Sunday 16 August 2015

What type of Wealth Accumulator are you?

In The Millionaire Next Door, Thomas Stanley and William Danko classfied people into 3 different types of wealth accumulators: The Under Accumulator of Wealth (UAW), the Prodigious Accumulator of Wealth (PAW) and the Average Accumulator of Wealth (AAW).

(Image source: amazon.com)


To start off, you need to calculate your "expected" net worth, which is one tenth your income multiplied by your age. This value may skew a little high especially if you're still young.

Expected Net Worth = Your Income * Your Age / 10

If you're net worth is above your expected net worth, you are a PAW, if it is the same, you are an AAW and if it is lower, you are an UAW.

Since your net worth is calculated based on your income, it does not really matter whether you are a high-income earner or a low-income earner (but it would be easier to save a larger portion of your salary if you earn more as less of your salary goes to daily necessities). The book also shows that many millionaires do not play an offensive game by earning high-incomes but rather a more defensive game, which is to save a larger portion of your salary, "defending" it.

The book also shows that your environment will affect you. If you choose to live in a status neighbourhood, you are likely to spend more to keep up with your neighbours. Children of UAWs are also more likely to require financial assistance from their parents in the future.

Some of the good traits of PAWs is that they spend less than they earn and invest the rest into the stock market, setting up their own companies, etc. and they avoid buying status objects. In essence, they are frugal people, but they are not cheap (Difference between being Frugal and Plain Cheap). They look at the value of objects and make sound financial decision, for example, instead of buying a new car which suffers much higher depreciation, they purchase used ones.

If you ever do feel envious of people with status objects, just remind yourself that people who buy status objects are more likely to have a small net worth than a high one.

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