Are you a P.A.W. or a U.A.W.?
Are you a high-wage earner and a big spender? Do you have a “consume” lifestyle? Do you have a lot of material high-status symbols?
If you answered yes to these questions you might be an under-accumulator of wealth (a U.A.W.) and not a prodigious-accumulator of wealth (a P.A.W.). So how do you know if you’re a P.A.W. or a U.A.W., and if you find yourself in the U.A.W. group what can you do about it?
These are questions posed and answered in the book “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko.
To answer this question for yourself - “Am I a U.A.W. or a P.A.W.?” - here is a simple rule of thumb you can use:
- Write down your total pre-tax income, including any investment dividends or assets that produce income.
- Take this number and multiply it by your age.
- Take the total and divide it by 10.
For example; a 41 year old executive who earns $103,000 would end up with an answer of “41 x 103,000 = 4,223,000 / 10 = 422,300″
This number is roughly what your net-worth should be for your age and income. We should expect our executive to have a net-worth of roughly $422,300.00. If our executive’s net-worth was significantly less than this number, he would be a U.A.W. - an under-accumulator of wealth. If our executive’s net-worth was more than double this number, he would be a P.A.W. - a prodigious-accumulator or wealth.
How do you measure up?
I must admit that I was shocked when I ran the numbers for myself - I knew I wouldn’t call myself “financially independent,” but I wouldn’t have figured that I would be as far below the target to be on my way to financial independence as I was.
Stanley and Danko define financial independence as the ability to live on ones wealth - our net-worth - for ten or more years.
I suspect that we all want financial independence - it’s many people’s “ultimate life goal”, but most of us don’t plan for and work towards this end. The authors argue that the biggest culprit that prevents people from achieving their goal of financial independence is living a high-consumption lifestyle.
I know I certainly do! I’m a “stuff” freak - I love my gadgets and electronic gizmos. My wife and I enjoy a very comfortable lifestyle that includes almost any consumer item within reason. We eat at restaurants quite often. We’re living the high-consumption lifestyle and are not on track to achieve financial independence without making some changes to the way we work, earn, save and build wealth.
The keys to achieving financial independence are four-fold:
1) Live on less than you earn. The majority of individuals with a net-worth of over a million dollars save and invest - on average - 15% of their pre-tax income. This requires giving up some of a consumption-based lifestyle for one of saving and investing.
2) Budget, budget, budget. About 83% of millionaire households create a budget for their income and expenses, conversely only about 16% of non-millionaire households create a budget.
3) Invest in what you know. Everyone is knowledgeable about specific subject matter; take advantage of this knowledge when looking for investments!
4) Seek professional advice. Realize when you’re not the most qualified to create an action plan to achieve your goals. Millionaires seek out professional help from tax accountants, CPAs, and financial planners far more than non-millionaires.
None of these keys is new or sensational information; you and I already know this! But seeing all of the steps laid out and presented in “The Millionaire Next Door” is very helpful. It breaks the problem of “how do I get started and what do I do?” down into manageable chunks; this helps prevent the getting-overwhelmed-factor.
I know that as I move down the list I can put a check mark in the “I don’t do that” column next to each of the four keys above. Just like many people, when my income increases, my spending increases. I was living comfortably on a lesser amount prior to my income increasing, so why didn’t the increase go directly into investments and savings? The mentality of a U.A.W. is to consume more as his means go up; this is the habit that needs to be broken.
“The Millionaire Next Door” will help you change your thinking about high net-worth individuals as well as give some good advice to help you change your habits. It’s shaken me up and forced me to look at how I earn and how I consume.
In addition, “The Millionaire Next Door” is filled with insightful and interesting information about high net-worth individuals. Did you know that the average millionaire spent an average of $267 on his watch and less than $600 on his most expensive suit?
Did you know that the average millionaire is more likely to hold a Sears or J.C. Penny credit card than an American Express card?
Did you know that 80% of all individuals with a net-worth of one million or more dollars built their wealth in a single generation? Only 20% of millionaires received their money through inheritance.
I highly recommend you pickup this book and spend time reading it. It’s well written, and refreshing because it doesn’t promise you “riches in 3 easy steps.” It’s good, solid advice.
2 comments January 23rd, 2006
