Most households in America with good to even great incomes, “have small levels of accumulated wealth. Many live from paycheck to paycheck.” And, as I also wrote in The Millionaire Next Door, these are the people who will benefit most from the book. With this in mind you will understand my keen interest in the contents of a just published report by the Pew organization.
The title is indeed telling, The Precarious State of Family Balance Sheets. Here are some highlights from this empirically based report:
- . . . many families, even those with relatively high income, are walking a financial tightrope, and have little, if any cushion to absorb an unexpected financial emergency.
- At all income levels households could not replace 2 months of income with liquid savings.
But the millionaire next door types are different as revealed in the original data from The Millionaire Next Door. The typical millionaire household had a net worth of $1.6M (median). Its total annual realized income was $131,000 or the equivalent of 8.2% of its wealth. [Call this return on net worth, RON] “. . . with a net worth of $1.6M we could live comfortably for more than 12 years.” In fact they could live longer than that. If we deduct income taxes totaling 25% of their income and then the equivalent of the 15% of the income they invest each year, they are down to $78,600. That is just under 5% of their total net worth. This translates into being able to sustain their lifestyle for approximately 20 years!
One of the millionaire next door mile markers suggests that by the time one reaches his 50s, one should have a net worth large enough to sustain one’s household for 20 years or more. While the income and net worth characteristics of millionaires have changed since the publishing of The Millionaire Next Door, the RON hasn’t changed much at all. For the national sample of millionaire women who owned their own businesses highlighted in Millionaire Women Next Door it was 8.3%. For the 733 millionaires profiled in The Millionaire Mind, the RON was 8.1% (average).