How Wealthy Should You Be

A person (or couple's) "net worth" is equal to total assets minus total debts. Think of it this way - if you sold everything you own, for cash, then paid off everyone that you owe, in full, your net worth is the amount of cash left over. You can easily estimate your net worth. First, simply get a pencil and paper and list the current value of everything you own (your assets) and calculate a grand total. This asset listing will include real estate, IRAs, retirement plan balances at work, brokerage accounts, cash surrender value of life insurance, and all other significant items that you own. Secondly, prepare a list of the current "payoff" balances of all your debts (loans, charge card balances, etc.) and tally up the total amount of this list of debts. Lastly, to calculate your estimated net worth, simply take your total assets minus total debts - this difference is your net worth. After computing your estimated net worth, the question becomes "How are we doing relative to our age and income level?"

 

The most interesting benchmark formula to assess how well a person, or couple, are doing from a net worth standpoint, was created by the authors of the best selling book The Millionaire Next Door.  Before I share the formula with you, I have one caution - this formula is to identify how wealthy you should be assuming that you did a stellar job of saving and investing over the years. If your net worth is equal to, or more than the amount computed by this formula, CONGRATULATIONS - you are well above average!

 

The two variables to consider in calculating what your net worth should be are (A) your income level, and (B) your age. Without further ado, here's my simplified version of the formula, presented as a two-step approach:

 

STEP #1: Multiply your age times your gross annual household income from all sources.

STEP #2: Divide the number you calculated in Step #1 above, by 10.  This final number is what your net worth should be if you did an excellent job with your finances.

 

EXAMPLE: A married couple, age 45, with a gross annual household income of $80,000 should have a net worth of at least $360,000, calculated as follows:

          STEP #1:  45 X $80,000 = $3,600,000.

          STEP #2: $3,600,000 / 10 = $360,000 net worth target