled with more “how-to” courses on investment strategy and wealth building techniques than you could consume in a lifetime. Everything you need to know already exists in print, yet you aren’t wealthy yet. Something besides “how-to” knowledge must be necessary since there is no shortage of it? But what is missing?
The reality is learning any particular path to wealth will not do you any good until you first learn how to get on the path and stay on the path in the first place. You are the cause of your wealth, or lack thereof, and getting clear on your commitment to building wealth is the critical first step that will make or break your success. The how-to mechanism will naturally follow when your commitment is clear. Without a clear commitment no amount of “how-to” can help your success.
In fact, when I first began coaching I made the exact same mistake as everybody else. I naively believed that teaching people the “how tos” of building wealth would work for them just like it worked for me. Just show people the tricks of the trade and they would emulate the success of the teacher.
Needless to say, it didn’t work that way. What I learned is that “how tos” are not what most people need to succeed. What separates people who achieve wealth (PAWs) from those who don’t (UAWs) is the “why”. You must get crystal clear at a deep, emotional level what this journey to wealth is all about for you.
(1) What does building wealth mean to you?
(2) What will you get by becoming wealthy?
(3) How will financial freedom positively impact your life?
(4) How can you build wealth congruent with your deeper values?
(5) What price will you and your family pay for not building wealth?
(6) What price are you paying today because you aren’t financially free now?
(7) What will your life look like once you have financial freedom?
(8) What are the obstacles that have kept you from building wealth up until now? How are you going to overcome them?
(9) Why should you prioritize your time, energy, and money to make financial freedom happen above other activities competing for your limited available resources?
(10) Why go through all the effort? Why not just relax and enjoy the day?
(11) How can you build wealth and still lead a balanced and fulfilling life?
(12) What is wealth building really all about for you and how does it fit into your life?
“Wealth is the slave of a wise man. The master of a fool.”
Clarity around questions like these will strengthen your commitment to building wealth which will then motivate you toward consistent and persistent action. Your drive for wealth must become deep enough to prioritize the actions necessary to reach the goal. If your “why” isn’t strong and clear enough to make building wealth a priority then it won’t happen. Life will always distract you with something else more important. It is as simple as that.
Having the “how tos” without the “why” is like owning a car without gas in it. You wont get very far or go very fast because the “why” is the fuel that creates action. Without fuel the vehicle is a motionless, clump of metal.
When you get the “why” then the “how tos” will follow. That is the great, unspoken secret that I learned in coaching people like you to build wealth. “Why” is the cause: “how to” is merely an effect. The “why” is what drives you to take action, and the “how-to” is the tool or mechanism by which you implement the action. A tool without the impetus to use it is useless, but a driven person will persevere until he finds the right tool – and that makes all the difference.
That is why successful people persist in their success despite changes in market conditions that might force them to abandon or replace their “how-to” strategy. They just correct and adjust their plans because the “how-to” is merely a mechanism or tool, and their drive is the real reason for their success. Their drive resulting from their commitment to financial success causes them to find solutions no matter what gets in their way.
Conversely, you can give a proven formula to wealth perfect for current market conditions to an uncommitted coaching client and they will still fail. Again the “how-to” strategy is just a mechanism or tool: it is not the critical element that leads to wealth.
PAWs choose many different paths to financial freedom, but the common denominator they share is a strong “why” that firmly commits them to building wealth. Stanley and Danko missed that essential point, but that is why they are wealthy.
How To Find Your “Why” For Building Wealth
Many people are fortunate and find their “why” on their own. No course is required. I discovered my “why” when I was in high school, and I have coached others who were equally clear about their “why” without any outside support.
Unfortunately, this is the exception rather than the rule. These are the lucky few who can build wealth using how-to information. The rest (likely you) get stuck in a frustrating loop where they learn great information but fail to implement successfully. They know what to do, but they just don’t do it “for some strange reason”. That’s why commitment based on a compelling “why” is the make or break step to financial freedom – unfortunately, it is a step that is seldom completed.
The reason it is the make or break step is because life is filled with distractions, and most people have conflicting values and desires that muddy the process of gaining clarity about building wealth. While the information necessary to complete the process on your own is available, it is spread out among various sources and disorganized making it hard to assimilate.
That is why I wrote a step-by-step system that walks you through the process of developing your personal “why” so that you can successfully build wealth. It is the first step in Seven Steps to Seven Figures – a blueprint for the wealth building journey. It offers a complete solution with everything you need to know including practice steps so that you can walk before you run. And it includes the support you need to get past the inevitable potholes that will get in your way as you travel the journey.
Remember, this self-test is your wake up call. Are you on track to financial security? Either you are a PAW – or you’re not. The results never lie. Anything less than a PAW means you are behind the curve which puts financial security for you and your family in jeopardy. Again, don’t take my word for it – just run the numbers yourself and let the results speak for themselves.
If you keep doing financially for the next three years what you did for the last three, where will you be three years from now? Five years from now? Ten years? What are you going to do different? When you get clear on your commitment to building wealth by knowing your “why” then you will transform the results you produce. I’ve done it with numerous clients and it can work for you too.
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