Net Worth: How Am I Doing? April 25, 2007Posted 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
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.
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.
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!