One Measure of Wealth

If I were training for a 5k, I could find lots of people willing to show me their training diary. I could pretty easily find someone at about my level and see their training distances and times. I could use this information to gauge my own performance.

When it comes to finances finding this kind of transparency is tough. Employers don’t want employees comparing pay rates. Most of us have been trained and conditioned to keep our money life secret. This lack of transparency makes it difficult to learn from the few that are doing really well with their money.

If you knew one of your friends had no debt and lots of savings, you might be inclined to find out how they did it – or perhaps even more motivating, if you knew your friend or neighbor with the nice clothes and the new cars was being harassed by bill collectors every night, you might want to learn how to avoid following in their footsteps.

If you don’t have a good measure of where you should be, there’s no way to know how well you are doing. A few years ago I thought I was doing really well. I was paying my bills on time and I certainly had a bunch of stuff. It turns out, how much stuff you have is a pretty poor measurement of your financial health.

In the book, The Millionaire Next Door they used this assessment:

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. You can use this calculator to find out where you stand.

For example, if Mr. Anthony O. Duncan is forty-one years old, makes $143,000 a year, and has investments that return another $12,000, he would multiply $155,000 by forty-one. That equals $6,355,000. Dividing by ten, his net worth should be $635,500 if he were an Average accumulator of wealth.

If your net worth is twice what is expected for your age and income , yeah you, you are a prodigious accumulator of wealth! If your number is significantly less than predicted by the formula, it may be time to scrutinize your relationship with money.