Are We Financially Behind After Our Income Dropped?!

August 20, 2023

In this highlight, we discuss what you should do when you feel financially behind.


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.



Most Recent Episodes

What I Learned From Being BROKE!!! (And Why I Wouldn’t Change It)

No one disputes the fact that being broke isn’t great. We want to spread the word that no matter where you came from, you can build wealth. In this episode, Brian and Bo share personal stories about their journey to wealth and lessons they learned along the way....

Top 10 Mind-Blowing Money Stats (2023 Edition)

These 10 money stats will blow your mind! We’ll discuss the unbelievable amount of money Americans save, when most reach millionaire status, and how many Americans carry a credit card balance. Research and resources from this episode: Most Americans don't have enough...

Wealth Multiplier Revealed: The Magic of Compound Interest!

There’s a reason why Albert Einstein called compounding interest the eighth wonder of the world! Do you know exactly how it works and how much your dollars could turn into by retirement? The Money Guy Wealth Multiplier can show anyone just how powerful every dollar...

From $0 to Millionaire in 10 Years (Is it Possible?)

How can you become a millionaire in 10 years or less? We’ll discuss common ways we see millionaires build wealth quickly, including through real estate, entrepreneurship, and the stock market. Discover how real wealth is built and why building wealth quickly may not...

Financial Advisors React to INFURIATING Money Advice on TikTok!

Brian and Bo are BACK to react to some more TERRIBLE financial TikTok advice! Join us as we take a look at some of the worst financial advice on the platform and tell you what to actually focus on in your own financial life. Enjoy the Show? Sign up for the Financial...

Investing Showdown: Dollar Cost Averaging vs. Lump Sum!

It’s a debate as old as time: what’s better, dollar cost averaging or lump sum investing? In this episode, we’ll cover the nuances and pros and cons of both, including in-depth case studies comparing investors at different times. Research and resources from this...

Is Inflation Really Ruining Your Finances? (You Won’t Like the Answer)

Inflation has changed our daily living expenses dramatically over the last few years. While we can’t control all of our expenses, there are many things in your control that can help you become a Financial Mutant and build wealth better than your peers. Enjoy the Show?...

Are $1,000 Car Payments Becoming the New Norm?!

New data shows more Americans than ever have car payments over $1,000. Is this becoming the new normal? How much could having a car payment of $1,000 be costing you for retirement? For more information, check out our Car Buying Checklist!