Are you rich? Check your net worth here

I was browsing over at Tyrone’s Millionaire Acts blog when I saw a mathematical formula he posted to determine if a person can be considered rich or not.

The wealth scoring formula, taken from the best-selling book The Millionaire Next Door, goes:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide it by ten. This, less any inherited wealth, is what your net worth should be.

It may not be the ultimate formula for determining wealth but at least it gives a general idea. Let’s see some examples.

Scenario 1: Christian is 22 years old working as a call center agent earning P20,000 per month. That is his only source of income. If we multiply his age (22) by his annual salary of P240,000 (P20,000 x 12), we get P5,280,000. Divide that by 10 and his net worth should be P528,000.

What’s net worth? That’s simply assets minus liabilities. Assets would include bank savings, investments, house, and anything that can produce income. Liabilities would be things that cause an outflow of cash or other assets. That would include housing loan, car loan, credit car loan, payable to utility companies, etc. In the case of Christian, if after subtracting all his liabilities from his total assets, his net worth is more than P528,000, then he can be considered “rich.”

Scenario 2: Anna is a 35-year-old Overseas Filipino Worker earning a total of P1.8 million a year. She has a P1 million stock investment that generate yearly earnings of P50,000 on the average. Her other assets include savings of P2 million and a house which cost P5 million. This house, however, came from a bank loan whose outstanding balance is P3 million. Based only on the following data, can you say that Anna is rich?

Let’s compute:

Age x Annual Income from all sources = 35 x (P1.8 million + P50,000) = P64,750,000

Divide by 10 = P6,475,000

Anna’s net worth must be more than P6,475,000 to be considered “rich” based on The Millionaire Next Door formula.

What’s her actual net worth?

Assets: Bank Savings (P2 million) + Stocks (P1 million) + House (P5 million) = P8 million

Liabilities: Housing Loan (P3 million)

Net Worth = Assets – Liabilities = P8 million – 3 million = P5 million

Still short of the P6,475,000 magic number but we can say that Anna is on her way to becoming “rich”.

Of course, this formula has its own flaws but it’s still a fairly good way to gauge whether you’re on the righ track.

So grab a pen and calculator now and check if you’re rich. Post here the results!

Speaking of networth, it looks like some PMT members do have a high networths. Just check the discussion thread Poll: How much is your networth?

Related reading:

• List of richest Filipinos in 2008
• Earning P1 million by age 30 (Part 2)
• Malaki na ba ang makaipon ng P1 million by age 30? (Part 1)
• Lifestyles of the “rich” and “wealthy”
• Financial Planning help and tips