When is PAWing Okay?

Our pets think pawing at us is okay, and our young kids do too. That’s usually the end of the Venn Diagram of “times when pawing is tolerable.” But what if there’s a different kind of PAW?

Who Lives Next Door?

One of my favorite books is The Millionaire Next Door by Thomas Stanley and William Danko. I’ll spare you the book review and skip to the PAW issue. As they studied first-generation millionaires and those you might expect to be millionaires—high earners such as doctors and attorneys, they discovered a key attribute—wealth accumulation characteristics.

Specifically, they found that many of us self-separate into groups of:

  • Prodigious Accumulators of Wealth (PAW)
  • Average Accumulators of Wealth (AAW)
  • Under-Accumulators of Wealth (UAW)

The authors noted that an AAW typically has a net worth (their assets minus their liabilities) of approximately their Age * Income ÷ 10.  A 40-year-old earning $100K should have a net worth of $400K.  By extension a PAW has accumulated twice or more the wealth of an AAW, and a UAW has built far less than an AAW.

This formula, Age * Income ÷ 10, is a simple benchmark to consider when you want to know your wealth-building trajectory. If you’re a PAW, you might want to read Die With Zero so you don’t die with a big pile of dollars and a small pile of memories.  If you’re an AAW, you may just need to stay the course and let compounding do its thing. If you’re a UAW, it may be time to change course or learn cat food recipes.

But is the PAW formula fair?

Whenever I hear someone whining about “that’s not fair,” I think (and sometimes say) “Fair is a place where a pig wins a prize. This is the real world.”  That said, the PAW formula certainly doesn’t lend much encouragement early in the wealth-building mission.

A 22-year-old Second Lieutenant earning about $72K per year (including BAH & BAS) would need a net worth of almost $160K to be a PAW and $80K to be an AAW. I suspect I’m not alone in recalling that my 22-year-old self had a negative net worth. In fact, it was not until my early 30s that compounding started to show signs of life on my balance sheet.

Arguably, we’re not accumulators yet in our early 20s. We’re usually debtors or maybe water-treaders. We barely have income, let alone the ability to save or compound it.  We probably shouldn’t have to wait until our 40s to know our flight path.

A modified formula can help younger savers check their progress:

Age * Income ÷ (10 + (40 – Age))

Thus, our 22-year-old butter bar would need a net worth of about $56K to be an AAW. This is still pretty steep, but let’s consider that part of net worth is things we own like cars, computers, furniture, etc. Yes, those consumables depreciate, but they also explain why investment accounts often can’t get started in earnest until some of life’s necessities are funded.

For reference, a 26-year-old O-3 makes about $109K and needs about $118K to be an AAW. Four years of active duty pay with a 15% to 20% savings rate makes a good dent in that number.

If there’s a utility to these benchmarks, it’s different for each of us. For example,

  • If you realize you’re a PAW or on PAW trajectory, you might consider what it’s going to take for you to spend more and enjoy your money.
  • If you realize you’re an AAW but like the idea of getting closer to that PAW number, maybe you’re motivated to add another percent to your TSP contribution this year.
  • If you realize you’re a UAW and that sticks in your craw, perhaps it motivates you to goose your savings.

Fairness Aside, it’s Mathematical Rubbish!

Several criticisms of the AAW/PAW formula merit discussion:

Compounding has exponents, but the AAW formula does not. Therefore, the formula is most likely to break down early and late on the timeline.

Wealth-building isn’t a bench press competition or college entrance exam number. It’s a pathway to achieving goals and having choices.  Arguably the PAW number is just another vanity metric.

Wealth isn’t inherently related to income needs. It’s possible that a UAW has all income needs met, so chasing a net worth number could be meaningless.

Without the “40 – Age” modifier, the formula essentially shames and demoralizes young savers and (non-savers).

For savers at or above the AAW level, it’s just another self-patting on the back—do they really need this?

Ultimately, the PAW formula is a benchmark. Benchmarks are not mandatory grading exercises. They are optional tools for those that want to measure an activity. You can take them or leave them.

Cleared to Rejoin

I’m one of those oddball types that likes numbers. I also like achievement.  The PAW formula is a number that represents a saving and compounding achievement. As a measure of wealth, the PAW formula really measures how much choice your future self with have.  You’ll likely have that wealth whether you ever know about the PAW formula.

Still, there are some who will have an “ah-ha” moment when they encounter the simplicity of the PAW formula. If this formula helps, motivates, irritates, or otherwise dislodges new thinking about how to build choices for the future, then it’s a great tool to have in your kit!

Fight’s On!

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