Is your net worth above or below the ideal amount?

In My Humble Opinion
1

Where is your net worth relative to the “ideal” amount?

Let’s get past a few definitional items:
Net worth = Value of all of your assets - value of all your debt and obligations

Example:
Cash $5
401k balance $10
IRA account $5
House $250
Cars $20
Household stuff $25
Total Assets $315

Mortgage ($175)
Car loans ($10)
Credit cards ($3)
Student loans ($5)
Total liabilities ($193)

Net Worth - $315 - $193 = $122

The “ideal” net worth per Stanley and Danko, author’s of the “Millionaire Next Door” is

Ideal Net Worth = (Age x Annual Pre-tax Income) / 10

In my example above the individual is 30 and make $60,000 per year pretax. Therefore his ideal net worth would be $180k, while his actual net worth is below that amount at $122k

Is your net worth above or below the ideal amount?

  • Above
  • At
  • Below

0 voters

If your net worth is below the ideal, steps to take to assist you getting to that ideal mark include:
Having a spending budget
Saving more for retirement
Saving more in general
Paying off debts, (ones with highest interest rates first)

2

How do you factor in two income families? Average the ages and total the income? Add the ages?

So one person is 35 and the partner is 33 and their annual income together is $150,000, what do you do next? My instinct says (34*150000)/10, but I haven’t given it a lot of thought.

3

I would add together the assets and liabilities, and the combined pretax income, but average the ages.

4

Cool, that’s my thinking too

5

Never mind

6

Why is that amount ideal? How do age and income relate to this number?

7

Impossible to calculate for a renter without a car, like me

8

Wealth (net worth) is accumulated over time, and your ability to accumulate wealth is a factor of your income. These are not hard and fast rules, but more like rules of thumb derived by Stanley and Danko, after studying the wealth accumulation patterns of varying people over time.

9

Impossible, I don’t think so. You don’t believe that you have a net worth even without owning a home or car?

10

According to the Wikipedia article on the book, this formula is what they use for average wealth, not ideal wealth.

11

Thanks for pointing that out. I read the book a long time ago but I didn’t remember this formula for ideal wealth and it doesn’t make a lot of sense to me. I’m heartened to see that the formula has been mischaracterized.

12

The info in that article helps make somewhat more sense out of it, not totally, but the point of it is clear. I don’t think it’s broadly helpful. For example right now I’m retired but my wife is still working. If I count just myself then I’m way over the ‘average’. I also know plenty of people who come out much under, but that’s because they didn’t start making a lot of money until later in life. That would give them a very high number based on their current income but they had no opportunity to accumulate wealth earlier.

13

If you average the ages, you have to then remember that the “ideal net worth” is for the couple, not for the person.

Example: one is 49, the other is 51. The average is 50. If each person earns 100,000, then total income is 200,000. 50 x 200,000 = 10 million, divide that by 10 and you get 1 million.

For a single person earning 100,000 at age 50, 50x100,000 = 5 million, and the ideal net worth is 500,000.

Same net worth per person (500,000).

All in all it’s a cute formula but needs a LOT of tweaking to be truly useful. Looking at our ages and the value of our IRAs, we are jointly over the “ideal” figure - but we also live in one of the more expensive parts of the country, and we have a lot of financial obligations due to being members of a “sandwich generation”, which point to a lot of peanut butter (store brand, nothing fancy like Jif) sandwiches in our future.

14

Frankly, a lot of that is bullshit for those of us toward the economic bottom.

  1. I have a spending budget.
    1a) I even adhere to it
    1b) I can even save about 10% of my income every month ABOVE what’s going into my 401(k)
  2. I am saving more for my retirement than ever before
  3. Again, I am saving 10% ABOVE what’s going into my retirement accounts
  4. I have zero debt
    4a) I have had zero debt for over 15 years now

My net worth is less that 1/3 of the “ideal” as calculated by your formula. Short of something like winning the lottery I can NEVER catch up, the numbers just don’t allow it. I don’t have enough years left, or a career path to a six digit income.

You can thank the Great Recession which entirely wiped out my retirement and savings (outside of my defined benefit pension). At one point our net worth was under $300.

The only reason I’ve doing as well as I am is

  1. A bunch of relatives died and I received small amounts from each of them, which I was able to (mostly) save, and
  2. That included my spouse, so I only have to support one person now, and
  3. I’ve sold off a bunch of stuff and used the money for things like vehicle repairs and dental work instead of dipping into my nest egg, and
  4. Federal covid payments and hazard pay also helped my bottom line this year. (Forgive me if I’m not hoping for yet another global pandemic in which I am forced to be a front-line worker in order to improve my nest egg further. I survived the experience. At least six people in my company did not).

Give me an actual means to legally acquire an additional $100,000 or so to dump into my retirement/savings. Please.

15

Did you not just leave your retirement and savings alone after the financial crisis. The market rebounded sharply in the years following the crisis, and you should have regained and exceeded your original positions.

16

Why? I’m a renter, and I own a paid-off car that I didn’t count as part of the asset total.

Anyhoo, I’m stunned that I actually am quite a bit over the “ideal amount.” Even if the formula is bogus, I like the results I got.

17

This concept of “ideal net worth” makes no sense to me. If I keep the same income to my 90th birthday, my “ideal” net worth would be huge. If I die the next day, that net worth is useless to me, all it is is something to pass on to my – well, I have no offspring, and if my husband pre-deceases me, there is no-one I care about to leave it to. How is that ideal? And how am I supposed to keep accumulating that net worth, on a fixed income? The whole thing sounds like nonsense to me.

On another point, why the poll? What is it to you how many people meet this pseudo-standard?

18

Superficially this calculation makes sense. But there are many outlying situations where it doesn’t work. Here’s a couple, just off the top of my head.

  1. Someone just graduated from college and started a new job. His salary is high but assets are virtually nil. The calculation shows him to be in very bad shape, but actually his prospects are excellent.

  2. Someone is well into her career. She has decent assets and a pretty good salary, but not quite enough saved according to the formula. Suddenly she’s laid off and has to take another job at half her former salary. The formula now shows her financial position to be much better than before, when obviously it is much worse.

19

I had a choice between cashing out and being literally homeless with a disabled spouse. WTF good does income 10 years from now do me when TODAY I have no roof over my head? Should I tell my diabetic spouse to just suck it up, he can live without his medication for six months or a year or three until I could get steady employment again?

I couldn’t wait years for the market to rebound, I had bills to pay TODAY - housing, transportation, utilities, costs for my (again) disabled spouse that would not wait. Food stamps only pay for food, not for anything else.

What would you have done in my place?

The ONLY retirement I had left after that was 1) social security (if it’s still around when I’m old enough to collect) and 2) my pension. ALL the 401(k) and retirement besides that which I now have is what I have managed to accumulate over the past seven years, from the point at which I landed a permanent full time job again.

20

Actually, when I was laid off it too me years to find another job, and when I did it was ONE FIFTH my former salary. Which sort of sucked.

I’ve clawed my way back up the ladder a bit. I now make almost half what I did before. After seven years of busting my ass.

I guess what ticks me off about these sorts of formulas is that they assume a steadiness that doesn’t exist for millions of people in this country.

It really sucks to get laid off and not be able to get steady work for 5-6 years, it can really drain your financially, and past 45 it can be really, really tough to regain the ground.