Are We Financially Behind After Our Income Dropped?!

Transcript

The next question is from Forcera regarding the Millionaire Next Door formula. When discussing a rapid increase in income, you mentioned using a three-year average for your wealth accumulation, whether average or prodigious. What advice can you offer regarding a decrease in income, such as when a spouse takes a pay cut for a better work environment? Could you provide some context on this as well?

Let me clarify the formula we’re referring to. The Millionaire Next Door formula, popularized by the book of the same name, suggests multiplying your age by your income and then dividing by 10 to estimate where your net worth should be. This calculation helps categorize you as an average accumulator of wealth, an under accumulator, or a prodigious accumulator if your net worth is double that number. For younger individuals, a modified formula factors in their age until 40, providing a more relevant perspective.

Now, let’s address decreasing income. If your income has suddenly dropped, consider adjusting your lifestyle accordingly. Aligning your expenses with your new income can help maintain your financial equilibrium. This adjustment is crucial as it can impact whether you’re categorized as an average or prodigious accumulator. If you’ve been saving 25% of a higher income but now save only 10%, you’ll need to reevaluate your strategy.

It’s important to understand that the mathematics of the formula will react to changes in the numerator (income) and affect the overall outcome. If your pay has decreased and you’ve realigned your lifestyle, recalculating your net worth could potentially place you in a better position than before. Your financial well-being might improve due to lifestyle adjustments, even if your income has decreased.

In light of a recent pay cut, focus less on the formula’s numerical result and more on adapting your lifestyle to match your new income. Swiftly aligning your expenses can accelerate your return to financial stability and contentment. This is particularly relevant for moments when adverse changes occur in your financial life.

Here’s a life insight: The hedonic treadmill applies both positively and negatively. While positive changes should be spread out for maximum fulfillment, negative adjustments should be made swiftly to minimize prolonged unhappiness. If a significant change in income occurs, it’s wise to streamline your lifestyle to match your current situation.

Regarding metrics, the Know Your Number course on learn.moneyguy.com is a better tool to assess your financial standing. This course evaluates your assets, annual savings, and expected retirement living expenses to provide a comprehensive picture of your financial outlook. It guides you toward understanding if you’re on track to meet your goals or if adjustments are necessary.

For example, if a client experiences a significant income reduction due to industry changes, they can find reassurance through the Know Your Number course. By assessing their financial foundation, they can determine if their savings strategy compensates for the drop in income.

In conclusion, when navigating a drop in income, swiftly adapt your lifestyle to match your new financial reality. Focusing on the Know Your Number course will offer a more comprehensive evaluation of your financial health. This course takes into account assets, savings, and future expenses, ensuring a well-rounded perspective. Your prior commitment to saving and planning will likely put you in a solid position to weather income fluctuations and continue your path toward Financial Independence.