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"The Millionaire Mind" - Balance Sheet Affluent

April 28th, 2007 at 12:05 pm

***CAUTION: Some serious "over-thinking" and a long post follows ... you may want to stop reading now, unless you enjoy mental gymnastics and don't bore easily*** Smile

"The Millionaire Mind" (TMM) is Thomas Stanley's excellent follow-up to "The Millionaire Next Door." In TMM, Dr. Stanley goes beyond studying mere millionaires to studying the most economically productive Americans, those with the very highest net worths (average $9.2 million) and incomes (average $749K).

Among those most economically productive Americans, he compares BAs (Balance Sheet Affluent) and IAs (Income Statement Affluent).

He starts with the following "Expected Net Worth" formula:

Age x .112 x Annual Realized Household Income = Expected Net Worth

BAs are those who have a net worth at least 2 times their Expected Net Worth.

IAs are those who have a net worth 1/2 or less than their Expected Net Worth.

Even tho' I am not a decamillionaire and never will be (unless the guys from Publishers Clearinghouse show up at my door with a bunch of balloons and a big check), and tho' my household's income is not even remotely close to the average income mentioned above, I have set a goal for myself to become BA by the age of 60.

Why this goal? Why BA? Why age 60?
1. I believe in emulating those you admire. I very much admire the BAs in TMM. Among their many admirable traits, they are humble and live well below their means.
2. My husband & I are self-employed business owners, which is very common among BAs, so we already have many of the traits and values of the BAs.
3. By becoming BA by age 60, I believe we will be well-prepared for a secure retirement.
4. I chose the age of 60 because it's on the low end of the retirement range. If we are BA by age 60, we may consider retiring early. If we are not BA by age 60, we'll probably keep on working.
5. I'm happy to say that we've reached the point in our lives where we are able to ask ourselves "Could we maybe spend a bit more? Could we donate more? Could we help our nieces and nephews through college when they reach that age? Could we take a trip somewhere (something we've not done for 5 years)? Dare we eat out more than once a month?!?" If I set annual goals to keep us on track towards becoming BA by age 60, and if we are at or ahead of that goal, then we can give ourselves permission to relax a bit and spend a couple bucks (prudently ... of course!)

So, this is the part where the serious over-thinking begins ...

In TMM, Dr. Stanley does not define what he means by "Net Worth" or "Annual Realized Household Income"!!! Ack!

I'll admit it ... I spent some time doing web searches to see if I could find out exactly what Dr. Stanley meant, and I even tried to find an Email address for Dr. Stanley himself so I could write and ask! I had no luck.

So ... I must come up with my own definitions. You are all welcome to chime in with your own opinions.

WHAT IS INCLUDED IN NET WORTH?
- Financial Assets: YES (of course)
- Real Estate, Including Primary Residence: I decided YES (tho' I realize this is open to debate). For one thing, TMM mentions the value of respondents homes many times, so I assume Dr. Stanley included it. For another thing, I personally believe a home is an investment as well as a place to live and enjoy.
- Cars: I'm on the fence, leaning towards yes. Cars are easy to set a value using KBB, are fairly easy to sell, and since we don't drive expensive cars it's not going to have a huge impact on our equation one way or the other.
- Other Household Items: I decided NO, tho' I know an argument can be made for including them. For one thing, too hard to set a value and not easy to sell. For another, we don't have collectibles or expensive possesions, and the only antiques we have are family heirlooms that we will never sell.
- The Dog: Tho' he is absolutely priceless to me, I decided not to include him. Smile

WHAT IS INCLUDED IN "ANNUAL REALIZED HOUSEHOLD INCOME"? [If you are still reading, you may want to go pour yourself a cup of coffee to keep from dozing off...] Keep in mind that we are self-employed, which complicates matters a bit:
- When your income varies quite a bit from year to year, you can't just look at last year's income. You need to take an average over several years to have a realistic picture. But how many years? 3? 5? 7? I haven't decided yet.
- I decided to start with the AGI (adjusted gross income) on our tax returns and start from there.
- Next, I feel certain that we need to add in our contributions to our tax-deferred savings plans (Keogh, IRAs, etc.)
- Tax-Exempt Earnings on Municipal Bond Fund: Should they be included? I think yes, and I think they should be included at their TEY (Taxable Equivalent Yield). But I'm sure others would have a different opinion with good justifications.
- Earnings on Tax-Deferred Savings Plans (the above-mentioned Keogh, IRAs, etc): Do you include your earnings on these????? I have no idea!!! They are part of the net worth, so perhaps the earnings on them should be included? But do you then have to try to guess the taxes you will end up paying on them down the road? This one is very tricky, and it does matter, since we have maxed these out for a long, long time (they make up a sizable portion of our net worth). Help!

Once I've figured out exactly how I am going to do the calculations, I will let you know where we are now and how we plan to get to BA by age 60.

8 Responses to “"The Millionaire Mind" - Balance Sheet Affluent”

  1. Ima saver Says:

    My husband and I are also self employed business owners. He builds houses, I do the books. Now, I know that we are BA's too. Thanks for the formula.
    Yes, I have included my house; it has almost doubled in value the past 10 years. I also include antique vehicles as they increase also.
    I do not include household things, even antiques. (Or my beloved dog, which is the most priceless thing I own.)

  2. scfr Says:

    Ima saver - Why am I not surprised? If I had guessed who of the regulars on this board is already a BA (and therefore someone I want to emulate) you would have been at the very top of the list! Smile

  3. Penny Vigil Says:

    Hello, I am a business women, owner of a pet sitting business in Southern California. This is the first time I have owned a business. I am reading "Millionaire Women Next Door" l am also reading and working on my pet sitting coaches book she wrote on how she made her six figures. She has a six figure pet sitting business in Northern California. That is were I would like to be for my first goal. It would really be cool to reach the Millionaire Women Next Door for my second goal. I would love any advise that you can give me.

    Thank you for your time.
    Penny Vigil
    azcrittercare@yahoo.com

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