Expected Net Worth

Today’s post is about another disagreement with “The Millionaire Mind” by Thomas J. Stanley.  Dr. Stanley says, the expected net worth of a person = age*0.112*income. Let’s talk about our imaginary friend Jane. She is 25 years old, and makes $40,000 a year working as a receptionist at a software company. She got an undergraduate degree in English Literature and has been working here for 3 full years.

Now, according to the above mentioned formula, her net worth is supposed to be age*0.112*income = 25*0.112*40,000 = $112,000

But, in her 3 years of working, she has only made 3*40,000 = $120,000

The difference between how much she has made and how much her net worth should be = $8,000. This means she could have only spent $8,000 over 3 years for all her living expenses. That comes out to be $2,667 per year, or $222 per month. Am I missing something here? How does that even make sense?

Now, you may think that she can spend more than $8,000 because she would have invested the money she was not earning in a high yield investment. Let’s assume she did that, but let’s also tackle the problem from a different angle (that is, we will start with how much money she decides to invest, and calculate her net worth from that). We will also use somewhat more realistic numbers. Say Jane is money smart, and instead of spending the entire $40,000 she earns, she decides to invest 30% of it in a high yield investment that gives her 10% a year. Thus, Jane lives on $28,000 a year, and invests $12,000 for all 3 years she has been working. For simplicity of math, let’s assume she waits until the end of the year to put the entire 12,000 into the investment.

The money she invested at end of  year 1 got 2 years to grow, and is now worth 12,000*(1.1)^2 = $14,520

The money she invested at end of year 2 got 1 year to grow and is now worth 12,000*1.1 = $13,200

The money she invested at the end of year 3 did not get any time to grow and is  now worth $12,000

Thus today, at the end of 3 years of working, Jane’s net worth = $14,520+$13,200+$12,000 = $42,240

As you can see, even though we made Jane a very aggressive saver, and her investment a very high yield one, her net worth is still much lower than what the formula predicts. Unless Jane decided to leverage her money, how is she supposed to have a net worth of $112,000?

If you have read the book, and/or understand what this formula is supposed to mean, please enlighten me. I am going out of my mind trying to find a rationalization of how he came up with it.