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Test driving Stanley's Wealth Index

How wealthy should you be? In the book "The Millionaire Next Door" and its sequels, Stanley and Danko study the feeding habits of American millionaires. Among various insights into the millionaire mind, they propose that millionaires have a higher 'wealth index' than the vast majority of people. That is, a higher net wealth relative to age and gross income. The formula to calculate your wealth index is:
Wx = Net Wealth / (0.1 x Gross Annual Income x Age)
Most peoples' wealth indices - I hazard to use the term 'average' - fall between 0.88 and 1.84 and so are, according to the authors, AAWs, or 'average accumulators of wealth'. Lower and higher values respectively indicate 'under' and 'prodigious' accumulators of wealth (UAWs and PAWs).

How broadly does the index apply? That is, how well does it fit the real world?

If AAW values are as predominant as the authors claim then it should apply across countries, age ranges, and income levels. So let's take it for a spin down under to the ABS' Australian Household Wealth statistics.

Age Cohorts - Nor shall the years condemn

Table 25 Age of Reference Person15 to 2425 to 3435 to 4445 to 5455 to 6465 to 7475 and overAll Households
Birth Year (From approx)19881978196819581948193819281958
Net worth (mean)$115,568$247,153$572,097$872,805$1,086,365$1,007,645$786,879$728,139
Net worth (median)$40,316$136,638$357,995$566,661$723,623$638,509$542,080$434,234
Gross Annual Income (Mean)$80,496$107,796$116,428$119,912$97,812$55,380$38,792$96,044
Gross Annual Income (Median)$70,564$91,884$98,488$100,204$74,100$37,596$30,368$74,984
Average Age2230405059698150
Wealth Index (Mean entries)0.650.761.231.461.882.642.501.52
Wealth Index (Median entries0.260.500.911.131.662.462.201.16
Index Diff on younger group (Mean)117.11%160.73%118.50%129.31%140.08%94.97%
Index Difference on younger group (Median)190.87%183.33%124.46%146.34%148.71%89.53%
Table 25 Age of Reference Person

I've written before on the different generations' ability to save, and it's also apparent here with the difference between Generations Y and X larger than the difference between Generation X and the Baby Boomers. Age 55 to 64 is really where PAWs start to shine as the mean breaches prodigious territory while the median remains ... 'average'.

The wealth index holds up pretty well for 'All Households', but the formula breaks down at the low and high age ranges. Every retiree seems above-average, like in Lake Wobegone, while those barely embarking on their careers can be said to be already behind, perhaps through no fault of their own.

This weakness highlights the danger of taking the wealth index as law. It was not meant to accurately model saving behaviour, but to illustrate the exceptional saving habits of millionaires despite many not having high incomes.

Income Quintiles - laughing comrades again

Table 13 Gross Household Income QuintilesLowestSecondThirdFourthHighestAll Households
Mean net worth$450,707$531,835$598,179$721,094$1,339,228$728,139
Median net worth$338,000$361,938$342,455$453,863$786,870$434,234
Mean income per week$393$857$1,450$2,240$4,297$1,847
Median income per week$399$850$1,442$2,231$3,615$1,442
Gross Annual Income (Mean)$20,436$44,564$75,400$116,480$223,444$96,044
Gross Annual Income (Median)$20,748$44,200$74,984$116,012$187,980$74,984
Average Age625446454550
Wealth Index (Mean entries)3.562.211.721.381.331.52
Wealth Index (Median entries)2.631.520.990.870.931.16

Table 13 Gross Household Income Quintiles
I am surprised at so many average-range values. In fact, the wealth index goes down as you ascend the income quintiles.

High earners seem also to be high rollers and so do not save disproportionately more than the rest of us, though they may still pack away squillions in terms of dollar value. It may be comforting to entertain the possibility that the rich feel equally skint. Perhaps it is human nature to adjust spending to your means.

So what's your wealth index? Do you even net wealth bro? Share your thoughts and comments below, but first, use Hugh Chou's excellent wealth index calculator.


  1. I'm not sure if I fully understand the significance of the measure, but I came out a couple of age-ranges higher than my cohort. No wonder I feel old all the time: my income and net worth may be proportionately much lower, but I'm *saving* like a 50 year old!

    1. I take it you've hit 'average' accumulation while still young, ahead of your age group. Well done on having saved like a 50 year old. Are you sure you haven't missed any assets or retirement accounts? It's always nice to find out you're even more ahead of the game. The question is where do you go from here? You can also ponder why your wealth index is not likely to increase even if your pay does!

    2. Oh, I hadn't thought of retirement accounts...
      Also, would you count student debt (HECS/HELP) as part of your net worth calculation? Maybe that and super will cancel each other out.

      As to why my wealth index is not likely to increase with increased pay...I may need some hints.

    3. Yes, student debt is also part of the equation. You will almost certainly be pleasantly surprised. Superannuation eclipses study loans in all age ranges.
      I also don't know why there is a tendency for the saving rate to decrease with income. (It wasn't a trick question.) Maybe it's in the book.


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