Are You a PAW Yet?

I am a PAW. Are you?

                                                          I love PAWs.  Don’t you?

A scoreboard keeps us engaged in the game.  As a player, you need to focus on the game and not on the scoreboard, but once in a while, it helps to lift your head up to see what the score is, so you can change your game accordingly.  A scoreboard also keeps us grounded, gives us a chance to pat ourselves on the back when we are doing well, or say meh when we are doing just OK and importantly, give us a kick in the shins (not this shins) or in the a** if you prefer, when we need to catch up.

The path to financial independence (FI) also needs a scorecard.  Wait a minute, you are thinking it already has a scorecard called ‘net worth’ right?  Yes, net worth can be a scorecard but as a wage earner, it doesn’t tell you how you are supposed to be doing in the net worth department.

The author of the best selling book, The Millionaire Next Door, Dr. Thomas Stanley, former professor of Georgia State University, did pioneering research on affluent people, and discovered that their lifestyles are far less glamorous than what most people thought.  Importantly, he discovered the millionaires share strong family and life values including charity, which in their view, helped them become wealthy.  The good professor also developed an interesting formula to see how your wealth stacks up against your own income level.  With this formula, we now have a way to link age and income to wealth.  He categorized the savers into 3 levels, based on their wealth relative to their own income and age.  These levels are named, as expected from an academic study, as Prodigious Accumulator of Wealth (PAW),  Average Accumulator of Wealth (AAW) and Under Accumulator of Wealth (UAW).  You might simply categorize them as Wealthy, OK or Struggling (respectively).  

There are some controversies around the formula, especially for higher-earning younger workers as it over-estimates the expected net worth, but that said, it works fairly well for most wage earners, especially those with at least 10 years of earnings under their belt.  Even otherwise, this tells you where you need to get to.   While calculating income or your actual net worth, you must exclude your inheritance if any.   Income can be from any source except from inheritances or trust funds (neither one applies to me 😢)

The formula is:  

Age x Annual pretax income / 10 = Expected or Average Net Worth.

If your actual net worth matches or is close to what this formula predicts, you are considered to be an AAW.  If your actual net worth is twice or more than this calculated figure, then you are a PAW (see why I love PAWs?).   If your net worth is half or less than this calculated figure, then you are only an UAW and you will be in awe of the PAWs!  What’s good about this scorecard is that it ties net worth to age and income, which is more useful than simply setting a net worth target out of thin air or based on some advisor saying this is ‘your number’.    It also levels the playing field somewhat because knowing a person is worth $1 million doesn’t tell you much.   If that person is a 50 year old earning $80K a year (PAW), he deserves lot of credit than another 50 year old millionaire earning $200K a year (AAW).  Use the calculator below to see how you fare.  

So, are you a PAW (higher than 2.0), an AAW (close to 1.0) or an UAW (less than 0.5)?

While some consider Prof. Stanley’s methodology as debatable, this formula is still broadly useful for many in their working career.   The main exception, as I said earlier, are high-earning recent graduates, especially with student loans.   For example, if you are a 35-year old cardiologist earning $300K/year with $150K of medical college loans to be paid back, your ‘expected’ net worth would be far higher than what you actually have.  The formula over-predicts in such cases.   Similarly, one other contingent where the formula gets it wrong, this time by under-predicting, is at the other end of the spectrum.  For example, a person who has had a relatively high-earnings career and decides at the age of 55 to down-shift to a low paying job as a way of semi-retirement perhaps.  In this case, based on his new low paying job, the formula would predict a lower net worth than what probably is reality for this person.  This formula, therefore, doesn’t work for retired folks with no earned income, but are living off of investments or rental real estate.    With a caveat on these limitations, by and large, the formula is a good scorecard on where you are placed if you have been working for some time and want to get to a net worth better than your same income-age cohorts.

There is another good way to declare your financial independence, using passive income as the metric, but until you get there, knowing whether you are a PAW/AAW/UAW can at least tell you whether your lifestyle needs adjustments.  This is especially true if you are falling significantly below average of what’s expected of your net worth based on your income and age.

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18 comments on “Are You a PAW Yet?”

    • By TFRadmin

      Thanks Fritz. But this is not a race! We are both trying to help others reach FI. I enjoy your blog very much and I hope you do mine as well.

  1. By Santiago

    whoah this blog iss fantastic i love reading your posts.
    Stay up the great work! You know, lots of people are hunting round forr this information,
    you can aid them greatly.

  2. By Gio

    Aw, I’m an UAW by this formula, but I have only been working at my current salary for 2 years and I paid off all my student loans in that time, so for me this formula isn’t really representative of my position. Still, one day I hope to be a PAW!

    • By TFR

      And you will be a PAW Gio soon! Getting rid of student loans within just 2 years puts you far ahead of your peers. Keep up this good work.

  3. By Kurt

    Good to have a metric, but in playing around a bit seems to give low results to me. But still useful! We just have to be careful to not compare ourselves to our peers–most of whom likely are not saving nearly enough and spending way too much and have too much debt (i.e., they’re “average”) but instead compare to where we should be in order to reach our own long-term financial goals. No matter what everyone else is doing, right?

  4. By Jax

    At 3.5, I am a PAW. But I have mixed feelings about that-most of my assets come from an inheritance. I haven’t “earned” them, but I have been managing them well. If I take out what I inherited, I am .35. If that is not a motivation to build my own assets, I don’t know what is!

  5. By Ty

    I agree with the previous commentor, JA. My income increased by 25%+ by taking the new job I have had for less than a year.
    If I use my new salary, I’m only AAW.

  6. By Stephonee

    Thanks for the calculator! I read Prof. Stanley’s last year, and the PAW/AAW/UAW is really interesting in the context of the difference in behaviors outlined in the book.

    I wish I had written down my number last year when I read the book (as I definitely did the calculation then!) but now I get 0.25-0.28 for myself and my husband (depending on whether I use his age, mine, or the average). I’ll take it! 😀

  7. By JA

    This formula is only appropriate if your income has remained relatively stable. If it has grown precipitously over time, it could be nigh impossible to be considered a PAW…

    • By TFR

      That’s only partly true. If income has grown much faster than your assets have, then you can at least be an AAW till you clock in the few years at high income to get to PAW status.

    • By TFR

      Don’t worry, you’ll get their soon ZJ. Keep up your 10! Journey.

  8. By Vicki@Make Smarter Decisions

    Really interesting! I always have a hard time with these when trying to add in pensions into the net worth equation. Still haven’t found much reading about that. This left me at AAW – thinking my pension would boost us to PAW for sure 🙂

    • By TFR

      Thanks. One way you could consider pension in this calculator is to multiply annual pension by 25 and add to your net worth. As a guaranteed income source, it can be treated as an asset generating inflation-adjusted pension each year. This approach should take care of it. Try and see if this makes you a PAW now!

      • By Moi

        I’m a AAW, but become a PAW with my pension. My pension doesn’t adjust for inflation – does the formula change for non-inflation pensions?

        • By TFR

          If your pension is inflation adjusted, take 4% as the rate (that is, multiply by 25) as I said in the comment above. If not, you can take 6-7% as the rate (that is, divide your annual pension by 0.06 or 0.07 and add it to your Assets). That’s a reasonable way to account for them. Best wishes in your 10! Journey.

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