The Millionaire Next Door is one of the most influential personal finance books I’ve read. This book is written by Thomas J. Stanley and William D. Danko, who wrote the book in 1996. Dr. Stanley conducted interviews with millionaires between 1982 and 1996 to understand the wealth building traits these people possess. The main traits he found were: discipline, sacrifice, and hard work. Stanley and Danko developed a simple calculation to answer the question: how much money should you have saved by a specific age?

Related: My post where I discuss the seven traits millionaires possess.

This is also a question I receive from my readers because I think people want to understand how they relate to their peers. Or, maybe people want a barometer to see how “on track” they are toward retirement.

The calculation Stanley and Danko developed

The calculation Stanely and Danko developed to gauge net worth is straightforward.  This formula can be used to gauge how much money should you have saved by age (enter your age here) is:

Net worth = (Your age * your pretax income) divided by 10. 

For example, if you are 30 years old and you make $100,000 per year your net worth should be  $300,000.

How do you define net worth?

How is your pre-tax income defined? Stanley and Danko define pretax income as your realized pretax annual household income that is from all sources except inheritances. This includes income from your job, your investments, your side hustle, etc. Anything that you are doing to make money should be included in this calculation.

In the book, Stanley and Danko take this definition a step further with a few more definitions. A prodigious accumulator of wealth, or PAW, is someone that is in the top quartile for wealth accumulation. A PAW has twice the wealth expected from the calculation. If you are right on par, you are an average accumulator of wealth (AAW.) Finally, if you are below where you should be – according to the calculator – then you are an under accumulator of wealth (UAW.)

Related: Joshua Sheets provides an in-depth explanation in his recent podcast on this topic.

Is there a hard and fast answer to how much money should you have saved by a specific age?

Let me start by saying there is no one correct answer because everyone’s situation is different. A person that graduated high school and immediately went into a trade (i.e. plumber or electrician) could be making close to $75,000 in their early 20s. If they start maxing out their 401(k) at age 20, by age 40 they will have just over $600,000 (5% return used for my conservative friends out there.) Let’s keep the salary at $75k and plug the numbers into the net worth calculator.

(40 years old * $75,000) / 10 = $300,000

This person would be considered a PAW. And rightfully so!

Compare that to a medical student that won’t make doctor salary until they are close to age 30, but their salary might be $150k – $300k to start depending on their focus. If they max out their 401(k) plan, by age 40 they will have a little over $230,000 (5% return.)

That is a difference of almost $400k! And it gets uglier because they are considered an UAW:

(40 years old * $150,000) / 10 = $600,000 ($1,200,000 if they earn $300k/year)

Now, I can’t argue that a doctor could also save into other vehicles to build up their investments more quickly. Also, this data points out an interesting theme. The net worth calculation is not a good tool to use when you are starting out your career. A 23-year-old that just graduated college making $75,000/year is most likely not going to have a net worth of $172k (per the calculator.)

My take on the net worth calculation

I think the calculator is a good tool to use for looking into the future. It doesn’t work for a young person that is just starting out in their career. If you are one of the young people out there looking at this calculator – don’t be discouraged!

Take the 23-year-old making $75k as an example. If he sets a goal to have an income of $100,000 by age 30, and he wants to be an AAW by age 30 and maybe a PAW by age 40. Then, by age 30 he or she would need a net worth of $300,000 to be an AAW and a net worth of $800,000 (two times the normal calculation) by age 40 to be a PAW. This is a tall task – even if he maxes out a 401(k) and Roth IRA, he will be short of both goals.

Now there are other assets that could help boost your net worth: purchasing a home and having equity in the home, other retirement accounts like a pension or a taxable account, jewelry, etc.

But the point is, I think it is hard for most people to become PAWs until they get closer to age 50. Especially if you have a high income.

There are many other philosophies/calculations out there for determining where you should be in terms of savings or net worth at different ages. The best tool out there is to calculate how much you think you will need in retirement. Determine how long you think you will live, determine how much you will spend each year, and make sure you have enough money to cover yourself. You don’t have to compare yourself to others – do what makes sense for you and your situation.

What’s coming in the future from The Grounded Engineer?

I’ve alluded to the financial independence retire early (FIRE) movement that is spreading like wildfire right now. People out there are going against the norm and retiring in their 30s and 40s instead of working until age 65. These people are PAWs and are saving over 50% of their income – in most cases closer to 70% of their income. More to come on the FIRE movement in future posts.

If you achieved financial independence or retired early, please send me an email if you want to be interviewed and featured on my blog.

Related: Physician on Fire’s Sunday best post reviewing a few FIRE bloggers

What do you think of this net worth calculation?

How do you stack up?