This calculator improves the formula ( [Your age] times [Annual Income] divided by 10 ) presented in The Millionaire Next Door by Thomas Stanley and William Danko by adding years of work into the formula to reduce the error for those young professionals or individuals with few years in the workforce.
The Millionaire Next Door formula works fairly well for people around 40-50 with a stable salary over the past years. However, this formula throws unrealistic and near impossible results for young professionals or individuals with less than 10 years in the workforce.
Examples:
- https://www.reddit.com/r/personalfinance/comments/6j242f/is_the_expected_net_worth_formula_in_the/
- https://www.reddit.com/r/financialindependence/comments/53n5qz/do_you_pass_the_millionaire_next_door_net_worth/
- https://www.reddit.com/r/personalfinance/comments/80j495/how_realistic_is_the_millionaire_nextdoor_target/
In order to improve the formula, years of work should be taken into consideration. Also, decrease salary over the past years since average yearly raise salary is expected.
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If your years of work variable is less than 10 years, the average salary is divided by 10. Example: 50,000 salary and 3 years of work (50,000 + 50,000 + 50,000 +0+0+0+0+0+0+0) / 10 = 15,000
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If your years of work variable is more than 10 years, the average salary is divided by years of work
A 4% decrease in salary per year is also applied, since the average salary raise in the USA is around 4%.
Expected Net worth = ( [Your age] times [Average Annual Income] ) / 10
Charly is 27 years old and makes 60,000 (pre-tax) a year with 3 years of experience. What should Charly's net worth should be?
The Millionaire Next Door formula says (27 * 60,000) / 10 = 162,000
Since Charly has been 3 years in the workforce, The Millionaire Next Door formula is expecting him to basically save almost 100% of his salary to achive the expected net worth, this however, is unrealistic and near impossible.
Calculate Average Salary = (60,000 + 57,600 + 55,296) / 10 = 17,289.6
Expected Net Worth = ( 27 * 17,289.6 ) / 10 = 46,681.92
Charly's net worth by the age of 27 should be 46,681.92
My purpose was to keep the formula as simple as possible, and no more than 3 fields. However, in order to increase the accuracy, other factors/variables can be used. For example: dependents, current debt, living expenses, etc...
Trent Hamm proposes the following formula in his post:
https://www.thesimpledollar.com/financial-wellness/what-should-my-net-worth-be/
npm install
npm start