Thursday, June 24, 2004

The authors of The Millionaire Next Door argue that this rough rule of thumb (Your yearly income X your age / 10) can be used to describe how well people are doing at building toward financial independence.1

They noticed that over half of the 3.5 million U.S. millionaires in 1996 had household incomes less than 131,000 USD a year--even though over 7 million households reported income in excess of 100,000 USD. So, they argue that the distinguishing traits of people who become financially independent are those relating to frugality--the ability to control expenses, stick to a budget, and generally not worry about keeping up with the Joneses. Millionaires tend to save at least 15% of their income, and focus very seriously on planning on how to build their wealth--rather than on how to maintain a fancy lifestyle. The result? A high ratio of net worth--the value of all assets, after subtracting liabilities--to income.