The Art of Gift Giving as a Broke College Student

The Art of Gift Giving as a Broke College Student

Today, my dear friend surprised me outside of my Corporate Finance classroom with a cup of green tea (little sugar, less ice—苇塘、少冰). I was on the other side of a bad cold and she knew that I would soon be drowning under a pile of work, so that morning she woke up early (a miracle potentially signaling the end of the world) and drove to a teahouse to order me a cup of happiness. Not even the linear algebraic derivations for the estimators of multiple regression models could put a dent in my happiness.

While yes, this means that I take my green tea very seriously, it also points to a weird phenomenon in college life: we’re all broke but we still like to give and receive gifts.*

The road to financial independence also does not seem to allow for even small gifts to friends and family. College student incomes are, after all, abysmally low as we wait for companies to deem our degrees valuable. And for those college students that want financial independence? Is the tradeoff give a gift now versus save for retiring early?

That thought process doesn’t fairly capture what’s at stake when you give a gift. Even at my stingiest (*ahem* freshmen year), I still spent money on gifts to family and friends. I’m not saying this to brag, but rather to point out a crucial part of relationships involves the exchange of gifts—particularly around the holiday season.

Leaving the anthropology and history of gift-giving to a sociology class, let’s delve into how gifts factor into financial independence. To begin, let’s consider the benefits all parties involved get when gifts are exchanged:

The product of my procrastination seems to clearly indicate that the receiver of the gift benefits the most. Yet the gift-giver isn’t left out of feeling good entirely. Both win, on some level. And on some level, their friendship deepens because giving someone a gift is just another way of showing that you care. Financial independence is always a goal to strive for as a college student, but taking the time and effort to develop lifelong relationships is also an important part of the “college experience” and life in general.

Cutting through all the gooeyness, giving gifts can seriously do some damage (depending on the gift) to your bank account. But the beauty of being a college student is—get this—everyone assumes you’re broke in the first place. Thus, the ultimate gift of time or something as beautifully simple as a cup of tea (for me, at least) are great gifts.**

Everyone could use a little cheer during this cold season, so cut back on that one episode of Netflix and give someone some of your time (or some tea).

*Yes, this is a generalization. Some people are scrooges and hate giving gifts.

**Just as a final note, I’m in no way saying that fancy gifts are the foundation for a healthy relationship after getting a job. I’m only pointing out that we get a break as college students from any expectations of fanciness that people on the road to FI should fully enjoy while it lasts.

Retirement Accounts for the Future

Retirement Accounts for the Future

I recently wrote a post on individual retirement accounts in How to Fund Retirement and focused on three accounts available to college students. After graduation, however, even more possibilities will be available to students. It’s important to understand what these accounts are as well so you can start contributing to them as soon as you have access to them.

Let’s start from the one account I most wish I had access to:




These accounts are tax-deferred like a Traditional IRA, meaning that you do not pay taxes on the money you put into the account, only the money you withdraw. You can start withdrawing at age 59.5 but have to start withdrawing at 70.5.* Unlike a Traditional IRA, 401(k)s have significantly higher contribution limits. In 2016, contribution limits for a 401(k) is $18,000 for those under 59.5 and just $5,500 for Traditional IRAs.

If you want access to your money before 59.5, you typically have to pay an extra 10% tax on top of income tax. Any withdrawals after 59.5, including the mandatory withdrawals after 70.5, are subject to income tax.

Typically you get a 401(k) through the company or organization you work for. Some companies are amazing and make 401(k)s even better by offering an employer match. This is basically free money, if there ever was such a thing, that employers commit to give based on an employee’s contributions. Say, for example, your employer says that they will contribute 3% of your salary to your 401(k). If you make $50,000 a year, then your employer is contributing $1,500 to your 401(k). Even better, employer matches do not count towards the employee’s contribution limit. So you can contribute up to the $18,000 limit and still receive an employer match.

It is also important to note that 401(k) plans vary from company to company. It really depends on who the company uses to help manage their employees’ retirement accounts. Some companies also do not offer an employee match.

Of course, if you go out on your own and start your own business, then you can always set up an individual 401(k). You would have the flexibility to determine which company you want to set up your 401(k) with and you can contribute both as an employee and an employer offering an employee match. Fun stuff.

Similar plans to a 401(k) that require working for a certain type of organization


The cousin of a 401(k) is a 403(b). A 403(b) is only for certain organizations, such as schools and non-profits, but provide basically the same services.

The second cousin would be the 401(a) Plan which requires employers to contribute to the 401(a). However, an employee is fully vested, meaning that they need to stay with the organization for a certain number of years to enjoy the benefits of employer contributions to their retirement account. This plan is also mainly for government or school employees.

A 457 Plan is also similar to a 401(k) plan, except better. While a 457 Plan is tax-deferred, there is no penalty for withdrawing your money before the age of 59.5 (other than paying mandatory income tax).

Furthermore, if your organization offers both a 457 Plan and a 401(k) or 403(b), then you can contribute the maximum contribution limits to both. For 2016, that means you could contribute a maximum of $36,000 a year.

The catch? This type of plan is exclusively offered to government employees and certain non-profits.

457 Plan: A perk of working for Uncle Sam

457 Plan: A perk of working for Uncle Sam


Roth 401(k)


A Roth 401(k) is pretty much the same as a 401(k), except contributions are taxed and withdrawals are tax-free. It is also possible to withdraw money from a Roth 401(k) early without any taxes if it counts as a qualified distribution (e.g. medical expenses).




The full name is Saving Incentive Match Plan for Employees Individual Retirement Account (they probably made the name fit to the acronym?). This are for small businesses with 100 or less employees. Contributions are tax-deferred and employers have to make some type of contribution even if employees do not.




Any small business owner with less than 100 employees (even the owner is the only employee) can open up a SEP IRA (Simplified Employee Pension Individual Retirement Account). A SEP IRA, however, functions in the same domain as a Roth or Traditional IRA. This means that you can only contribute $5,500 to a SEP IRA, Roth IRA, and Traditional IRA altogether. If you put $5,500 into a SEP IRA, for example, then you cannot contribute to your Roth or traditional IRA for that tax year.

Typically, however, funding a SEP IRA is the employer’s responsibility and they can determine whether to contribute annually.


To compare each of these accounts more easily, check out this chart that focuses on the main retirement accounts**:

  401(k) Roth 401(k) SIMPLE IRA SEP IRA
Available to… An employee An employee Employee at small business (<100 employees) An employee
Contribution Limits (for 2016) $18,000 $18,000 $12,500 $5,500 (although the employer can contribute more)
Tax Benefits Tax-deferred Taxes on withdrawals Tax-deferred Tax-deferred
Employee Match Depends on company Depends on company Required Determined on an annual basis

Note: for all of these, your company needs to offer the plan in question. You cannot get a SIMPLE IRA if your organization offers a 401(k).

These are among the other retirement accounts that will be available to us college students after landing our first career. The option available to you will depend on where you end up working, but it is essential to be aware of the retirement accounts available to you. Should you change companies, however, or retire early, then it is possible to rollover any of these plans to a different type of individual retirement account, such as a Roth IRA. With these savings vehicles, you have the opportunity to save a lot of money on taxes while building a good nest egg for the future.

Nest egg hiding places for the future

Nest egg hiding places for the future


* I’m still at a loss as to why they are so set on the ½. 59.5. 70.5. Why aren’t the numbers just rounded instead of making people figure out when they are halfway to 60 or 71? If someone would like to reveal this mystery for me, I would be extremely grateful.

**Check out the “Similar Plans to 401(k)” section to see more specialized retirement options. I left them out of the chart, however, since they aren’t readily available to everyone.


I left out some retirement accounts, for the sake of brevity (or ignorance). If you have any others to share, please do so in the comments below!

How to Fund Retirement

How to Fund Retirement

There are 47 or so years left until retirement for the typical college freshman, which is more than twice the 18 or so years we have had so far. A lot can change between now and then: our dreams, health condition, financial situation. The myriad of “what-if” situations are dizzying and who honestly wants to consider retirement as a college student?

With so much uncertainty for the coming decades, it is important to be aware of the different savings vehicles available for retirement. No one wants their hard earned money to be eaten away by inflation or taxes.

Fortunately, in the United States, there is a retirement vehicle that can dodge both of those problems: tax-sheltered retirement accounts. These types of accounts share three important characteristics that make them ideal vehicles for saving a nest egg:


  • Invest in the Stock Market

Putting all of your retirement cash in a savings account (or worse, a checking account) is subjecting it to a painful, lonely death by inflation. The dismal 1% interest (and often less) isn’t a worthy investment. It would take 70 years just for your initial deposit to double in value, and that’s not even factoring in the damage done by inflation.

Retirement accounts, however, allow you to invest in the stock market, where you have the potential to get higher returns and have a better chance at beating inflation. Careful consideration is required to invest in stocks and bonds, but you will never be financially secure just sitting on a pile of cash if the cost of living rises.


  • Tax-Sheltered: No Capital Gains Tax on Earnings

Retirement accounts are set up by the government, and as such, have special protections from a typical brokerage account. Whenever you make money selling shares of a stock in a normal brokerage account, there are capital gains taxes that eat into your profits.* Whenever you buy a stock that pays dividends, the dividends are taxed as well.

Not so in a retirement account. You can buy and sell stocks without worrying about taxes on any earnings. This is an enormous advantage when saving for retirement, as capital gains taxes alone can take anywhere from 15-20% of your profits.


  • Additional Tax Benefits

Depending on the type of retirement account, you do not have to pay taxes when you put money into the account or when you take it out. In either case, you do pay taxes at some point—either when you withdraw or deposit respectively—but both scenarios have their advantages.


Retirement accounts are great savings vehicles for the future, but they also are not perfect. The two major drawbacks are contribution limits and withdrawal limits. Contribution limits are determined by the IRS annually** and set the amount you can deposit in a retirement account per year. You also cannot contribute more than you make. If you make, say $2000 from work-study and put all of it into your Roth IRA (see below for details), and your lovely grandmother gives you $50 for your birthday, then you cannot put that $50 into your account. Since you only made $2000, you cannot contribute $2050, even if the contribution limit for 2016 is $5500 for a Roth IRA. Withdrawal limits, on the other hand, prevent you from withdrawing all of your retirement money before the usual retirement age. Often times, you have to wait until you are 59.5 to access the earnings from dividends and selling shares.

While there are multiple different types of retirement accounts, college students without a steady job can only take advantage of a certain few. There are three individual retirement accounts that U.S. college students*** can start funding for the future:


Traditional IRA (Individual Retirement Arrangements)


A traditional IRA is tax-deferred, meaning whatever amount you contribute is only taxed when you withdraw the money. Whenever you contribute to a traditional IRA your taxable income also lowers correspondingly. This means that you can pay less taxes when contributing to a traditional IRA (in addition to paying no initial taxes on the amount you contribute) and only pay income tax on the money you withdraw later in life.

However, you can only withdraw money without a tax penalty (usually a 10% tax on top of income tax) when you are 59.5 as well as start withdrawing money (a.k.a. required minimum distributions) at 70.5 to avoid an extra 50% tax. You cannot keep your money in a traditional IRA forever, after all, since the government does eventually want their tax dollars.


Roth IRA


A Roth IRA is a traditional IRA’s opposite twin. While they both are protected from capital gains tax, the similarities stop there. All contributions to a Roth IRA are taxed upfront and there are no required minimum distributions at any age. Any money withdrawn from a Roth IRA after 59.5, however, is not taxed.

Another useful feature of Roth IRAs is that you can withdraw the amount you contributed without a tax penalty. There are some tricks to doing this, such as withdrawing the amount you contributed for that year. Note that this specifically excludes withdrawing any money made from investing in the Roth IRA, but there are also some tricks to getting that money out as well (stay tuned for a future post on this!).




A myRA is like the starter pack for a Roth IRA. In fact, after myRA account reaches $15,000 or its 30th birthday, the money automatically transfers into a Roth IRA.

Like the Roth IRA, any contributions to a myRA are taxed upfront but not taxed at withdrawal.

myRA’s, however, are severely limited as retirement accounts since it only invests in US treasury bonds, which makes it a glorified savings account in terms of investing. Currently, the highest interest rate on a US 30-year treasury bond is 2.3%, which would take 30.5 years to double any amount of money. The main advantages of a myRA is that it can easily be converted into a Roth IRA and doesn’t require a set starting contribution. Brokerages sometimes ask for a set amount to be in a Roth or Traditional IRA that people like college students just don’t have saved up. Thus, the idea behind the myRA is that it can ease someone just starting out into a Roth IRA.

With a little research, however, you can find a traditional or Roth IRA account that does not require a starting contribution. You will still have to pay fees to buying and selling stocks, but you have better and more diverse investment options.

If you are considering a myRA, my advice is to convert it into a Roth IRA as soon as you have enough to do so. Check with the brokerage firm you want to set up your Roth IRA with, save like crazy, convert that myRA into a Roth IRA, and finally start investing in something with better return.

To summarize all of this:




With all this time to fully enjoy the benefits of compound interest, the next natural question is where to put the money. While options are limited for college students, we can still invest in our future by maintaining an individual retirement account.



*No capital gains tax also means you cannot tax loss harvest in a retirement account. If you want to learn more about tax loss harvesting, check out the MadFIentist’s post on tax loss harvesting.

**Sometimes the amount you can contribute to a certain retirement account is limited by income level. A Roth IRA, for example, is unavailable for someone making more than $132,000. I highly doubt, however, that person would be a typical college student.

***International students can also open IRAs.

What’s Your Savings Rate?

What’s Your Savings Rate?

The current household savings rate in the United States is around 5%. Certainly, households have to pay for food, bills, and the roof over their heads—to name a few. Even considering these pressing needs, however, 5% still is a very dismal number.

To further understand why 5% is a depressingly low savings rate, let’s look at how many years it would take to retire.* Using the MadFIentist’s Savings Rate Calculator inspired by Mr. Money Mustache’s post on “The Shockingly Simple Math Behind Early Retirement,” it would take you around 52 years to retire. Assuming you start working right out of college, you will be in your mid-70s when you finally retire. Who in the world wants to still be working to pay the bills in their 70s?

Five percent is extremely low even by the usual rule of thumb savings rate of 15%. It would take you 35 years to become financially independent and you’ll retire as you near your sixties if you work after graduating college.

But what if you don’t want to travel the world with grey hair? What if you want the freedom to work if you so choose, to travel if you so choose? What if you want financial independence?

Then even 15% is terribly low.

Your savings rate is crucial for financial independence. To put it another way, how much do you value the years of your life? The 10% difference between a 5% savings rate and a 15% savings rate is around 17 years (which is currently 89% of my short life). Seventeen more years that you have to work to survive. Thus, to reach FI as fast as possible, you have to save as much as possible.


How to Determine Your Savings Rate


The math is quite simple:

(Amount you save for retirement/amount you earn)*100%

Instead of looking at how much you save overall, it is more important to look at the amount you save for future you. Money saved for future purchases skews your FI savings rate. If you save a lot of money for a car or a down payment on a house, then you aren’t actually any closer to financial independence since you plan to spend the money.**

I determined my savings rate by looking at the amount I contributed to my Roth IRA over the amount made from work-study and side hustles. My savings rate for the last academic year was 52%. If I continue to save 52% after graduation, it will take me 14 years to be FI.

As a college student, however, the difference between saving 10% and 20% can be very small. Some of us are already living close to the edge (the ramen life is real) and a lot of our money (or all of it) goes toward tuition. Thus, having a low or non-existent savings rate in college is understandable. If possible though, it’s a great idea to get started now to establish the habit of saving every penny.


This Doesn’t Mean You Don’t Live


My apologies for the double negative, but I do want to point out that striving for FI doesn’t suck out all the fun in life. You can still spend the money you earn.

My discretionary expenses rate for the last academic year was 16% (the rest was spent on textbooks, laundry, and other necessary expenses).*** I determined my discretionary expense rate by dividing the amount of money spent on things I could live without (read: entertainment) over the money I earned in the semester. This includes eating out a couple times, a Disneyland ticket, two trips to escape rooms, and Christmas gifts for my family.

As you can tell, I’m still willing to pay money for experiences, but not so willing to buy stuff (unless it’s for others). My closet is full so there is no point in buying more clothes. My dorm has all the stuff I need (plus some).

In short, the goal is to save and spend your money in line with your values. When there is nothing truly valuable to spend your money on (aside from basic necessities), then my advice is to save it for the FI dream.


* Of course, if you love your job, then there is no need to leave it. Part of financial independence is having the freedom and flexibility to pursue other options should things change.

**Just to qualify this a bit more, you save for things that will boost your income, like an income property, but then calculating your savings rate becomes a bit more complicated.

***I want to bring this down to 10% or less for the next academic year.

Your Financial Independence Number

Your Financial Independence Number

As I discussed in this article, financial independence (FI) is achieved when you have enough money to retire indefinitely. But how much do you actually need for that?

If only it were that easy

If only it were that easy

Basic Math


To calculate the minimum you need for financial independence, use this formula:

The amount you spend each year/0.04

[or, similarly, the amount you spend each year*25]

For example, if you spend $45,000 a year, then you’ll need a portfolio worth $1,125,000 to become FI.


Isn’t that too simple?


(The math, that is, since $1,125,000 sounds like a lot of money to me too.)

Admittedly, this is a rule of thumb. The formulas above will have to be tailored to your individual needs, but even that isn’t too difficult to do.


“Amount you spend each year”


Everything from rent, transportation, food, to entertainment gets lumped into this category.

You can get a rough calculation of your FI number even as a college student. Just use how much you pay for room and board as well as any miscellaneous expenses as the amount you spend each year. Don’t subtract student loans, scholarships, or grants from your calculations, since this type of aid won’t be available your entire adult life.

I wouldn’t include the cost of tuition in this calculation, since we’re trying to figure out the bare minimum needed to be considered FI. You won’t, after all, still be paying for more years of tuition after graduating. I, for example, estimate that with my current expenses for room, board, and miscellaneous expenses that the minimum needed for financial independence is around $420,000.

Here are some formulas to calculate your FI number based on whether you live on- or off-campus:

On-Campus (semester system):

(Meal Plan for one semester*3+Cost of dorm room for one semester*3+ miscellaneous expenses throughout year)/0.04

On-Campus (quarter system):

(Meal plan for one quarter*4+Cost of dorm room for one quarter*4+ miscellaneous expenses throughout year)/0.04


(Monthly Rent*12+Food Expenses+ miscellaneous expenses throughout year)/0.04

Miscellaneous expenses should capture the cost of transportation, any bills you pay from living off-campus, and entertainment (e.g. that Netflix subscription).


That’s Not A Lot to Live On


If you don’t want to live like a college student the rest of your life, then you are going to need more money for true FI. If, for example, you live in the Oregon and plan to live the rest of your days in Singapore, then you will definitely need more than your annual expenses to be FI.

photo-1413839283606-909dd35681caBoth are cool places, but one requires *a lot* more money.

Both are cool places, but one requires *a lot* more money.

Another way to calculate your FI number with some added cushion is to substitute the amount you spend each year with the amount you make each year. This doesn’t exactly work for college students, but you can estimate how much you’ll make after taxes in the future and divide by 0.04.


The Mysterious 0.04


While using your expenses or income to estimate how much you’ll need to retire is understandable, why you divide by 0.04 is more mysterious.

Four percent (0.04) is widely considered to be the safe withdrawal rate for retirees, no matter how early you retire.

Safe Withdrawal Rate: the amount of your portfolio (usually considered as the investments in a retirement savings plan), represented as a percentage, that a retiree uses for expenses

Of course, you don’t have to withdraw 4% from your nest egg. Withdrawing more lowers the probability that your portfolio will last you through retirement while withdrawing less raises the probability.

There is a lot to say in defense of using the Four Percent Rule as a rule of thumb, but fortunately, others have already written extensively on this topic. I highly recommend you read the MadFIentist’s thorough examination of the Four Percent Rule’s validity here. The Trinity Study is the original study that brought the Four Percent Rule to light, which you can access here (this is the second take of the Trinity Study, like Trinity 2.0).

What about inflation?


The Four Percent Rule extracted from the Trinity study is inflation adjusted, so if inflation is particularly high in one year, you would be living on less of your portfolio than normal years. This just means that while your withdrawal rate of 4% remains the same, the amount of money being withdrawn from your portfolio varies.

For example, if you have a portfolio of $1,000,000, then you could withdraw $40,000 at the 4% withdrawal rate. Should your portfolio only be worth $1,100,000 the next year, then you could withdraw $44,000 at the 4% withdrawal rate.

Inflation can also change the amount you need for FI. If your expenses go up significantly (due to inflation or lifestyle changes [e.g. kids]), then you should recalculate your FI number based on your new expenses.


And Taxes?


When you retire, then your tax bracket should go down, which decreases the amount of taxes you pay (sometimes to $0).

However, if you love your job and don’t want to retire, then you would just leave your nest egg alone and live off your salary, devoting any excess to fueling your portfolio’s growth. Since you wouldn’t be touching your portfolio, there wouldn’t be anything to worry about.




There are tricks for handling healthcare expenses in retirement, but require a lot more explanation than can be done in one post. Those interested should check out:

GoCurryCracker’s “Obamacare Optimization in Early Retirement

This is an interesting analysis on optimizing your Obamacare plan as an early retiree.

MadFIentist’s “How to Hack Your HSA

This is an amazing post on how to use your HSA as a retirement savings plan, with an infographic as an added bonus.




There are several retirement calculators out there, but the two I use the most often are the MadFIentist’s and Vanguard’s. You have to sign up to use the MadFIentist’s calculator, but it’s free to use. Vanguard’s calculator calculates the probability of how long your retirement nest egg will last given a variety of variables.

I also made an Excel sheet (a very simple one, that is). You can download it and play around with the numbers by clicking the “Savings” link: Savings. This post on BudgetsareSexy, however, has a much better Excel sheet and a list at the end of other awesome Excel sheets for FI.

Last, but definitely not least, I highly recommend everyone read Mr. Jim Collins’ Stock Series. He discusses how to achieve FI through passive investing as well as the Four Percent Rule.


Whether you want to retire early, at 65, or go at it on your own from the start, your FI number is a good estimate to guide you on how much to save for the future.

The Millionaire Next Door on Misconceptions of Wealth

The Millionaire Next Door on Misconceptions of Wealth

As a society, and perhaps most of the world, we have deep-rooted misconceptions of what it truly means to be wealthy.

We think wealthy people go on spending sprees for stuff like this:


They just buy them in bulk, or so I hear.

Or they can afford to do stuff like this:


I just cried a little on the inside. Instead of burning those bills, give them to me ‘kay?

People with a 6+ figure income are wealthy. That’s how you get the money to burn in the first place, right?

Sure, those types of people above have a lot of stuff and a lot of money to burn, but that doesn’t mean that are set for life. If they truly knew how to control the amount of money flowing into their reserves, they should be able to retire right at that moment and maintain the same lifestyle of heavy consumption indefinitely.

Another way Dr. Stanley and Dr. Danko, the authors of The Millionaire Next Door, define wealth is by net worth.

Net worth: value of your assets (e.g. investments, cash in your checking account, any houses you know you lucky college student)-value of your liabilities (e.g. that pesky student loan debt)

Dr. Stanley and Dr. Danko define two groups of people, asides from the average accumulator of wealth, into these groups:

PAWs: prodigious accumulator of wealth—they get the whole personal finance thing

UAWs: under accumulator of wealth—they need some training (or perhaps in college)


So, how do PAWs get to where they are now?


  • Save most of their money

Sometimes even up to 70% of their income

  • Or just get a job that makes boatloads of money and save some of it

If you’re making $1,000,000 a year and just save 15% of it, you are saving $150,000 a year. While you might not be able to maintain the same lifestyle that requires you to spend the rest of your money after taxes, you’ll probably still be comfy compared to everyone else.

  • Invest in something

Dr. Stanley and Dr. Danko make a great point that you should invest in stuff you know about. Great at fixing up houses? Planning on going into the pharmaceutical business and understand medical studies? Then you can invest in those fields (e.g. housing, pharma stock).

Proceed with caution though and don’t get too full of yourself though. I’m sure a lot of people who were the best at fixing up houses got screwed over by the Recession. Be sure to understand the risk you take when undertaking an investment, even with your special knowledge.

As a college student, it can be difficult to plunk a lot of money down in a huge investment like a house. A great way around this obstacle is to start a side hustle. You’ll learn a lot of new skills and gain a lot of experience.

  • Don’t rely on others (especially parents) to prop them up

I think this is a super important point for college students. Even if you are receiving assistance from your parents to go to college, don’t go on a spending spree with money that is not actually yours.

I’d love to eat out once every week to escape cafeteria food, but that doesn’t mean I need to spend my parents’ money to do so. Since the money I make from my job is limited (and I value investing earlier more than eating out every week), I have limitations on my spending.

I’d love to eat sushi every day <3

I’d love to eat sushi every day <3


How do you know where you stand?


Dr. Stanley and Dr. Danko provide this simple formula to gauge how much your net worth should be:

“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be” (page 13)

The formula above determines what the average amount of net worth you should have currently. Being significantly above their prescribed net worth makes you a PAW and below makes you a UAW.

If I apply this formula to my situation, I make $2,000 in an academic year because of work-study (pretax annual household income)*19 (age)/10=$3,800

My current net-worth: around $1,500 (current value of my investments+cash-student loans)

Of course, as a college student, I am certainly not in the ideal situation. My net worth has to increase by 60%.

I’m working on side hustles to improve that number and getting good grades/extracurriculars to earn more in the future. Even if I am currently below the ideal net worth, college is a perfect time to work on my PAW habits so that the increase in income does not correspondingly increase spending.


I highly recommend The Millionaire Next Door. You can get it on Amazon here* or, better yet, make use of your local library like I did. It’s a great way to orient your perspective on what it actually means to be wealthy money-wise. And what better time to learn this than while we’re still young?

*Not an affiliate link