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Are You Worth What You "Should" Be?
Net Worth = Assets - Liabilities
Your net worth is an excellent indicator of how well you accumulate money over your lifetime. Certainly, net worth is inclusive of more than just cash savings, as the equation indicates above.
Consider however, net worth is really an indirect (or arguably a direct) measure of your spending behaviors. If you accumulate "things" instead of "assets" in your lifetime, you likely will likely have a very poor showing when it comes to calculating your net worth.
Purchasing depreciating assets such as cars, boats, clothes, shoes, etc. contributes to a low net worth because you are spending what should instead be saved and accumulated.
If you were to purchase a house, or securities, or any other appreciating asset, you would otherwise expect your net worth to increase.
Here is the catch... having a big house and displaying high social status by mortgaging and borrowing can give the appearance of high net worth, but actually leaves you worth next to nothing.
What should my net worth be based on age?
My favorite simple equation for determining how much you "should" be worth is based on annual income and your age. It comes directly from the book The Millionaire Next Door by Thomas Stanley.
Expected Net Worth = (Age x Pre-tax Annual Household Income)/10
I really like how this equation actually provides an excellent reflection of your spending vs. accumulating behavior to date.
Essentially, if you make $600,000 a year and you are 50 years old, with a present net worth of $450,000, you are actually a fairly poor accumulator of wealth. Per Stanley's equation, you should be worth $3 million!
Why $3 million? Using Stanley's equation, Expected Net Worth = (Age x Pre-tax Annual Household Income)/10, simply plug in the theoretical numbers listed above.
If you are making this type of income and have only managed to save a small portion of it, you live a high-consumption lifestyle.
A high-consumption lifestyle is the plague of the West in the 21st century. Displaying high social status to others instead of attaining a high net worth - which typically nobody sees - is a no contest. We tend to lead a lifestyle geared more towards impressing others as opposed to improving our own character and merit. It is truly a sad state of affairs for the average American household. Is it really any great mystery why rates of divorce, unhappiness, and depression maintain such high rates? I think not.
What if I don't make much money?
Let's consider a more realistic scenario with more pedestrian numbers than the ones used above. Take a household earning $70,000 combined pre-tax income presently at age 35. Cut them a break right? After all, they are only 35! They aren't doing too bad.
Not so fast...
Using these numbers we figure this 35 year old couple should already be worth $245,000
Consider for a moment that most people in the United States, even one's who are much older than our example couple, barely have enough savings to cover a month's worth of expenses let alone $245,000.
There is a solution however...
Start living below your means, not above them!
Closing thoughts on net worth
Best-selling author James Clear eloquently describes how certain outcomes can be a lagging measure of your habits. Poor financial habits and high spending behavior almost always equals low net worth. Frugality, savings, and investing are typically habits that yield an eventual outcome of extraordinarily high net worth's, even with very modest incomes of $70,000 or less per household!
Stanley's equation above is certainly not a perfect example because maybe you are at the very beginning of your journey. Perhaps you just paid off a significant amount of student loan debt or paid for your own wedding. Of course this equation would not capture this event in such a unique situation. I believe that this equation would be something to turn to after you finish eliminating your debt to help keep you motivated along your path.
No matter where you are now remember, net worth is timestamped and very specific to a particular point in your life. This means that you can change it, significantly. All you need are better habits.
Not sure where to start or how to improve your habits? I suggest taking a look at Clear's book Atomic Habits. He gives great insight on why goal setting is dead and achievement is largely based on relatively mundane "habit stacking".
Let us know in the comments below what you learned when you calculated your "expected" net worth using the above equation.
Until next time...
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