Are you RICH? Use this Math formula to find out



A best-selling personal finance book proposes a mathematical formula to determine if you can be considered rich or not.

Here’s the wealth scoring formula from the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko:

Multiply your Age by your annual household income from all sources except inheritances.

Divide the result by 10.

This, less any inherited wealth, is what your net worth should be.

Let’s see its application in the Philippines.

Scenario 1: Call Center Agent

Christian is 22 years old working as a call center agent earning P20,000 per month. Including 13th month pay, his annual income is P260,000 (P20,000 x 13). This is his only source of income. If we multiply his age (22) by his annual salary of P260,000, we get P5,728,000. Divide that by 10 and his net worth should be P572,800.

Wait, what is net worth?

That’s simply assets minus liabilities. Assets include bank savings, investments, house, and anything that can produce income. Liabilities are things that cause an outflow of cash or other assets. That would include loans such as housing loan, car loan, or credit car loan and other liabilities such as payable to utility companies, etc.

In the case of Christian above, 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: OFW

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 generates yearly earnings of P50,000 on 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 we 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 in order 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
  • Total Assets = P8 million

Liabilities:

  • Housing Loan: P3 million

Net Worth:

  • Assets – Liabilities = P8 million – 3 million = P5 million

Anna’s net worth is P5 million, a bit short of the P6,475,000 magic number from the formula above.

So, are you rich?

Grab a pen and calculator now and check if you’re rich. Of course, this formula has its own flaws but it’s still a fairly good way to gauge whether you’re on the right track. Post here the results!

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

Also view this other useful, awesome article: Saving P1 million by age 30, malaki na ba yun?

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12 thoughts on “Are you RICH? Use this Math formula to find out”

  1. By this computation I declare myself very poor 🙂 though working my way on being moderate and hoping someday to become rich. I love this site very helpful for I pinoys, I just really wish I had all this information 10-15 years ago.

    Reply
  2. This is stupid. If i am 24 and make P100,000 a month, and my friends father is 62 and makes P99,999 a month, my networth is higher by 1peso. Your age does not make your net-worth increase. You’re closer to dying when you’re older, how does that make any sense what so ever? This is the kind of backwards logic that results in the current INSANELY low IQ level of the philippines.

    CONGRATULATIONS PINOYS, OUR COUNTRY IS ONE OF THE DUMBEST IN ASIA!!!

    Reply
  3. poor chris (who seems to have a “high” IQ) didn’t understand the blog.
    you are rich IF you have that net worth (as computed). naturally, if you are older, you should have earned more hence have a higher net worth to be considered rich according to that criteria.

    Reply
  4. Yes Chris our country became one of the dumbest in Asia because of people with peanut brains like you. Get a mentor and maybe you will grow.

    Reply
  5. I’m 82 and I earn 0 pesos per year therefore my networth should be at least 0 therefore according to this formula I’m rich.

    Reply

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