THE BROKER MILLIONAIRE NEXT DOOR

One of my favorite personal finance books is The Millionaire Next Door. The authors studied actual American millionaires to understand how they built and maintained their wealth. I highly recommend reading it.

One concept that caught my attention was their formula for estimating what your net worth should be based on your age and income. It's a simple benchmark to see whether you're accumulating wealth at a pace similar to the millionaires they studied.

Expected Net Worth (ENW) = (Your Age × Your Annual Income) ÷ 10

(Exclude inheritances from both your annual income and your net worth.)

Here's how to interpret the result. If your net worth is:

* Less than half of the ENW, you're an Under Accumulator of Wealth.

* Around the ENW, you're an Average Accumulator of Wealth.

* At least double the ENW, you're a Prodigious Accumulator of Wealth.

When I applied the formula to myself, I realized it isn't as straightforward for self-employed professionals.

The book assumes a more traditional source of income, but as a real estate broker, mine isn't.

Should I use my gross commissions before broker splits? My commissions after splits but before business expenses? Or my actual income after deducting all business expenses?

Then there's another challenge. My income fluctuates from year to year. Should I use last year's income or average several years?

After a lengthy discussion with ChatGPT, here's the approach that made the most sense:

1. Use your net income after business expenses.

The book uses your annual realized income. For self-employed professionals, we think the closest equivalent is your net income after all legitimate business expenses. That's what your business actually earned.

2. Use your 3-year average net income.

One exceptional year can skew the results. Averaging your net income over the past three years gives a more realistic picture of your earning power and makes the formula more useful.

The book wasn't written specifically for brokers, entrepreneurs, or other self-employed professionals, so there's no definitive answer. But I think this interpretation makes the formula much more practical for people whose income isn't fixed.