Free Money Finance Top 10 Most Hated Posts/Themes: #3 MND Formula for Net Worth

My #3 most hated theme here at Free Money Finance is the net worth formula from the Millionaire Next Door that determines whether or not your net worth is as high as it should be. Here are a few of the select comments about this lovely post:

I have read this book, I'm wondering if the formula must be adjusted, however for the earlier years in your life... For example, mid to early 20's. Most people in their twenties still have no positive net worth, when factoring in a car payment, student loans, and especially the newly found MORTGAGE on the house they buy. I, for example, have a negative net worth of around 180,000 - yet I am supposed to have a net worth positive of around 100,000. I don't think I've even made 100,000 total in my entire life yet!... There should be a way to adjust the formula for the younger years in life, when debt accumulation happens due to schooling and purchasing a home!

And as if that weren't enough:

I have to agree that this "rule of thumb" is more offbase than most "rules of thumb," especially for those towards the beginning or end of their careers...

And more:

I have to agree with the folks who question the validity of the rule of thumb for people early in their careers. It's especially problematic for young professionals. Take a young lawyer, for example. Three years out of law school, she might make $150K/year, at around age 30. Because she spent time in law school, she probably had no net worth built up when she started her job. But according to the rule of thumb, her net worth should be $450,000, or three times her current salary. That's just not realistic. The rule of thumb may only work once you've hit 35, or been working for some number of years (like 7-10).

And more:

The book formula is a poor rule--unless it was designed to use a biased rule to 'shock' people into saving.

Using misleading information to cause (scare) people into behavioral changes because one thinks s/he knows what is best for all people is risky as one solution does not fit everyone's unique circumstances. Even if that behavior is considered most reasonably to be a "good" one.

Makes me wonder what else from the book is misleading.

And on and on. Apparently, it's not a favorite of most people. ;-)

However, there is good news on the net worth calculation front. I've recently posted How to Compute Your Net Worth and Check Your Financial Progress and How to Compute Your Net Worth, How High Your Net Worth Should Be, and Be Sure to Do It Once A Year which have both received positive comments on the net worth formulas they include.

Comments

[Duane Gran]

If prodigious savers in their 20s don't like the formula, it is simply because they haven't been in the game very long. The author was primarily interviewing people with grand children. I seem to recall from the statistics tables provided in "The Millionaire Mind" that the average age of the respondent was about 45.

With all that data you can imagine the author's (and reader) desire to distill it into a short explanation. The formula describes the people he interviewed and it is quite helpful or frightening for people in a similar age range.

I think it would be fascinating for the author to research the habits of successful people in their 20s and devise a formula to describe young people with exceptional habits. Maybe he could title it "The Millionaire Next Decade."

[Trent]

I just spent a week reviewing "The Millionaire Next Door" on my site, and it's clear that the book does have an obvious age bias. Very little attention is paid to the finances of people under 40 in the book except when they're viewed as extensions of their parents. To simply say that the net worth rule of thumb in the book is flawed is to look at the book too narrowly - the entire book has an age bias that comes up time and time again.

[dforester]

While I agree the targets might be a bit aggressive & intimidating for some (I can't claim to've met them, but I'm darn sure trying) the 1st commenter in your article clearly doesn't understand net worth - that, or he has an even more serious problem.

He only considered the liability part of his house (the mortgage); not the asset part (what it's worth).

Theoretically, a recently-purchased house should have 0 effect on your net worth. Perhaps a small negative owing to the transaction costs, but nothing significant. If the market is changing up (or down) quickly, that will be different, of course.

So, either this commenter lost his shirt to housing, in which case I'd argue he was speculating where he shouldn't have been, or he's got MONSTROUS credit card & student loan debt, or he just didn't consider that his house is actually worth something.

[Foobarista]

In the book's defense, it studied millionaires, and those it studied are the "grind it out" types who made their money slowly. There are young self-made millionaires, but they are much more rare, typically made their money in business or in hyper-powered careers, and have quite a bit of luck or singularity (hotshot young trader on Wall Street, superstar athlete, etc) involved, so they don't make for good models for a study of personal finance.

The "grinding" takes a long time, so few of them will be under 35 and most will probably be over 50.

[Lazy Man and Money]

I think it's fair for the book to note how the millionaires formula works out with the caveat of their age and historical income levels.

If I were making 30K a year and then move to a big city and get a big raise to 60K a year, I'm not going to have the savings other people with 60K would have.

I haven't read the book, but if it clearly makes those notes then I have no problem. I have seen it proposed in the bloggospere without those notes as if it has some kind of meaning in that context.

[Lord]

One shouldn't confuse high income with high net worth, and the book examines this in detail. The reason the book focuses on those over 40 is because it takes time to accumulate real wealth. There are very few that accomplish it when they are still young.