I was reading The Millionaire Next Door again and found out that I am wealthy! The authors offer a calculation to determine if you are wealthy, just 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. Why does it matter? It affects my whole life!
I never thought I was wealthy or rich! These are words I always thought applied to someone else. You know what I mean, the people who lived in large homes, earned seven (7) figures and could do anything they wanted. People like doctors, celebrities and business owners. Wait a second, I was a business owner! The difference was I never earned seven (7) figures (net) in any year. I definitely did not live the wealthy lifestyle that you see in the movies. That’s fiction anyway!
Funny, how we rely on those fictionalized ideals of wealth or do we? We all know rich people; they may be relatives, friends or neighbors. It may perpetuate the myth of wealth or provide a completely different image. As an entrepreneur, I met a lot of successful people through the local Chamber of Commerce. Networking with other successful people helps you succeed too. How did I recognize who was successful? All you had to do was go to their business and look! I had a restaurant and I could tell right away how much they were earning by just watching their traffic.
You don’t have to share your net worth or ask how much they are earning. Would you recognize a successful person by just looking at them? I don’t think I would know either! Supposedly, you tell a rich person in Texas by their hat and boots. Rich people do not wear their labels out to impress you. They may even dress down to avoid attention. Have you ever seen Warren Buffet? Enough said! We often networked at different restaurants and could see how busy they were as the meetings ended. It was great trading secrets.
Why should you calculate your net worth? You want to establish a baseline so you can measure your progress to your financial goals. If you never calculated your net worth, all you need are your assets less your liabilities. Assets generally are something that generates cash and liabilities are debt or obligations owed to others. Net worth is a measure of an individual’s or businesses’ value or worth on a particular date. A company or individual is more valuable as their net worth increases. Most individuals use net worth to guide their financial decisions. If you have a lot of cash, you should put your savings to work to earn more money.
Most people include cash, home equity and stocks and bonds as assets. Liabilities are usually a mortgage, credit card debt, auto loans and student loans. You usually include market value of your home in assets and the mortgage in liabilities. Negative net worth would be a danger signal. It would mean your outstanding debt is more than your assets. It is a signal you should pay down debt! Your goal is to have a positive net worth and watch it grow over time. This is why you calculate a baseline number to track your progress. The goal is to have sufficient net worth to retire sometime in the future.
How much is enough? Everything depends on how much you need in retirement. If you were earning $100K while you were working, how much do you want in retirement? Have you thought about how much you need to live reasonably in retirement? This no easy task since the stock market has it ups and downs. How will you avoid the pitfalls of investing? Your net worth is just a measure of your value, but you can use it to measure your progress. How much will you need to retire?
How long will you live in retirement? If you had a million dollar net worth, you could comfortably withdraw $40K for 25 years. If you need $80K to live in retirement, you would need a two million dollar net worth. Saving and investing is the best way to increase your net worth. You can invest in assets such as a business, income property or other things of value to grow your net worth. There are two (2) main factors to figure out your net worth to support your retirement; length of time in retirement and how much you need in terms of income. Start early, time is on your side!
Wealth is different for everyone and different by every age! Will you have enough in retirement to support your lifestyle? You need to start saving and investing now to reach your goal. It is no secret that Social Security was never intended to support you in retirement. It was always a safety net and you were supposed to save enough to make it a comfortable retirement. A little early planning will make it much easier to reach your goal. A net worth calculation establishes a baseline to help you measure your progress. What are you going to do? Let me know in the comments. I am already wealthy and retirement will be fine!
Photo by: erOOmbOb
My Financial Independence Journey says
My net worth is nowhere near where it should be according to that calculation. But that’s because I started late. I spent a lot of time getting educated and then suddenly shifted to a high paying job.
I am aggressively increasing my income and net worth through investment in dividend paying stocks. My goal is that I won’t have to worry about how long I’m going to live. The income from my investments will eventually be able to support me forever. And grow faster than inflation over time.
Great, the hardest part of planning is trying to figure out how long you will live. Right now inflation is low, but you should invest for growth.
Honestly, I have yet to read that book. I have heard several people recommend it, so I think I better check it out. I’m not sure that our net worth is where it “should be”- although it probably is. What I do know is that it is growing rapidly now that we have learned how to save it.
I think the main reason to figure out your net worth is to measure your progress against that number. BTW, the book is a good read and will give you some insight about rich successful people.
Money Beagle says
Our net worth is likely below that level, but that’s something we sort of knew would happen when we made the decision to have my wife stay at home to raise our young kids. Losing that income definitely hurts when it comes to building wealth, but the trade-offs for us were worth it. We’re still making very positive strides toward our future, paying off debt at a good rate every month, contributing over 10% toward retirement, and putting cash aside for long term spending needs (like our new roof this spring), so all in all, I’m satisfied (just not overjoyed) with where we’re at.
My wife worked part time when our children were young. It is well worth the sacrifice. As your income increases, you can add to your investments.
Darwin's Money says
We HOPE to be wealthy! I’m pragmatic enough to assume that with the skyrocketing costs of college and an uncertain professional future, I wouldn’t make the claim until I’m already in my 50s or 60s when I know I’ve “made it”. At our age, anything can happen and even though things are going very well now, that could change quickly.
I an (un)fortunate to be in my sixties and I just becoming comfortable with the word (wealthy)! Actually, I not sure if I will ever be comfortable with it. I know I have sufficient investments for retirement and yet, I want multiple income streams just in case the market turns or something unforeseen occurs
John S @ Frugal Rules says
Like Greg, I have not read the book though I probably should as I have had numerous people recommend it to me. I love your point about Social Security, it was meant to be simply a safety net and it’s wise to plan as if you’ll not have it…that way if you do get it it’ll just be extra.
Thanks! I believe there will always be Social Security in some form, but it is not enough to support a reasonable lifestyle.
Our net worth is pretty good because of buying a business. Even when we were spending too much and not saving enough, the business payments kept coming out and now I’m able to sell it for a profit. I certainly didn’t really know what I was doing, but in hindsight, it was a great move.
A profitable business is a great way to increase your net worth. The next step is what are you going to do with the proceeds?
Great points, especially with regard to being honest about one’s financial goals. Great post.
Thanks, knwing your net worth is an important baseline for measuring progress.
Canadian Budget Binder says
That was a great book, I read it last year. I was talking to my mum and dad in the UK tonight who are now retired and living on their UK pension and investments etc. I asked them if they didn’t have other sources of income now would they be able to make it on their gov’t pension alone. They told me it would be very tight. You see 8 years ago they had money after they sold their business where they could either invest or buy properties. When they found the MER was 2% for the advisor they said sod that and paid cash for 2 houses that now provide them with passive income and have been. They do not live in these houses. Real Estate was the best investment they said. They calculated how much they made in the past 8 years compared to what they would have made investing. My mom said they are much further ahead. Interesting what you learn from your parents! I don’t know what we will need in retirement but what I do know is that we can’t rely on anyone but ourselves to get us there.
Very true! Whether it is real estate, investments or a business, we all need multiple income streams. When I retire (again), I will have a pension, Social Security, brokerage account, IRA and Roth IRA. In addition, I will have some income from this blog.
Mandy @ MoneyMasterMom says
Happy to report that our net worth is better then this bench mark. That being said I don’t feel happier now then when we were just starting out living in a Condo and saving every extra penny. Too many people think wealth is the ticket to happiness. In reality it gives you options but not happiness.
Money has very little to do with happiness, although lack of money can make you very unhappy. I was happy when I was striving for wealth and I am happy now. My happiness came from what I was doing rather than the money.
Kevin Watts @Graduatingfromdebt says
I always thought being wealthy was more of a mindset. Usually wealthy people behave differently and have different habits. Here’s an article that explains this better:
Wealthy people do think differently, but so do successful people!
KK @ Student Debt Survivor says
I haven’t calculated my/our networth yet (mostly because I just recently got out of debt and we just purchased our condo). I don’t plan on social security being around by the time I’m old enough to collect, so I know that building up a big retirement fund is incredibly important. Congrats on being “wealthy”:-) Hopefully we’ll be increasing our earnings, building our real estate and retirement funds and following you’re lead!
Thanks, I did not realize I was leading! I just like the idea of having choices in life and money or wealth allow you to have choices.
Cat Alford says
This is awesome. How nice to randomly find out that you are “wealthy.” 🙂 The Millionaire Next Door is one of my all time favorite books. I am quite sure I’m not wealthy due to the student loan debt, but maybe one day I’ll get there!! Also, I wish doctors made 7 figures (That would be very rare and is definitely not the norm!) Great post!
Thanks, some doctors do make 7 figures, but most do not. I never met an unhappy doctor though. I always felt it was more important to be happy in my career and the money would follow. As a teacher, I make very little, but I enjoy what I do. I have more time to explore other areas to earn more money.
Cat Alford (@BudgetBlonde) says
Thanks for the comment back! I am very passionate about explaining to others that doctors are not as “rich” as people think they are. You might enjoy this article: http://caduceusblog.com/archives/1128 which explains it pretty well in my opinion. The only 7 figure doctors right now are extremely high end plastic surgeons in LA and New York. Most doctors make between $120,000-$350,000 a year (not including what is taken out for malpractice insurance.) That’s still a great salary, but it’s extremely well deserved for what they go through. I am a teacher too, and I love my job as well. I don’t know what I’d do without my students! Thanks again for taking the time to respond. 🙂
You’re welcome, although I have only been a teacher for 12 years, I really enjoy influencing young people. Funny, how blogging has the same elements too.
Cat Alford says
So true! 😀
Abbie@ yourfinancialeducationtutor.com says
I read the Millionaire next door years ago. It got me thinking about my net-worth. Glad to know that you discovered you are wealthy. The opposite happened to me. I discovered that my net worth was extremely low. That’s when I decided to do something about it. I first had to stop doing things that decreased my net-worth. Now I can work on increasing it.
Good for you! I think of net worth as a baseline where I can track my progress against.
Johnny Moneyseed says
The company I work for offers a pension plan. At 20 years you receive half of your basic pay. Which actually equates to about 30% of our actual paychecks, because they also take out our cost of living pay.
Needless to say, a lot of people are banking on those retirement checks, so they spend at or above their means. They don’t realize they’ll be going from 100% to 30%. All they think about is that they’ll be getting paid to not work.
How much better would it be if you could adapt to living on 30% of your take home pay, so when the time comes for retirement you are not only well-adapted but you also have a ton of money saved up?
Very true, but I would want about 70% though. That gap is significant! It reminds me of Social Security which is insufficient too!
Social Security and government programs are both a great safety net and a horrible backstop that lazy people can use to do nothing. Sadly, these programs seem to be manipulated more and more by people who have no interest in getting ahead….while people who truly need them find it difficult to navigate the red tape to try and find work while making sure they sustain some small level of support. Watching these programs gives me even more motivation to be wealthy! I want no part of that….
I think you always should take care of your own future! Social Security has become a political because instead of investing the money, the government uses it to pay for other things.
Hey, I did the calculation; and the number I got is much less than our net worth. Does this mean that we are wealthy?
Yes! That is tthe shrt answer, but I calculated mine without using my home equity because I view it as
Yes! Don’t get too comfortable because I think I still need more and you probably do too. I approached it a little more conservatively and did not include my home equity because it is iliquid.
I know! Apart from all else, our real net worth is all wrong structurally – on a mission to change it all.
Good for you!
Brick By Brick Investing | Marvin says
I have heard nothing but great things about that book. It’s definitely on my to read list. We are considered wealthy as well but we still strive for financial independence.
All it takes is a plan! It took me 7 years and I worked my plan utilizing income property.
Alexis Marlons says
Who doesn’t want to be wealthy right. But we have to be realistic with our goals and strive for it. It is hard but it is definitely possible.
All you need is a plan! When I started investing, I never thought about becoming rich or wealthy. I was just thinking about my future. One of the byproducts of saving and investing is accumulating enough assets to be able to take care of yourself in retirement. A lot of times, words that may mean different things describe your success. I still think the words rich and wealthy describe someone else, however I was illustrating the “millionaire Next Door” formula for net worth. I take it a bit further by excluding home equity because I will only have some access to those funds.
I’ve come to realize that wealth for me is less of a number and more of a concept or a way of life.
If I can live happily on less, I should do it, but if I can’t, I should make more.
What the final number ends up being, is not important.
The word itself is meaningless, but it has meaning as a identification of success. I use my net worth as a baseline of measuring my progress and an indication of success.
Andrew @ She Thinks I'm Cheap says
The Millionaire Next Door is a great read, it’s nice to learn about simple calculations that will tell you an interesting story. Given that you are already wealthy now, as long as you maintain your levels of income/spending, you’ll continue to be wealthy down the road! I don’t think a lot of people consider that a high income does not indicate someone is wealthy.
Personally, I’m a fan of wearing the brand name on the inside, or not at all!
My income was modest, but through saving and investing I managed to accumulate a lot of money. I still maintain a very modest lifestyle and expect my nest egg to keep growing. My role models (parents & others) showed me that wealth is not worn or shown. In fact, that would be inappropriate.