What this article covers
Opher Ganel argues that a high income doesn’t make you wealthy: net worth (what you own minus what you owe) does. He shows where different net worth levels rank among American households, with and without home equity, then applies the Wealth Formula from The Millionaire Next Door to show why a 40-year-old earning $60,000 with $500,000 can be wealthier than one earning $600,000 with $1 million.
Key Takeaways
Wealth is measured by net worth, not income
A six- or seven-figure income makes it easier to save and invest, but someone earning $1 million a year and spending $1.1 million is destroying wealth. Opher Ganel notes that age, consistent earnings over a career, frugality and luck matter at least as much as income in building net worth.
Being a millionaire doesn’t quite put you in the top 10% of American net worth
Using DQYDJ’s net worth percentiles, the article finds nearly half of Americans have a net worth below $100,000 and nearly 1 in 9 have a negative net worth. Reaching the top 5% took more than $2 million, and the top 1% about $15 million counting home equity or $10 million without it.
The Millionaire Next Door formula judges wealth relative to your age and income
The Wealth Formula multiplies your annual income by your age and divides by 10 to get an expected net worth. Below half of that makes you an under accumulator of wealth (UAW); double or more makes you a prodigious accumulator (PAW). That’s why a 40-year-old with $1 million on a $600,000 income is a UAW, while one with $500,000 on a $60,000 income is a PAW.
If you’re like most of us (or at least most who read personal finance topics), knowing how much it takes to be wealthy is at least somewhat of interest to you.
Does a High Income Make You Wealthy? Why Net Worth Matters More
First, we need to be clear on what counts as being wealthy.
High income, say 6 or even 7 figures, doesn’t count as being wealthy. Really.
Sure, having such a high income means you can afford to buy a lot of things. More importantly for our purpose here, it means you can save and invest a lot, which lets you build wealth far more easily than someone with a lower income. However, if you earn $1 million a year and spend $1.1 million, you’re destroying wealth rather than creating it.
Wealth isn’t determined by income, but rather by what you have set aside, and preferably invested. For a lucky few, wealth may also be inherited and passed down over multiple generations. Wealth is determined by your net worth or the difference between what you own and what you owe.
High income and wealth are somewhat correlated, but they’re not the same. In fact, it appears that other factors are at least as important. Things like age (you’ve had more time to invest), consistency (if you’ve earned a good income over a long time period, you’re more likely to be wealthy than someone who earns more now, but hasn’t earned more for most of her career), frugality (the less you spend, the more you can invest and build wealth), and luck (this could be having the luck to be born to a wealthy family and/or to have outsized investment returns as a result of taking high-risk investments that pan out).
What Net Worth Puts You in the Top 10%, 5% or 1% of Americans?
According to a nifty calculator at DQYDJ.com, here are the net worth percentiles in the US. These tell you what fraction of Americans has a lower net worth than the numbers in the left column. Home equity here means the value of your primary residence less any mortgage balance owed on that property.
What does this table teach us?
- Obviously, counting your home equity as part of your net worth generally increases the number, so the percentile for the same net worth without equity should be higher. The difference is if you’re “underwater” and have a negative equity (which most homeowners don’t).
- Nearly 1 in 9 Americans have a negative net worth.
- Nearly half of Americans have a net worth lower than $100,000.
- Being a millionaire doesn’t quite put you in the top 10% (unless you have a million beyond your home equity). According to research from 2020, there were 12.1 million American households with a net worth above $1 million (discounting home equity).
- To be in the top 5% requires more than $2 million.
- The top 1% have about $15 million counting home equity or $10 million discounting it.
- Increasing your net worth 10-fold makes the biggest difference between $100,000 and $1,000,000. This shouldn’t be surprising, since that’s a $900,000 increase which is far bigger than any of the lower tiers. Once you hit $1 million, there’s only 12% above you so you can’t go higher by more than that even if you get to a trillion dollars.
How Wealthy Should You Be for Your Age and Income? The Millionaire Next Door Formula
In their highly regarded book, The Millionaire Next Door, Thomas J. Stanley and William D. Danko define a classification of Americans into three categories.
- Under accumulators of wealth (UAWs): Those who have less than half their expected net worth for their age and income according to the authors’ “Wealth Formula”
- Average accumulators of wealth (AAW): Those whose net worth is within a factor of 2 of their expected accumulation
- Prodigious accumulators of wealth (PAWs): Those who have a net worth that’s double (or more) what they “should have” accumulated.
This “Wealth Formula” simply takes your total income, multiplies it by your age, and divides it by 10. If you’re married, you’d take your joint income and the age of the older of the two of you.
For example, if John Smith earns $120,000 a year (including wages and investment returns), and is 45 years old, his expected net worth would be $120,000 x 45 / 10 = $540,000. If John has a net worth of less than $270,000, he’d be in the UAW category. If he accumulated over $1,080,000, he’d be a PAW. If his net worth is between $540,000 and $1,080,000, he’d be in the AAW category.
While all other things being equal, higher net worth makes you wealthier than someone with a lower net worth, you could have a lower net worth than someone else, but be considered wealthier because your income and/or age are lower.
For example, if 40-year-old Jack makes $600,000 a year and has $1 million net worth, he is less wealthy than 40-year-old Jane who makes $60,000 and has a net worth of $500,000. Despite Jack’s net worth being twice Jane’s, he’d be in the UAW category, while she’s a PAW.
The Bottom Line: Measure Your Wealth Two Ways
Having a lot of money isn’t the only or even most important thing, but… As my wise grandmother used to say, “Money is the least important thing, as long as you have plenty of it.”
The above will show you where you stand relative to other Americans in terms of your net worth, either with or without counting your primary residence equity. Further, you’ll be able to figure out where you stand relative to where you “should be” based on your age and income.
Frequently Asked Questions
Does a high income make you wealthy?
Not on its own. Wealth is determined by net worth, the difference between what you own and what you owe, so a high earner who spends more than they make is destroying wealth rather than creating it. Income and wealth are somewhat correlated, but age, consistency, frugality and luck matter at least as much.
How much net worth do you need to be in the top 1% in the US?
Based on the DQYDJ percentiles cited in the article, the top 1% had about $15 million in net worth counting home equity, or about $10 million excluding it. Reaching the top 5% required more than $2 million, and a $1 million net worth fell just short of the top 10%.
How do you calculate your expected net worth using The Millionaire Next Door formula?
Multiply your total annual income by your age and divide by 10. If you’re married, use your joint income and the age of the older spouse. For example, a 45-year-old earning $120,000 would have an expected net worth of $540,000.
What are UAWs, AAWs and PAWs?
They are the three categories from The Millionaire Next Door. Under accumulators of wealth (UAWs) have less than half their expected net worth for their age and income, average accumulators (AAWs) are within a factor of 2 of it, and prodigious accumulators (PAWs) have double or more.
Can someone with a lower net worth be wealthier than someone with a higher one?
Yes, by The Millionaire Next Door’s measure. Because the formula accounts for income and age, a 40-year-old earning $60,000 with a $500,000 net worth is a PAW, while a 40-year-old earning $600,000 with $1 million is a UAW, despite having twice the net worth.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.