Monday, September 30, 2013

The millionaire next door ....... part II

EPF numbers is a good place to get an overview of majority of working class wealth. My gut feel tells me if a person could not retain much of their net worth in their EPF account, it is unlikely that they can have significant wealth outside their EPF account as well. Only persons with confidence of generating at least 8 - 10% will be likely to withdraw from their EPF savings for investment purpose. If it is for education or housing purpose, it is very likely that a person do not have have enough savings. The simple logic is if they are not financial distressed, why are they breaking their EPF piggy bank?

When I look at the numbers, there are only about 15,783 members with more than RM 1 million in their account. Even we include the borderline millionaire, as a percent to total 6 million active members is less than 1% or 0.3% to be very precise. The number is very. Very small.

The second table says 85% of members are earning less than RM 3,000 month but my interest is to study the "rich" people. When I sieved through the Economic Planning Unit(EPU) data, I found that household income with more than RM 5,000 is rising fast from about 10% in 1999 to about 34% in 2012. Most of them are concentrated in the urban area.

If 33% of people is earning more than RM 5 k, I figure out if someone can have monthly contribution of RM 1k/month, that will put 33% of household to be in RM 800 k bracket when they are in their late 40s. Surprisingly, if we look at the first table, there are only 3,000 people in this bracket.

The top 20% highest income earner in Malaysia is drawing an average of RM 12 k/month. If you are earning more than RM 10 k, that I figure will put you in the top 3% earner in this country. Again, the number of wealthy people in comparison to their earning power is too low! I would expect to see at least about 100,000 millionaires but shockingly only less than 20,000.

In the book of the millionaire next door, the same shocking statistics is incredibly consistent manifesting itself.

  • More than half of America wealth owned by 3.5% of households. 
  • More than 7 millions households earn more than USD 100 k
  • More than 25 millions households earn more than USD $ 50 k
  • Average net worth of American, excluding home equity, is only USD 15 k

How come there are so little affluent people even though they are hardworking, educated and high income earner?

How come? How come they are not wealthy?

The measurement of wealthy is relative. Let's put overall happiness index asides for a while, let's focus on more down-to-earth materialistic measurement. For a person earning RM 40 k per year at the age of 40, is considered wealthy if he accumulated at least RM 160 k. On the other hand, a person is earning RM 400 k per year, at the same age of 40, if he accumulated only RM 500 k does not consider to be wealthy. At his income and age, he should accumulate at least RM 1.6  million, if not more!

The formula is Realizable Income x Age / 10

I found this formula is very useful, though it is a little bit subjective or arbitrary derived by the authors, but that at least it is a very good effort to quantify or to measure whether a person is considered wealthy. I find it very sensible because it helps to establish measurement of a person ability to accumulate wealth based on their potential. It is very fair because the measurement is taken in relation to their earning power. It is also telling us how long a person can sustain him or herself before running out of money. I bet that a person with RM 160 k wealth from RM 40 k income can sustain him/herself at least 5-7 years without a single sen coming in. A person with RM 500 k wealth but earning RM 400 k/year will likely to run out of money within 2 years if he cannot find a similar job!

......................................................................................................................................... to be continued

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