Net Worth: How Am I Doing? April 25, 2007
Posted by pf in Expenses and Savings, Goals, Net Worth Update.Tags: average net worth, Barack Obama, everbank, foreign currency CD, foreign currency investing, millionaire next door, net worth, net worth age comparison, personal finance, what is my net worth, what should my net worth be
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Over the last couple of months, I have spent time trying to figure out my long term goals and how to best position myself to meet those goals. What I have not really done is considered how much progress I’ve made thus far and compared it to some sort of benchmark. While I know where I’m trying to go and how far I’ve gotten, I don’t really have a good sense for whether that means I’m on track or lagging.
So, I thought I would do a bit of research to find something I could use to create a point of comparison. I suspect I’ll find more than one tool, so I’ll consider using several of them to get a reasonable sense for where I am and how I compare.
Below are some of the ones I found:
The Millionaire Next Door
If you haven’t read this book, you should. The millionaire next door provides a forumla for determining whether or not you’re on the path to wealth:
Multiply your age times your realized pre-tax annual household income from all sources except inheritances
Divide by 10
This is what your net worth should be. So, for example, a hypothetical 35-year-old making $100,000 per year should have a net worth of $350,000 [(35*100,000) / 10].
For myself, my current net worth is slightly above where I need to be based upon this rule of thumb – so far so good!
Tool from CNN Money
CNN Money has a tool (link) that allows you to see where you rank based upon your age and income. This is a bit different than the Millionaire formula in that it does not really tell you where you should be, but shows you where other people are at based upon age / income from a 2005 Market Audit Survey by Claritas.
You have to look at it closely, however. For example, I’m 34 and when I look at the median net worth for my age group, it is a scary $2125. If I just move it a notch to age 35, it jumps to $44,875. For myself, I think that is the more reasonable comparison. I shouldn’t be surprised at this. You may recall one of my recent posts entitled “Half of All Workers Have Savings less than $25K Really?“…some of this data seems to lend credence to it.
From an income standpoint, I must admit, I was more surprised. Someone making $50K per year has a median net worth of $109,975 while someone making $100K has a median net worth of over $350K! I had expected it to be much lower. However, without being able to look at the detailed data being used for this tool, I can’t really determine what the drivers are. At any rate, for my age / income, I appear to be in good standing for my age group, but only slightly so for my income…things still look pretty good overall.
NetworthIQ
I recognize that any analysis is only good as the data that has gone into it, but I thought it worthwhile to check out the net worth statistics (link) on NetworthIQ. Some would argue that the data set from NetworthIQ is not a good sample size or representative of the entire population, but as long as I go into it with that realization, I think it still has some usefulness.
The data is a bit similar to that from the tool on CNN Money in that you can view by age and income. Interestingly, however, the data is also segmented by education and occupation. The median net worth for my age is significantly higher than the CNN tool at $131K, but the median net worth is much lower for my income. Hmmmm… I’m not sure exactly what that tells me, but in any case, my net worth exceeds both…so I guess I’m still feeling pretty good.
Survey of Consumer Finances
The Survey of Consumer Finances (SCF) is a triennial survey of the balance sheet, pension, income, and other demographic characteristics of US families conducted by our good friends at the Federal Reserve Board. Unfortunately, the 2007 survey is not scheduled to start until May of this year, so the only data currently available is from 2004.
This survey contains a lot of great data in a variety of areas and also includes some charts / tables specifically on net worth. The entire table is too large to post here, but below is an excerpt:
Again, until you hit the 35 and over age group, the net worth is pretty low in comparison. Again, although I’m 34, I still think using the figures from the 35-44 group provide a better basis for comparison. Again, my networth compares pretty favorably. I’m definitely going to save the link to my favorites as I’ll be interested to see the updated results from the survey.
Foreign Currency Investing
Wealth Score
I also came across an article from Liz Pulliam Weston outlining a formula for determining your wealth score. This is somewhat different than the other tools / information above in that it provides a ratio of your net worth divided by your lifetime earnings (ex: from your social security statement). I don’t have my statement readily available, but I’m very curious to see how this one turns out since it is a bit unique versus the others.
Anyway, while I doubt this list of tools is exhaustive, I do think they should provide you with some benchmarks to compare yourself against. However, you should also keep in mind that not all of these tools are created equal. For example, even if my net worth is above the median from the Federal Reserve Survey, it doesn’t mean I’m doing enough, it just means I might be doing better than the average person (and we know how well we are doing as a country in terms of saving, etc…don’t we?).
So, while useful to see how you stack up against your neighbors, I would more strongly recommend the tool from Millionaire Next Door or the Wealth Score to get a sense for whether or not you are making sufficient progress to reach your goals. No single tool is a be-all / end-all…use all of the information available to you to make the best analysis possible.
For myself, I think I am doing “ok”, but will continue to strive to do more. If any of you have any additional tools / tips, please share them!
I’ve read the Millionaire Next Door, but I’m still confused on the fomula. I’m 23 and make $30,000 a year. According to the formula I should have a networth of $69,000 but that seems a little odd to me since I’ve only been working for a year. My networth is only $10k.
[...] Net Worth: How am I Doing? by Pfodyssey @ My Personal Finance Odyssey. The author ponders on various benchmarking tools to compare his net worth progress. [...]
[...] trackback The 99th Carnival of Personal Finance is now up. One of my recent articles entitled “Net Worth – How am I Doing?” is [...]
Julian –
You make a great point. Practically speaking, the tool is a guide and given that you are just starting out, is probably not going to be very useful to you just yet…other than to provide some motivation and give you a sense for where you want / need to go (ie – you shouldn’t feel bad about it). The fact you have bothered to look at it at all probably puts you in very exclusive company for your age group (I certainly didn’t pay any attention at that age).
My advice to you would be to focus on doing a great job at work / in your career to increase your earnings potential and to those areas in your financial life that will help you create the most wealth.
Reading blogs like this one is a great source for this. If you haven’t read it already, I would also suggest you take a peek at Pareto’s Principle (80/20 Rule of Personal Finance (http://pfodyssey.wordpress.com/2007/04/07/paretos-principle-8020-rule-of-personal-finance/) as a thought starter.
I would also encourage you (if you aren’t doing it already) to begin tracking your net worth on a regular basis so you can measure your progress. An easy start might be to setup an account on something like NetworthIQ (http://www.networthiq.com/). You can also use the NetworthIQ site to look at other people your age / income who have reported their net worth for comparison. You should take it with a grain of salt (not everything there is probably true), but it should give you a reference point.
It sounds like you’re already making the first steps in taking an active role in creating wealth…that’s huge.
sure it’s a good feeling to compare yourself to others, the majority of which don’t save anything…..the US savings rate is negative, so it’s not hard to beat the Jones. With that said, work towards that magical number you believe you need for financial independence and to maintain a certain life style once you’ve quit working.
If you’re feeling competitive, I believe the true competition is the person who gets to their goal first…
whatever that financial goal might be.
[...] Net Worth: How Am I Doing? [...]
[...] Net Worth: How Am I Doing? [...]
For Julian, and you PF, if you are interested. On my site, at http://www.joetaxpayer.com/retirement.html
I offer an online calculator (sspreadsheet) as well as a downloadable one. The MND % is not too useful, I’d say. The sheet I created shows one starting at age 20, working till 62, and saving 15% (including company match on 401(k) if any). At 30, you’d have 2X annual income, but at 40, 5.2X. At 62 one would have over 20X to replace their pre-retirement income.
Of course, you can change any of the assumption on the sheet, inflation, rate of return, income, etc.
JOE
Thanks for sharing Joe.
That Millionaire formula supposedly tells you whether or not you are better than average, not where you “should” be (whatever that means). It is oversimplified though since it gets easier to amass debt as you get older and reduce loan payments and increase income.
I have not found any good calculators that show averages for income AND age though. I would like to make one if I can find some good data.
I found a good article in Money magazine that shows average net
worth by age range for the top two quintiles (top 20% and the next
top 20% of people by income. Here is the result in 2004 dollars ( I am guessing net worths went up and then back down a lot during the housing mess the last 4 years):
Age 35 -44
“upper-middle” or second quintile to the top, average household
income:
$68,800
net worth
$131,580
Millionaire formula net worth:
39 yo x $68,800 / 10 = $268,320
“Upper” or top 1/5th of people by income average household
income:
$105,770
net worth:
$266,600
Millionaire formula net worth:
$412,503
Ages 45 -54
Upper middle avg. income:
$69,830
Net worth avg:
$188,600
Millionaire formula net worth:
$342,670
Upper avg. income:
$105,770
Net worth Avg:
$406,940
Millionaire formula net worth:
$518,273
Ages 55 – 64
Upper middle avg income:
$71,880
Avg net worth:
$358,900
Millionaire formula net worth:
$424,092
Upper avg income:
$104,740
Avg net worth:
$640,100
Millionaire formula net worth:
$617,966
Ages 65 -74
Upper middle avg income:
$67,775
Avg net worth:
$615,300
Millionaire formula net worth:
$467,647
Upper avg income:
$105,255
Avg net worth
$936,700
Millionaire formula net worth:
$726,659
So you can probably see that the formula to multiply income by
age and divide by 10 to get net worth is not valid except around
middle age which is what I think he used for the formula based on
my memory of the book which I read a few times. It is too high when you are young and too low when you are old. It is quick and easy though and gives you a rough ball park.
Universal – keep in mind, the higher one’s income, the lower the percent that will be replaced by social security. So while someone earning $20K will get just over $11K (57%), someone making $60K will receive under $23K or about 38%. If we are shooting for an 80% replacement at retirement, the lower income person needs to make up 43% which takes about 11X their income, but the higher earner needs 62%, or 15.5X their income. The amount one should have at each age is not a straight line as you discovered, it’s a curve.
Joe