[Kelly66]

How to Compute your Wealth Discipline Ratio (WDR)

Hi Friends, I was looking for a personal finance thread in Team BHP but couldn't find any, so I felt this thread would be the most appropriate to post this topic.


What is the most important number in personal finance?

I came across this article in early 2021 and started calculating my WDR ratio starting 31/3/21 : https://ofdollarsanddata.com/wealth-discipline-ratio/.

Instead of talking Net worth and Wealth in absolute terms, this methodology of calculating the WDR seemed more practical and logical to me.

The article initially talks about the Lifetime Wealth Ratio (“LWR”) - a concept invented by the financial blogger J. Money at Budgets are Sexy back in 2015.

J. Money defined the LWR as:

Lifetime Wealth Ratio = Net Worth (NW) / Total Lifetime Income (TLI)

Apparently, in the US it is easy to get the TLI using your Social Security Number and using the above formula you can get the LWR. So, US residents would find it a bit easier.

In the original article, J. Money provided his own rankings for how to interpret your LWR:

• 0%-10% – Meh
• 10%-25% – Now we’re cooking!
• 25-50% – You’re on fire, baby! Give me your number!
• 50-100% – Marry me.
• 100%-1,000% – How do I get into your will?

Despite how unscientific his ranking system is, this is a far better way of determining your financial competence than just the Net worth.

Your net worth is a stock (i.e. a snapshot of your accumulated wealth) while your income is a flow (i.e. a measure of how your wealth is changing through time). They are both great, but limited.

LWR, on the other hand, controls both the stock (i.e. your net worth) and the flows (i.e. your total lifetime income) in your personal finances, to judge your financial skill. It is basically a measure of how good you are at converting your income (a flow) into wealth (a stock).

LWR allows you to benchmark the two most important things in personal finance (your saving ability and your investing ability) at the same time. If you are a good saver or a good investor (or both), you will have a higher LWR than someone who isn’t.

However, LWR has three major flaws:

1. LWR is skewed against young people simply because they have had less time for their assets to compound. It is basically impossible for a young person to have a LWR above 100% unless they got extremely lucky with their investment portfolio. Why? Because after paying taxes, how else could someone have a net worth more than the income they took home?

2. LWR is biased against high earners who have to pay higher taxes. For example, if you made $500,000 when you were 22 and lived like a total hermit, you might be able to save $250,000 as a result. That is a LWR of 50% despite being an incredibly good saver. Even though this person in the top decile of financial responsibility he only scored a 50%. The issue is that the LWR penalizes those individuals who pay more in taxes.

3. LWR is the least useful for anyone who has had low income for a long period of time. Why? Because, as the data shows, those with low income spend basically all of their money on the necessities (food, rent, etc.) Without extreme saving measures, it is very difficult for these people to build wealth. This is why the LWR isn’t a great measure of their financial skills because having low income for a long time will just add deadweight into the denominator of the LWR.

Given these limitations, is there a way we can adjust the LWR into a slightly more useful metric? Yes, this is where The Wealth Discipline Ratio comes in!


The Wealth Discipline Ratio™ (“WDR”)

The author of this says, WDR is identical to the LWR, except we should remove some level of basic spending from our income each year, because everyone has to spend some money on the basic necessities to get by. Therefore, we should remove this “necessity spending” from your total lifetime income because there is no way you could’ve saved or invested that money. The author's theory is that money that you never had a chance of saving or investing should not count against you when it comes to building wealth.

However, money that you could have saved/grown should be counted. This is why this measure is called the Wealth Discipline Ratio, because it looks to answer the following: Of every Dollar/Rupee in wealth that you could have built through saving + investing, how much did you actually build?

This is a measure of your financial discipline through both savings and investing. It’s not just your savings rate, because it also incorporates how you use your savings to invest and increase your wealth.

The WDR is defined as:

Wealth Discipline Ratio = Net worth (NW) / (Total Lifetime Income (TLI) – Basic Lifetime Spending (BLS))

Unfortunately, there is no perfect way to calculate basic lifetime spending, but we can make some assumptions to get started.

What’s the right amount? This is where your financial discipline comes into play.


How to compute the WDR in the India Context?

This is the methodology that I used to calculate my WDR:

1. Net Worth (NW) as of March 31st can be worked out easily and some of us do this for declaring the Assets & Liabilities Sheet/Balance Sheet as part of our IT filing. Since we are nearing March 31st, you can compute this and keep it ready as of 31/3/2025. Fortunately, only the latest NW is required for this ratio.

2. Total Lifetime Income - For this, I took the Gross Total Income (GTI) (which is same as TLI) from my Income Tax Returns since the time I had been filing returns. You need to take the GTI for every financial year since the time you have been working. So, those who have just started their career would find it easier to start computing the WDR. Others, will have to do some homework of digging out your old IT returns. No pain, no gain, right?

3. Basic Lifetime Spending (BLS) - As a family of 3, we have been tracking our spends in an excel sheet from FY 2007-08 onwards, so I was able to take the BLS from there for each financial year. For years before that, I used the ratio of BLS/GTI (Cumulative BLS and Cumulative GTI from 2007 to 2024) and applied that % to each of years prior to 2007 till the time I started working. So, if you don't have BLS for every year, you may want to do the same to arrive at a % and apply it for those missing years. I did go through some posts in this thread and I am sure many of you tracking your expenses already, so calculating BLS should not be a problem.

After doing the above exercise, I created an excel sheet to tabulate NW, GTI and BLS for each year of my career and I computed my WDR (and also LWR) and I am tracking the same for the last 4 years. My WDR has been increasing every year thereafter.

What is the ideal WDR?

Unfortunately, the author thinks there is no ideal WDR, but it can still be useful for understanding your financial history.

For example, if your WDR is less than 10%, you are probably living a “you-only-live-once” kind of lifestyle and you may want to consider saving/investing more. However, this doesn’t imply that a higher WDR is always better. In fact, a very high WDR (100%+) might be a sign of someone who is prioritizing money over living a more fulfilling life.

WDR can provide some good insight into what you are doing with your money and how you might be able to change to reach your financial goals.

Because the only thing that matters in personal finance is whether you can live the life that you truly want. If you can, then, financially, you have won. If you can’t, then what do you need to change to get there? Perhaps, increasing your wealth discipline ratio is a good place to start.

The intention of this post is not to publish my WDR or for any of you to do so after computing yours. I just found this method useful to see whether I am on the right track in my personal finance journey and hence wanted to share it with a wider audience.

Thanks for reading!


Cheers!

[Aditya]

How to Compute your Wealth Discipline Ratio (WDR) - Post moved to a new thread.

[Axe77]

Thanks for sharing this along with helpfully the limitations of each formula as well. I was intrigued to try this but had a couple of immediate questions / reaction.

# In the first formula (LWR), is TLI taken on a pre tax or post tax basis? Can I assume its pre tax since you’ve taken the GTI for the second formula?
# For the second formula, honestly I feel for most people coming to a reasonably accurate BLS number may be nearly impossible unless they have recorded as well as saved this information at a granular level for a very very long period of time.

Not sure how someone can reasonably benefit from the 2nd formula without this information.

Thank you.

[Kelly66]

Originally Posted by Axe77

Thanks for sharing this along with helpfully the limitations of each formula as well. I was intrigued to try this but had a couple of immediate questions / reaction.

# In the first formula (LWR), is TLI taken on a pre tax or post tax basis? Can I assume its pre tax since you’ve taken the GTI for the second formula?
# For the second formula, honestly I feel for most people coming to a reasonably accurate BLS number may be nearly impossible unless they have recorded as well as saved this information at a granular level for a very very long period of time.

Not sure how someone can reasonably benefit from the 2nd formula without this information.

Thank you.

You're welcome. In the US, they are calling it "Taxed Medicare earnings", so the TLI should be post tax for LWR and it would be the same for WDR as well.

Ideally, we too should take it post tax but I took the GTI (pre-tax level) to provide for any errors in the BLS calculation. Even after keeping the denominator higher my ratio's looked healthy, so I was fine with it. If we take it post tax, it will improve the LWR% and WDR% even more. Those of you who want to calculate it more accurately should take it post tax.

Yes, for WDR, BLS is a must. Even if you have BLS for the last few years, you can take the same ratio of BLS/GTI for the remaining years. I took 36% for the missing years, if that helps.

[Entsurgeon]

In India, its not unusual to have gained 15-50 times return on real estate in a span of 10-25 years past.
Most of the people would have this LWR through the roof due to this. For any middle class person nearing retirement age right now and who bought at least one real estate in their mid career, a ratio of 100% would be easy at least in india.
I think , the lifetime earnings should be measured adjusted to inflation and should be considered post tax.
Also, any reduction in wealth due to encashment- selling a real estate or funds should be added to networth adjusted for inflation unless its reinvested.

[charanreddy]

This is an interesting mental math problem to start the day. This metric doesn’t need to be precise to be useful. I.e. we are looking for if the ratio is 10% or 30% or 60% , not necessarily 30% vs 32 %.

An approximate easy way to calculate this :

Gross Income : ( latest annual salary - starting annual salary ) X number of years worked / 2

Above assumes a linear income growth and should with in +/- 5% vs accurate calculation for most folks.

Net income : gross income X (1- 33% ) : if your salary is less than 50L , use like 25%/ 20% factor for income tax

Expenses : Assume a normal household expenses including rent and groceries. May be 1 lakh currently per
Month if one is in a metro.

Total expenses : ( currently yearly basic expenses - starting year expenses )X number of years worked / 2

Net income post expenses : net income - net expenses.

Net worth : easy to calculate, primary home value needs to he added to this net worth as well.


High level, in my case my number is closer to 70% suggesting i live a very boring and conservative life :(

[Kelly66]

Originally Posted by Entsurgeon

In India, its not unusual to have gained 15-50 times return on real estate in a span of 10-25 years past.
Most of the people would have this LWR through the roof due to this. For any middle class person nearing retirement age right now and who bought at least one real estate in their mid career, a ratio of 100% would be easy at least in india.
I think , the lifetime earnings should be measured adjusted to inflation and should be considered post tax.
Also, any reduction in wealth due to encashment- selling a real estate or funds should be added to networth adjusted for inflation unless its reinvested.

Real estate holdings will go into NW (under Immovable asset) and it will based on your Purchase price as per Income Tax rules not current market value. So, if you have bought it ages ago, your numerator will not be inflated as stated by you.

If you sell your real estate (e.g.at a high market value), it will shift from Immovable asset to Financial asset (Bank account) and will still be part of your NW. And it will also come into the denominator as part of your GTI (less tax as clarified above) i.e. sale value after adjusting for inflation (viz indexation). Since it comes into both Num and Denom, your ratios will not be affected significantly.

Hence, you need not worry about LWR or WDR going over the roof. Moreover, we are not comparing each other's ratios here. This exercise will help you to compare your own YOY change in these ratios over a period of time.

Hope this clarifies.

PS: In US also people buy and sell real estate.

[Kelly66]

Originally Posted by charanreddy

This is an interesting mental math problem to start the day. This metric doesn’t need to be precise to be useful. I.e. we are looking for if the ratio is 10% or 30% or 60% , not necessarily 30% vs 32 %.

An approximate easy way to calculate this :

Gross Income : ( latest annual salary - starting annual salary ) X number of years worked / 2

Haha, you took the easy way out! Income that is being referred to here is Income from Salary, Property, Business, Capital Gains and Other sources viz. all the 5 Heads as per your IT return form. Needs some more work, but you will get there

[Entsurgeon]

Originally Posted by Kelly66

So, if you have bought it ages ago, your numerator will not be inflated.
This exercise will help you to compare your own YOY change in these ratios over a period of time.

Hope this clarifies.

PS: In US also people buy and sell real estate.

Most people, while calculating their networth would consider the current value of their asset and not the purchase price and rightly so.

Another thing that this thread missed is whether return on investment is counted in income or not. It can't be if the first post mentions some people have the ratio 100-1000%. Are we calculating the notional values or realised value because networth includes former.

So, if I invested just 30% of my earnings and now my networth is 150% of my total lifetime earnings, what if I sell all of it? My ratio is going to drop under 100. I am not clear if these calculations includes returns on investment as income. Since you suggested that income should include all gains from salaries as well as investment, the only way a ratio can ever cross 100 is if it's not realised and only the current market price is added to networth.

[Kelly66]

Originally Posted by Entsurgeon

Most people, while calculating their networth would consider the current value of their asset and not the purchase price and rightly so.

You are right, people have different ways of calculating their NW and glad you brought up this point. That's why I chose the Assets and Liabilities format (as mentioned in my OP) defined by Income Tax since this is what we would declare if we are required to. Also, GTI is from IT returns so everything is consistent.

See in this link: https://tax2win.in/guide/schedule-al-income-tax-return




If any of you want an excel format of the same, I can attach it.

How the amounts of assets and liabilities are to be filled-in?

As per IT requirement, the amount of assets have to be reported at :

• Cost price
• If asset was forming part of wealth tax, then the value of such asset as per wealth tax return
• Liabilities to be disclosed on actual basis.

Another thing that this thread missed is whether return on investment is counted in income or not. So, if i invested just 30% of my earnings and now my networth is 150% of my total lifetime earnings, what if i sell all of it ? My ratio is going to drop under 100.

I did mention in my reply to your earlier post that if you sell the property, it will cover the return on the investment made. Since market sale value (Say 1 Cr) goes into the Num & Denom, your LWR% & WDR% will not drop but actually go up (not go through the roof though), because what goes into the Num will be the actual sale value (1 Cr into bank balance) whereas what goes into the Denom would be the Capital Gain after indexation (less than 1 Cr) as per IT (Head Income from Property).

It can't be if the first post mentions some people have the ratio 100-1000%. Since you suggested that income should include all gains from salaries as well as investment, the only way a ratio can ever cross 100 is if it's not realised and only the current market price is added to networth

The LWR rankings shows that even 25-50% is very good and the same calculation will be even higher for WDR. Let's say you have invested your salary into Mutual funds periodically, your NW would keep going up in long term and your LWR/WDR % would keep going up.

As per my CA, other than property, every else in NW will be at current price (as stated by you) e.g. MF holdings, Vehicle at current IDV, Bullion at current rates, etc. That's how I have taken all these years.

WDR is a measure of your financial discipline through both savings and investing and how you use your savings to invest and increase your wealth. So, people can increase their rankings over a period of time.

Cheers!

[Entsurgeon]

Another couple things that needs pointing out-
Networth calculations in most cases would be post taxation. Hence the denominator should be post tax income.

Also, the total income i.e. denominator needs to be adjusted for inflation. My first salary was in high four digits and was considered very decent for its time. These days people pay more in an upscale restaurant on a family dinner.

[Ananthang]

Can we add ancestral property and assets of parents under net worth as eventually I will get that

[Kelly66]

Originally Posted by Ananthang

Can we add ancestral property and assets of parents under net worth as eventually I will get that

You can add after it is formally gifted to you via a gift deed.

[Kelly66]

Hi,

I am attaching the format that I use for calculating Networth. It's the same Assets & Liabilities format as shown above in excel and it also has the Balance sheet (with formulae) at the bottom.

Hope some of you have started work on your LWR & WDR!

[ATTACH=Assets & Liabilities (A&L) TBHP.xlsx]2735183[/ATTACH]

Cheers!