So you've calculated your net worth and you have a number. What does that number mean? are you normal? Are you doing okay?
One of the benchmarks that I use is found in Thomas J. Stanley's book Millionaire Women Next Door.
Stanley has been studying millionaires about as long as I've been alive (don't tell him that, poor guy). He was fascinated not only by the rich but also by ordinary people with extraordinary wealth.
If I make $1,000,000 a year (I wish, that along with a gorgeous body and kiss me lips would get me the last name Pitt and a guy named Brad for a hubby), I should have a higher net worth than someone making $10,000 a year.
And I'd need that higher net worth to maintain my high flying, movie star lifestyle (and those of the bundles of orphans I adopt).
To compensate for income, Stanley came up with an equation separating the financial women from the girls.
Your Expected Net Worth = Your Age X Your Annual Realized Income / 10
So if I was 35 (and fancy that, I am) and making $60,000 a year, my calculation would be;
My Expected Net Worth = 35 X $60,000 / 10 = $210,000
I should, by Stanley's calcs, have a net worth of $210,000.
If my net worth is above $210,000, then I'm doing fantastic, above average.
If my net worth is below, well, not doing so hot, am I? I'm below average.
This equation doesn't really work for new graduates although it did drive me to play catch up. Keener that I am, I didn't appreciate starting my worklife financially behind. That may be why today I'm financially ahead.
Comments (1)
Stanley's formula is a pretty rough guide - useful as a starting point for working out how well you are doing as against a bench mark but subject to a lot of limitations. It does not work well for people who are still building their careers and whose income is (hopefully) rising rapidly from a relatively low base. It works better for people who have been working and saving for a number of years with a relatively consistent level of income.
Still, anything that gets us motivated has to be helpful.
Posted by traineeinvestor | August 8, 2006 3:23 AM
Posted on August 8, 2006 03:23