Under Accumulator of Wealth

Under Accumulator of Wealth (UAW) is a name coined by Thomas J. Stanley and William D. Danko in a New York Times bestseller, "The Millionaire Next Door". The term is used to represent individuals who have a low net wealth compared to their income. A $700,000 per year doctor can be an "Under Accumulator of Wealth" if his/her net worth is less than the product of their age and one tenth of his/her realized pretax income [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . Take for example a 50 year old doctor earning $700,000, according to the formula he should have (50x70,000) or about $3.5 million in net worth. The UAW style is based more on consumption of income rather than on the method of saving income. Prodigious Accumulators of Wealth (PAW) is the reciprocal of the more common UAW, accumulating usually well over the product of the individual’s age and one tenth of his/her realized pretax income and are usually considered to be millionaires; however, not all are [ Sahadi, Jeanne. "How Much Are You Worth?." Millionaire in the Making. 20 Aug 2004. CNNMoney.com. 29 Nov 2007 ] .

pending tomorrow’s cash today

The most prominent idea shared by UAWs and American society in general is “spending tomorrow’s cash today” [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . This is the leading cause of debt and a lack of net worth in the UAW category. This contradicts the common belief of a PAW: “save today’s cash for tomorrow” [Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996] . Many UAWs do plan, under certain conditions (such as a rise in income), to use investment strategies to accumulate wealth; however, most don’t actually use investment strategies to accumulate wealth once the initial conditions are met. For example, Under Accumulators of Wealth will promise to start investing once they have earned ten percent more in annual income. Unfortunately when most receive that extra ten percent of income, there isn’t an investment made [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . These claims and ideas usually branch off an initial belief that a lack of wealth can simply be solved by an increase in income. Even among those that do invest money, most invest only because they have an excess of income. Between 2001 and 2004, the median family income dropped 2.3% and in response, the percentage of families who owned investment stocks fell by 3.3% showing that investments are only made in times of excess [ Kirchhoff, Sue. "Average Family Income drops 2.3%." Money. 23 Feb 2006. USA Today. 29 Nov 2007 ] .

Better than theory

The “better than” theory is one of the main reasons many UAWs don’t hold true to their promise to invest after a rise in income. The theory is that the UAW’s “necessity” for that income will also rise in response to the risen income level. Most UAWs are possessed by possessions. According to a study conducted by Yale and stated in "The Millionaire Next Door", individuals measure the level of their success through comparison to nearest neighbors and/or closest relatives [ Stanley, Thomas, and William Danko. The Millionaire Next Door. New York: Pocket Books, 1996.] . Therefore, as the level of income rises, so will their desire to outperform those that they compare themselves to [ “The Millionaire Next Door.” New York Times. 1997. 29 Nov 2007 .] .

Better off theory

In addition to the “better than” theory, there is a “better off” theory. This theory suggests that those UAWs who grow up in a poor family and land a high-income career have a tendency to feel the need to be “better off” than their parents. To a UAW, “better off” implies a larger house, a respectable degree, a foreign luxury car, a boat, and a club membership. A hypothetical example is provided in "The Millionaire Next Door" to explain this concept. Teddy Friend is a typical UAW that grew up in a poor family but was still exposed to a rich lifestyle at school. He saw “rich kids” and decided that one day he would be “better off” than his poor parents. Sure enough, when Mr. Friend reached a high income level, he indulged himself in possessions. He bought a large home along with a foreign luxury car [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . According to most UAWs, he lives a very comfortable lifestyle. He lives a very comfortable lifestyle in terms of possessions, but in terms of financial security, Mr. Friend’s lifestyle is uncomfortable.

Money: a renewable resource

Another belief that UAWs have is that “money is the most easily renewable resource” [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . This belief usually is another leading cause for UAW’s consumption and investment habits. Money is more easily spent now than it is saved. In America it is easier to generate a high income than it is to accumulate wealth.

pending habits

When it comes to spending habits, UAWs are everything but frugal. A typical UAW tends to live in luxury, style, and above all, comfort [ “The Millionaire Next Door.” New York Times. 1997. 29 Nov 2007 http://www.nytimes.com/books/first/s/stanley-millionaire.html>.] . Not all UAWs fit these characteristics. A $50,000-a-year janitor can be more of a UAW than a $700,000-a-year doctor. The spending habits that UAWs have are a direct effect of the “better than” theory.

Million dollar choices

Some of the financial choices that UAWs make are considered to be “million dollar choices” because if the choice hadn’t been made, the UAW would have in excess of a million dollars. One example of a million dollar choice is to smoke. Smokers and alcoholics tend to be UAWs because instead of building net worth, they spend their income to purchase alcohol or cigarettes. Another hypothetical example given in "The Millionaire Next Door" explains how a small purchase of cigarettes over a long period of time can accumulate a large sum of money. Mr. Friend’s poor parents were smokers and drinkers. They smoked at least three packs of cigarettes a day during the week. Three packs a day over 46 years translated into a sum of money that exceeded the value of their home by $33,000 [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . Even more extraordinary, if the Friends had invested and reinvested that money over a 46-year period, the portfolio would have exceeded $2 million. The value of a small amount of money over a long period of time is amazing. A UAW makes choices that, although financially insignificant at the present value, have a very significant future value. Choices such as drinking two cases of beer a week, smoking several packs of cigarettes a day, and buying large amounts of unnecessary food and objects are some examples of typical UAW choices. These choices are not necessarily large financial purchases right now, but over a long period of time, the opportunity cost of that money is very expensive.

Car shopping habits

Not all UAWs are prone to purchasing foreign luxury vehicles. A $50,000-a-year janitor can be a UAW even though he does not drive a Mercedes-Benz. (However, there are a large number of UAWs that do drive Mercedes-Benz and other luxury cars). It is not the type of car that characterizes a UAW, but rather the way a UAW buys a car. A UAW will spend roughly 60 hours on the decision to purchase a car. They search for the best dealer with the best possible deal. They know the top dealers as well as the blue book price of the car with all the accessories. At the end of the process, UAWs will usually get a very good deal for the car [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . Of course, $60,000 for an $80,000 car is a very good deal, but the purchase isn’t entirely necessary (neither was the time put into buying it).

Investing strategies

The difference between UAWs and PAWs is wealth. Wealth is usually obtained through investment strategies that maximize unrealized (nontaxable) income and minimizes realized (taxable) income [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . UAWs tend to spend more time on purchasing a car than on looking at appreciating investments. Appreciating investments such as a 401k or an Individual Retirement Account (IRA) constitute tax-deferred growth and produce an unrealized income for the individual holder. Some UAWs do hold a 401k or an IRA but with a low portfolio value. UAWs usually have the belief that in order to comply with the “better than” or “better off” theories, they need to maximize realized income. Maximized realized income minimizes unrealized income and produces low portfolio values. Certainly there are some UAWs that invest in the stock market and are very active traders, but most don’t. Active traders move from stock to stock to try to maximize capital gains on investments based on daily fluctuations of the stock market. This investment strategy is very risky, but has potential for some enormous capital gains. UAWs also are more prone to being swindled out of money from cold call investors. Cold call investors, although they know very little about the stock market, target high income earning families and persuade them into purchasing investments with them. A vulnerability to cold callers can subject individuals to lose trust in the stock market and eventually become a UAW. Then there are UAWs that have relatively low risk tolerance for investments. Twenty percent of UAWs keep most of their cash in cash/near cash accounts (investment accounts such as a bank accounts that have low interest rates, high liquidity, and are federally insured) so that they can have quick access to cash when consumption habits rise. Then there are some UAWs who have considerable knowledge of the specific market of a company or type of investment, but do not utilize that knowledge to their advantage. "The Millionaire Next Door" uses Mr. Willis as an example. He is a six-figure, very successful businessman for Walmart. He has been employed there for 10 years, during which the company has been explosively growing. Stock prices have shot up in this 10-year period of time. During this enormous growth period, Mr. Willis bought zero shares of the company he worked for, although he had firsthand knowledge of its success [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . A characteristic that determines if the individual is a UAW is their belief about investing. A UAW will usually state the following about investing: “it’s hopeless,” or “I never have the time needed to make it pay off,” or “we have never made so much… but the more we earn, the less we seem to accumulate.” Other remarks might include, “Our careers take up all of our time,” or “I don’t have 20 hours a week to fool around with my money” [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . A UAW does not spend a considerable amount of time evaluating their investment strategies. On average, they’ll invest only 4.6 hours a month evaluating their investment portfolios. This is about 83% less than the amount of time a PAW allocates to financial planning [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . Minimal time dedicated to financial planning is a leading indicator of a UAW.

Educational and career choices

Although UAWs exist in all career fields and have obtained different levels of education, some professions are more likely to lead to a UAW lifestyle. Doctors, physicians, lawyers, and dentists are among the top professions with a high UAW concentration of individuals. The individuals in these professions are twice as likely to be a UAW than a PAW [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . There are two reasons for these findings. First, because these professions require advanced degrees, individuals get a delayed start in the accumulation race. Most of the income during these educational pursuits is used to fund tuition, housing, and student loans rather than investment. The second reason is that American society has prescribed a lifestyle to these professions. Doctors are expected to live in an upscale neighborhood with multiple cars, a boat, and other luxury items. Their lives become a high consumption lifestyle to fulfill the “better than” theory [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] .

Correlation between income and wealth

With doctors having a high propensity to be a UAW as evidence, there is an indirect relationship between the level of income an individual earns and the net wealth that one accumulates [ Reynolds, Alan. Income And Wealth. Westport, CT: Greenwood Press, 2006] . Doctors have a reasonably high level of income; therefore, it is more likely that doctors have relatively low amounts of net worth. The same holds true for those that have lower levels of income. They are more likely to accumulate more in relation to their level of income [ Keister, Lisa. Wealth in America. Cambridge: Cambridge University Press, 2000] . Of course, there are those who are an exception to the rule on both sides of the spectrum. Mr. Friend’s parents were poor, but they lived a high consumption lifestyle leading them to be UAWs.

Children of UAWs

When children are brought up in a high consumption, UAW lifestyle, they are more likely to become UAWs themselves. More often than not, the children of UAWs become more devout believers in the UAW system than their parents. The children grow accustomed to luxury and believe that they too may possess the same luxury as their parents. It is an extreme manifestation of the “better off” theory. On the other hand, PAWs may also produce UAW offspring. If the Friends had invested the money they had been consuming, they would have been considered PAWs; however, the standard of living that their son, Mr. Friend, grew up in would have been diminished. Mr. Friend would have felt an even higher desire to be “better off” than his parents were. He may still have been a UAW regardless of whether his parents were UAWs or PAWs [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] .

Economic Outpatient Care

Economic Outpatient Care (EOC) is a term used to express when an affluent parent provides money to an adult child. Besides offspring observations resulting in UAW children, EOC is a contributing factor to the passing on of the UAW belief. Offspring who receive EOC have 98% of the annual income compared to their counter parts who are not recipients of EOC. In comparison, they also have 57% of the net worth [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . EOC gives recipients a false sense of financial security. For this reason they purchase homes in upscale neighborhoods that exceed the recommended value according to their incomes. Thirty percent of American families live in homes valued at $300,000, yet only earn an annual income of $60,000 [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . These homes then demand nice cars for the driveway, nice furniture for the living room, and a nice plasma TV to compliment the furniture. These offspring also purchase and consume the EOC rather than invest it. If a dose of EOC is given on a regular basis, the EOC can actually be absorbed into the individual’s perceived annual income. Expenditures are then calculated with the anticipation of a regularly scheduled dose of EOC.

America: the ultimate UAW

The average American is a UAW, with an annual income of $32,000, a total net worth of $36,000, and a realized income value that is about 90% of their total net worth [ Stanley, Thomas, and William Danko. The Millionaire Next Door . New York: Pocket Books, 1996.] . The government draws the poverty line based on income, and society determines a family’s well-being based on their level of earned income. Income is a poor indicator of well-being. On the other hand, wealth is a good indicator of the financial independency or financial dependency of individuals. Unfortunately society has an almost unlimited amount of ways to consume income and a limited way to save income; therefore, individuals are more prone to spend than save. That eventually results in an adoption of a UAW lifestyle.

ee also

*"The Millionaire Next Door"

References

External links

Income/Wealth Calculator to Determine: http://www.retireearlyhomepage.com/millbook.html