I’ve been re-reading The Millionaire Next Door lately (what!? it’s an annual tradition), and I’ve been revisiting the idea of net worth benchmarks.
To read the Wikipedia Notes on the book, check out their “The Millionaire Next Door” summary here.
WHAT IS “NET WORTH”
It is (for me), the single best indicator of your financial health and wealth.
I had always thought that a high income meant you were rich, but after experiencing debt on a high income ($65,000 gross a year), and realizing I had technically had less than a beggar on the street with $50 in change.
Seeing as I owed $60,000, I realized income was just a number.
It is more important to figure out your net worth as the indicator of your wealth.
HOW TO CALCULATE YOUR NET WORTH
Generally speaking it’s:
ASSETS — LIABILITIES = NET WORTH
Whatever you own, without what you owe, is what you are worth.
Update: Of course by “worth” I mean in a dollar & cents sense.
Not worth as in worth as a human being contributing to the world and to society.
This is where it gets tricky however, how do we figure out what we own or owe?
For me, I say anything in a bank account and your house and cars.
I don’t add my (very cheap & fully paid for) car in my net worth any more, but that’s because I’m lazy and I’d rather just count the numbers than to figure out the value and so on.
But if you have a car loan and you don’t off set it with the value of the car, then it isn’t an accurate picture.
Everything else, such as personal effects — laptop, clothes, furniture — is not included in that, although some people do estimate the worth of their valuables and add it to the list. Either way it’s fine.
There are many ways to slice the net worth cake, and it’s all up to what you feel is a fair and accurate representation of what you’re “worth”.
HOW DO YOU MEASURE UP?
So in the book, they give this calculation to see if you are ‘on track’ for your age and income.
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.
But at that time, I was in $60,000 of debt, being a newly graduated college student. This made no sense to me, seeing as I was working, but I owed a lot!
My original net worth calculation was supposed to be:
22 x $65,000 = 1,430,000
1,430,000 / 10 = $143,000
I should have been at $143,000 of net worth right out of school, and I was at NEGATIVE $60,000!
Naturally, I saw this and became extremely dispirited and depressed.
I thought I had failed myself and I’d never catch up to be someone who was financially secure.
This was the general consensus among students, so other blogs came up with other calculations for students:
So came another net worth calculation for students, using the same principles:
Your age minus 27, then multiplied by your realized pre-tax income less any inheritances
Now divide by 10
This made much more sense, seeing as since I was 22, I would be in the negatives for net worth if we accounted for students who weren’t fortunate enough to have their tuition covered.
As for choosing the number 27, it is because they assumed it would take 5 years to clear student loans diligently, therefore since many students graduate at 22, 22 + 5 = 27.
My new net worth calculation for students was now:
22 – 27 x $65,000 = – $325,000
– $325,000 / 10 = – $32,500
There, much better. Negative $32,500.
I was still $27,500 below THAT benchmark, but at least I wasn’t off by such a huge amount!
QUICK AND HANDY CHART (from CNN Money)
So if you want to have a quick (very simple) comparison chart of what you are worth compared to others in your age and income, here it is!
If you want to really get down and dirty with the numbers, go to the CNN calculator and type in your age and income to get something more customized.
I couldn’t show everything here, there are too many variables.
NET WORTH IS JUST A NUMBER
In short, net worth is the number that most people don’t know about you, but is the best general indicator of wealth (just speaking in numbers of course).
They might know your age and income, but net worth is what you save aside, so unless you tell them what you save on a regular basis and how much you owe, they probably have no clue, seeing as they don’t have inside knowledge into your finances and bank accounts.
It is handy for you to know what it is, so you can keep track of your growth and to use it as an indicator for your personal assets. By tracking your net worth on a monthly or yearly basis, you will be in a better position to know if you are improving your financial situation. You can use Excel to track down your assets and debts or you can use a free software that track it for you (how cool is that?). I personally use Mint since it’s free and I can get my monthly update on  my net worth without working hard:
Other ways you can count yourself as being rich is to just simply feel like you are, and you wouldn’t be far off from the truth.
Check out this Global Rich List, and you will immediately see just how rich you are compared to the rest of the world.
Here’s an example with $45,000 as a salary:
If you have all your needs covered and then some, and your wants are few and far between, you probably feel rich and content.
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I have been tracking my net worth for more than 12 years. It is rewarding to see it grow and it forces you to stay on track.
I started with an excel spreadsheet and now I’m using a specialized software (http://theblueplum.com)
I recently signed up for the newsletter and the second one came in today. I had calculated net worth with the way fun spreadsheet but I had completely forgotten to include our vehicles on it! Here I was thinking we were -$20,000 but once I included both vehicles and our bank accounts (I had the emergency fund, not the checking accounts), it took us to the positive! $576.70. Definitely a better starting point than I thought I was a few minutes ago.
I agree that the MND equation doesn’t really work for young people (especially those with student loan debt), but I also don’t think subtracting 27 from your age works. Because then you’re basically just saying as long as you save 10% of your income from age 27 on, you’re good – and for most people, they aren’t going to get rich that way. They might not even have enough to finance retirement that way, depending on what their income level is and how well they invest that money. I do wish there was a better way for those in their 20s to calculate and compare financial health, though. Almost every book/blog/other piece of money advice I’ve ever read seems to be geared toward the 35 and up crowd.
I agree with RB40- by age is quite pathetic! I”m doing good by age but not by income.
By age is very low because they’re probably in student debt, as I was when I graduated…
Wow. I like CNN’s age figure better than salary figure. We are doing fantastic by age, but falling short by income. Also the Global Rich List is very sobering. I didn’t realize how “rich” we really are. Why do I feel so poor?
Perhaps you feel poor because it’s relative to those around you.
If you see other people with fancy items, you think — why not me?
But if you were transplanted just as you are with your house and things into Africa or India, you’d realize immediately how rich you are.
It’s all relative. Don’t feel so bad 🙂
The MND calc is way low for me. It just kind of highlights that if you make a lot and save a lot – even if you start late like I did – you can leave others in the dust.
I think it’s a good general guide to seeing where you stand as a benchmark.
For me, by income, the issue is I don’t really know my average income. I should try and figure it out, or at least think — if I joined a company, what would I be paid for my skills now? — and then use that.
I remember feeling quite depressed when I read that method of calculating net worth from Millionaire Next Door. If I use the second method you suggested, I am ahead of the game. Although that’s because I worked during school, and didn’t graduate with as much as the “average”student.
I also checked out the Global Rich List and I am within the top 1%, isn’t that crazy?
The Millionaire Next Door is a great book. It’s definitely a must have for anyone’s book collection.
By the second calculation method and age, I’m in good shape. By income, I’m not. Of course, I haven’t even worked enough to earn that kind of money, so I’m not really worried about it. I’ve always found the ideas of net worth and wealth interesting, because it always has a geographical component to it. The Global Rich List is a great example of that. I’ve even noticed it in my area. The ‘wealthy’ people here, wouldn’t qualify as wealthy elsewhere.
Surprisingly better than I thought I would be. I agree with the networth of 232,000 by retirement age being low. I hope I’m doing a lot better than that in 25 years!
I like the networth suggestions by age. That makes me feel better! I’ve actually surpassed that networth (though any of the savings I have for the wedding, honeymoon, and house will eventually drop off that map in the next few years, leaving me back with limited networth :P).
By the old standards, I fall far short. But by the new standards I’m way ahead. So I like the new standards better! Of course, if I had a real job before I was 28 I would have had a way higher net worth!
Wow, the median net worth by age chart is quite pathetic. People will have to keep working until they die from what I see.
I balked when I saw the first calculation! The second calculation does seem fairer but does not hold for post-graduate studies. The best rule of thumb I’ve heard regarding education debt is: Do not take out any more debt than what your annual salary post-graduation is expected to be.
Perhaps we need a third calculation!
Divide by 5 instead of 10? 🙂
I think a lot of “net worth calculations” are mostly to spur people to save more so that they’re in the average categories at least.
In reality, as you can see from the CNN calculators, people who are younger or still studying don’t have the savings of someone who is in their 60s, although it may seem like they have the same income.
It doesn’t truly account for time & life changes.
Well, if I’d been a saver instead of a spender all my life, my financial net worth would be WAY ahead of those figures. Unfortunately, I spent everything and I could kick myself into the middle of next week for being so foolish! Having said that, I have to say that I am somewhat surprised by the lowball figure of $232,000 given for Net Worth by Age for ages 65 and older. Is it just me or does that number seem ‘low’ to others as well? After reading more articles on retirement than I can count, this number wouldn’t seem to come close to covering expenses in retirement according to the pundits. Given future inflation, seems to me that money would run out very quickly. In a perfect world we could all afford to retire but there are many people who cannot afford to.
My family was quite frugal while I was growing up, so I saved myself a lot of money. It’s nice for me to see that I’m far above the median when I feel like I’ve barely tried at all.
I’m glad that I’m doing much better than I “should” be according to the MSN chart. However, I’m way behind if we are using the millionaire next door rule.
I love The Millionaire Next Door, but I too was wondering exactly what my net worth should be. I’m 24; according to the book’s calculation and my current salary I should have a NW in excess of $80,000. That, since it is more than I made in my first six years working (ages 16-21), seems unrealistic.
I like the minus-27 calculation. Since I didn’t have student loans I used 21 (the age at which I graduated college) instead of 27, and came up with a number that’s only $400 above my current net worth. YES! Thanks for sharing 🙂
THANK YOU for the observation about the differences between having a high income and a net worth. I just graduated and have a job with a decent salary, but I have a negative net worth. I have often thought the same thing when encountered by people asking for change – even though I have a decent paying job, I have less $ to my name than the person asking me for change. It doesn’t mean that I won’t give any help that I could, but it’s an interesting thought.
You’re welcome.
On the plus side, now that I am in the positive net worth category, I do donate 10% of the gross I earn to charity — the ones that really help those who need the money the most.
I can’t imagine being on the street and it’s hard not to give when you see how others have no choice but to live.
Yuck, I have a negative net worth.
Baby steps! 🙂
I find all the different schools of thought on net worth fascinating. I can’t wait to get home and play with all my numbers and these different ideas on net worth (Yes, I am that much of a geek).
If you’re a geek, then I’m one too. 😛