If I Had a Million Dollars…Would I Be Rich?

Once I was in a Starbucks with my friend Marie. We were both working at the coffee giant, in the Finance department, and using our employee discount for lattes. The people-watching was free.

Marie grew up in Seattle and knew who-was-who in town. While we were talking she nodded to someone leaving the store carrying two enormous coffees. He was big and tall, wearing jeans and a windbreaker, not a designer brand on him. He looked like a truck driver. “That’s Phil Condit,” she said.

At the time Condit was Chairman and CEO of Boeing, then the largest aerospace company in the world and employer of over a quarter of a million people. Today there are lots more CEOs who wear jeans and hoodies, but back then you could say Condit didn’t look like a CEO, or a multi-millionaire.

In their ground-breaking study, The Millionaire Next-Door, Thomas Stanley and William Danko revealed what America’s wealthy really looked like and offered some guidance for how to accumulate wealth. The bottom line was, in fact, a bottom line: often those who “looked” the wealthiest – living in the upscale neighborhoods, wearing the designer duds, eating in the toniest restaurants, and taking the posh vacations – were actually poor, at least in terms of their bottom line, their financial net worth.

One path to poverty, despite high incomes and great resources, is often the pursuit of image. Wealth is distinctly different from stuff. But we can see stuff. We can show off stuff. We can drool over other people’s stuff. We are often comparing ourselves to others, to this image of wealth and success, and it gets in the way of actually being wealthy and financially successful. But how do we know how we’re doing, given what we have to work with?


Stanley & Danko came up with a formula to determine whether you’re wealthy. Their formula combined two strong determinants of wealth — age and income — into a simple standard against which you can evaluate how you’re doing. Basically, the higher your income, the higher your expected savings, and the older you are, the more you should have saved.

Here is the rule according to Stanley and Danko:

 Age x Realized Pre-Tax Annual Household Income (all sources[1])

Divided by 10

= Expected Net Worth

[1] Excluding inheritances

You’ll note any family money through inheritances or trusts is not included in this metric. From their research, 80% of millionaires are first generation wealthy.

How do you stack up? Let’s look at a couple of examples:

Age                        =             55

Income                 =             $50,000

Expected NW      =             $275,000

Actual NW           =             $325,400

Congratulations! You are on your way to truly building wealth.


Let’s take another example:

Age                        =             35

Income                 =             $250,000

Expected NW      =             $875,000

Actual NW           =             $325,400


Hmmm. You may have to adjust your lifestyle if you want to really build wealth.

Stanley and Danko further divide their participants into quartiles. If you’re in the top quartile, you are a Prodigious Accumulator of Wealth (PAW). You have accumulated the expected net financial worth given your age and current earnings. Stanley and Danko found that PAWs are frugal, living in modest homes and driving inexpensive cars; they are investors, savings nearly 20% of their household income annually; when they spend they will spend on education. PAWs emphasize building wealth.  Having twice the expected net worth places you squarely in the top quartile.

If you are in the bottom quartile, with Actual Net Worth less than Expected Net Worth, you are an Under Accumulator of Wealth (UAW). By contrast, UAWs have a higher propensity to spend and tend to live above their means; their emphasis is consumption.

Stanley and Danko summarize the difference between the two cohorts as looking rich, rather than being rich. One of their millionaires from Texas described the former as having “a big hat, no cattle.”

As outlined in detail in the book, the authors note seven factors they saw consistently in their prodigious accumulators. The Top Two factors are:

  1. They live well below their means
  2. They believe that financial independence is more important than displaying high social status

One other thing: the Millionaire Next Door married once, and remained married. (A whole other topic – more on this another time.)

You have more control over building wealth than you may feel, and having an objective benchmark on how you’re doing is critical to tuning out the noise and working with what you have. Wealth is more often than not the result of hard work, perseverance, discipline and (you guessed it) planning.

Skip the big hat, go for the cattle.

Thomas Stanley passed on in 2014. For more on Stanley’s research, check out http://www.thomasjstanley.com/


The Barenaked Ladies explain the challenge to become a Prodigious Accumulator: