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Do You Benchmark Your Net Worth?

{ 38 comments }

I love updating our net worth and seeing it grows. The growth means we are getting closer and closer to true financial independence every year. If you’re not keeping track of your net worth, you really need to start. Seeing your net worth grows is a great motivator and it doesn’t take much time to calculate.

Net worth = Assets – Liabilities

Assets: Your assets include bank accounts, certificates of deposit, stocks, bonds, mutual funds, real estate holdings, 401(k), IRAs, and businesses. Optional – personal properties such as cars, jewelry, and collectibles.

Liabilities: Basically, your debts.  Car loans, mortgages, credit card debts, and business loans fall into this category.

The easiest way to keep track of your net worth is to use an online aggregator such as Personal Capital or Mint. Those sites will give you quick overview of your finance whenever you login. If you’re concern about security, then go with the basic Excel spreadsheet or Quicken.

Benchmark your net worth

If you have been reading Retire By 40 for a while, you’ll know that I update of our net worth every month and compare the gain with the S&P 500 index’s. However, is this the best way to measure our net worth growth? A few weeks ago, a reader commented as follows.

You can’t compare your portfolio’s performance with the S&P if you include money that you add to the portfolio. What value is that metric and how would you use it? You aren’t really comparing the performance of your holdings versus the S&P index (or any other) if you count money added, because those indices don’t get to “add money” (though they do count dividends reinvested which is not the same thing)

benchmark net worth asset allocationOkay, I see his point. This year we aim to invest at least $50,000 in our tax advantaged accounts and that will give our net worth a boost. On the other hand, our asset allocation isn’t 100% stock so we are bound to lag the S&P 500 index during the bull years. So using the S&P 500 index to bench mark our progress really doesn’t make a lot of sense from the pure financial sense.

However, I still think it’s a good idea to benchmark our net worth to something and the S&P 500 index is the most convenient thing for me to compare to. After all, stock is the biggest part of our net worth.

Anyway, I’d like to see our net worth grows 5 to 10% every year. The S&P 500 index return about 7 to 12% over the long term so it’s around what we’re shooting for. I guess I could take International stocks, interest rate, and the housing market into the equation, but that’s making it way too complicated. The S&P 500 Index price is very easy to find and it’s a good target for us. We’d be in great shape for full retirement in 15 years if we can increase our net worth 7% every year.

Alternative Benchmarks

Personally, I think it’s a little boring to keep track of your net worth and not benchmark it. You just see the number increase, but the competitive spirit will be missing. If you don’t like to use the S&P 500 index, what else can you use to check your progress? I did some research and here is what I found.

net worth by age income benchmarkAge and Income Median Net Worth

You can compare your net worth against people your age and income at CNN Money. The problem with this method is the Median net worth is quite low. I’m pretty sure 99% of our readers are doing much better than the Median. It’s nice to see that we’re way ahead of the game, but ultimately not very useful.

The Millionaire Next Door Formula

Here is the net worth guideline from The Millionaire Next Door. One of the classic personal finance books, by the way. If you haven’t read it, check it out from your local library.

Net worth = Age * Pretax income ÷ 10

The problem here is this formula doesn’t work well if your income fluctuates. In my case, my income increased until I quit my engineering career. Now it’s lower and I’m sure it will be quite volatile in the coming years. When we retire full time at 55, our income would drop again. Should I pick the highest number and use that? This is a nice benchmark if you’re in a steady career with salary that steadily grows as you age.  This formula doesn’t really work for me as you can see from the table. Also, the net worth results is a bit low.

Age Income Net Worth
25 $60,000 150000
30 $80,000 240000
35 $100,000 350000
40 $50,000 200000
45 $60,000 270000
50 $70,000 350000
55 $25,000 137500

Saving VS Annual Spending ratio

Here is one that I like. The target is to accumulate 20 times your annual spending by the time you retire at 72. I think this is more reasonable if you’re a saver and live below your means. Also, it will be more accurate as you get closer to 72 because you’ll have your annual expense nailed down by then.

Here is the table adapted to my situation. I increased the Saving Ratio to 30x because I’ll be spending more time in retirement than the average person. If you plan to work until 72, then you can increase the saving ratio gradually from 1x to 20x.

Age Saving Ratio annual spending net worth
25 1x $30,000 $30,000
35 10x $50,000 $500,000
45 30x $60,000 $1,800,000
55 30x $70,000 $2,100,000
65 25x $80,000 $2,000,000
75 20x $90,000 $1,800,000

Financial Samurai Method

Here is the suggested Net Worth Growth Target chart from Financial Samurai. The growth rate is extremely aggressive early on because when you’re young, you don’t have much to begin with. It’s easy to grow your net worth 100% if you only have $3,000 in the bank at 25 year old. As you get older and wealthier, it’s much more difficult to grow your net worth. Check out his article if you haven’t read it yet.

net worth growth

*VS Financial Bloggers

You can also compare your net worth against a bunch of financial blogger’s – posted at Rockstar Finance.

Benchmark your net worth

In the end, it’s up to you to find your own benchmark. For me, I like using the S&P 500 index so we have something to shoot for during the bull market years. I think for the bear \ years, I’ll use Financial Samurai’s suggestion which is the Risk Free Rate, the 10-year government bond yield. That’s a nice range for us to shoot for.

What about you? Do you keep track of your net worth and the rate growth? Which of these methods do you like? Let me know if you have a good suggestion. Maybe I should just shoot for a flat 8%.

track your net worthSign up with Personal Capital to help keep track of your income and net worth. Personal Capital is geared for investors and have many great tools. See my review of Personal Capital and how they helped me reduce my investment fees.

 

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.

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{ 38 comments… add one }
  • Ernie Zelinski September 29, 2014, 1:39 am

    First, my net worth when I was 40 years old was MINUS $30,000 (due to student loans). Since then I have occasionally updated my net worth but I have been very erratic about it. I don’t have a benchmark aside from comparing it to people in my age group.

    I found a spreadsheet of my net worth from 2002, when I was 53. My net worth was not all that much given that I have worked far less than 50 percent of my adult life.

    Having said that, about 4 months ago I did an update of my net worth and was surprised to find out that it increased an average of well over $50,000 a year since 2002. I can’t tell you exactly where this increase came from, however. Certainly not from real estate, given that my home is worth $25,000 less than I paid for it in 2007. What’s more, since 2002 I lost another $10,000 on a condo unit that I purchased and then sold.

    Now that I am 65, I know that my net worth is definitely in the top 20 percent of households in my age group. (I am single so my household has had only one person contribute to its net worth.) Incidentally, I haven’t included the value of my intellectual property (my books) which presently generates me an income of over $100,000 a year. That asset has to be worth at least another $300,000.

    Here are two of my favorite quotations that have inspired me to get to where I am today in net worth and prosperity:

    “If you follow the crowd, you will likely get no further than the crowd.
    If you walk alone, you’re likely to end up in places no one has ever
    been before. Being an achiever is not without its difficulties,
    for peculiarity breeds contempt. The unfortunate thing about being
    ahead of your time is that when people finally realize you were
    right, they’ll simply say it was obvious to everyone all along.
    You have two choices in life. You can dissolve into the main
    stream, or you can choose to become an achiever and be
    distinct. To be distinct, you must be different. To be different,
    you must strive to be what no else but you can be.”
    — Alan Ashley-Pitt

    “You are only as rich as the enrichment you bring to the world around you.”
    — Rajesh Setty

    In summary, net worth is great. But it is just as important to be able to generate great new creative ideas on how to make some substantial money in the future, particularly without having to work in a corporation.

    Ernie J. Zelinski
    The Prosperity Guy
    “Helping Adventurous Souls Live Prosperous and Free”
    Author of the Bestseller “How to Retire Happy, Wild, and Free”
    (Over 200,000 copies sold and published in 9 languages)
    and the International Bestseller “The Joy of Not Working”
    (Over 275,000 copies sold and published in 17 languages)

    • retirebyforty September 30, 2014, 9:15 am

      That’s fascinating. That’s a big turnaround from 2002. It must be your intellectual properties that increased your net worth over the years. Thanks for the quotes.

  • Mr. Frugalwoods September 29, 2014, 4:30 am

    While I certainly have a long term net worth goal, I don’t really benchmark against that goal on a yearly basis. So much of my “net worth” at this point is subject to the whims of the market that investment gains/losses dwarf my (still substantial) yearly contributions.

    If the market is good, then my net worth increases. If it’s bad, it decreases. In neither case should I pat myself on the back or mope around 🙂

    We do carefully benchmark and track our spending rate though. That’s something we have almost total control over, so we can optimize it to the nth degree!

    • retirebyforty September 30, 2014, 9:17 am

      You must be doing very well if the market gains/losses dwarf your contributions. That’s the end goal, isn’t it? Eventually, the market gain will be able to pay your whole expenses.

  • Jon September 29, 2014, 5:13 am

    I track our net worth but haven’t compared it to a benchmark – yet. Reading this has just given me an excuse to crunch more numbers and I thank you for that!

    I think I will go with the saving vs spending ratio as a trial and see how that goes. If that doesn’t work out too well, I think I might just shoot for a flat percentage as you mentioned. As long as our net worth is growing at a reasonable rate, I think that is the most important thing.

    • retirebyforty September 30, 2014, 9:18 am

      Adjust the saving ratio to your personal situation. If you’re planning to work longer, then set 20x at the end of your career. If not, then increase it a bit for early retirement. I think it’s a good benchmark too. I should add a table with more granularity.

  • Dave in Sunny FL September 29, 2014, 6:06 am

    The idea of net worth is where the Rich Dad definitions of Asset (“Anything that puts money in your pocket”) and Liability (“Anything that takes money out of your pocket”) become so significant. A family with a $1 million personal residence might have the same net worth as a family with $1 million of rental property (under a bank definition, or the one you used at the top of your article), but they are in no sense in the same relative financial position.

    • retirebyforty September 30, 2014, 9:20 am

      I like that definition too. Using investible assets is one way to do it. You can still sell the personal property so I think it has a place in the calculation.

  • Kenny September 29, 2014, 7:28 am

    I used to do NW calculations religiously when I was younger, and then after the career took over my life, it was hard to do it. It was all about career and asset management. Now, it is all about keeping the job going, and watching for any leaks in the money pot!

    So, can you please write about how the Networth Computations should be done, and possibly allow access to some free tools that might be out there (in XLS form) more than putting all numbers on a website (too public for me).

    I hit $100K in networth in 1986 and since then it has grown from there. I strive to be debt free which I am and it was the single biggest reason why my net worth increased. It did not come without sacrifice, but it is/was all worth it in the end. I was able to buy a condo for my kids to go to college, and have a separate home for us empty nesters. Kids love it since they have their own place between the two, and this is a luxury for them only with all of those small sacrifices.

    Computing networth is critical and that is what attracted me to your site in the first place since you were so open in your computations. I love the CNN site and I played the numbers for various ages and incomes and many thanks to God and America to allow me the opportunity to be above those numbers.

    Hard Work + Sacrifices + Right Investments + A Good Plan = Exceed CNN Networth Stats

    Thanks for great articles and ideas.

    Kenny

    • retirebyforty September 30, 2014, 9:22 am

      Sure, I will put that on my list. An excel sheet is a great way to do it. I’ll come up with a form and upload it here.
      It looks like you’re well ahead of your age group. Congratulation! That benchmark is pretty low, though.

  • kammi September 29, 2014, 8:27 am

    Yes I do check my net worth. I have no debt, but I’m determined to be a mult-millionnaire and exit the market by the time I hit 65! (I’m 30 now but I’m doing well..I should be able to to get there!) I want to have choices and be able to enjoy a higher standard of living as my age increases.

    • retirebyforty September 30, 2014, 9:22 am

      Good luck in your journey. You’re so young and I’m sure you’ll be able to get there. It’s all about determination.

  • Mom September 29, 2014, 8:56 am

    I only benchmark myself against myself (year over year, month over month, etc) and compared to my expected growth plan before retirement. It concerns *primarily* our contributions, and only somewhat our investment returns.
    You could use a weighted rate based on your allocation. If you have 80% stocks, 20% bonds, you can use 80 of the S&P increase and 20% of a bond index’s increase to get a decent gauge of your progress.

    • retirebyforty September 30, 2014, 9:24 am

      What kind of percentage do you get year over year? When I was younger, I could easily hit double digits because the contribution is higher than the stock market gain. Now, it’s quite difficult to hit double digits.

      • Mom October 1, 2014, 9:11 am

        Right now, we’re at 30% from September 2013 to Sept 2014 – but I’d say *most* of that is from contributions. I’m shooting for 6% investment gains because of our allocation mix right now. As we get closer to retirement, that goal is likely to decline to 4% as I shift more towards bonds.

  • J. Money September 29, 2014, 10:33 am

    You could also compare it with a bunch of us financial bloggers who share it with the world too 🙂 Here’s a list of 80+ I’ve put together so far:

    http://rockstarfinance.com/blogger-net-worths/

    Though keep in mind we’re all in different phases/ages with and without kids too. And living all across the world 😉 Lots of variables to consider!

    • retirebyforty September 30, 2014, 9:24 am

      Great! I added it to the main article. Thanks.

  • cato September 29, 2014, 10:38 am

    I only benchmark against what my target goal is. Using general tables, formulas, or median reports usually don’t make sense to me because I live (and will retire) in a high cost area. I know what my major expenses will be and what my retirement income will also need to be, for how long, and and when so I just break down the targets by year to the PV. I’ve been tracking using this method for about 22 years and it seems to be working well. I suppose it is interesting to see where others are at, but it would help of there was more granularity in the data.

  • LeisureFreak Tommy September 29, 2014, 11:07 am

    Because I retired early and hope to do so often I consider any income I earn pursuing an opportunity I am passionate about as a short-term bond (the Bond called ME) and do count it that way in my yearly net-worth tracking. Because my retirement is fully financed from my investments, 100% of any earned-income (minus taxes/commuting expenses) are saved/invested. As I move that earned-income money to other holdings its treated like any other re-balancing of asset allocations would be treated. Because I am pulling funds from my accounts monthly to finance my lifestyle, my goal is to always have a higher end of year balance than I started with and I track that difference. Some years my net-worth increase its significant and others not so much. Depends on the market and the performance of the ME bond. My spending discipline is usually always on track but anything there that causes a hit is also tracked. Like you said, do what works for you. Good post.

    • retirebyforty September 30, 2014, 9:27 am

      Wow, that’s an interesting way to look at it. I love the ME bond concept. I should adopt that too. That would be a great future topic.

  • EL September 29, 2014, 11:20 am

    You have to track it in order to grow it. If you blindly invest and do not have the data, how do you know your on the right path. I try to grow it every year by at least 10%, so heres to good market appreciation and dividend compound growth.

    • retirebyforty September 30, 2014, 9:29 am

      10% is a great goal. I don’t know if we can hit that target at this point.

  • Tawcan September 29, 2014, 2:26 pm

    I only benchmark against myself and compare the year over year improvement. It’s interesting that you mentioned The Millionaire Next Door Formula. When I ran it through I found that we’re doing much better than the formula. That’s a bit comforting considering years ago when I read the book we were nowhere close.

    • retirebyforty September 30, 2014, 9:30 am

      Great job! The millionaire next door formula is a bit too difficult when you’re young. The linear scale doesn’t work well for net worth. I think it’s much easier to meet their target when you’re older.

  • Anton Ivanov September 29, 2014, 4:46 pm

    I love comparing my net worth against other people and various benchmarks. Thanks for putting all of these resources together on one page!

  • Justin @ Root of Good September 29, 2014, 5:13 pm

    I don’t compare my own NW to any benchmarks. I do track it though. I have a detailed spreadsheet with quarterly NW data for over 10 years. And now I’m using Personal Capital, so I can take a look at any time.

    When I look at my changes in NW, I’m focused on WHY the different parts of the balance sheet change. Liabilities – am I paying down debt fast enough? Assets – am I contributing enough to investments; are they properly invested in the right places?

    I track investments and compare to index returns. Since I invest in indexes, that’s about what I should get anyway, so it’s normally pretty boring! Which is good…

  • Clay September 29, 2014, 7:24 pm

    I don’t particularly care too much for benchmarking my net worth.

    According to this: http://www.shnugi.com/networth-percentile-calculator/

    Having a $0 net worth for me (25 years old), would mean that I am ahead of a quarter of my peers. My guess is that this is due to student loans not being paid off yet. Frankly, it seems like most folks my age are still too busy going out and living their lives than planning for retirement. This might sound slightly arrogant, but I don’t want to benchmark myself against the average 25 year old because it might make me a bit too comfortable with where I am at.

    I look forward to retiring early (or at least having the option to), and I’m not so sure that benchmarking my net worth would help me move forward.

  • No Nonsense Landlord September 29, 2014, 8:49 pm

    I generally beat most of the statistics, if I am allowed to include my home equity. I even beat all of the bloggers, but I still feel broke…

    • retirebyforty September 30, 2014, 9:31 am

      Why do you feel broke? It sounds like you’re doing really well. You should give yourself a pat on the back. 🙂

      • No Nonsense Landlord October 2, 2014, 2:24 pm

        Good point, but I have been paying off debt like a madman. Lots of RE equity, and decent IRA/401K balances. The other accounts are just a number…

        Soon I will be hanging up the spurs.

  • DividendDeveloper September 30, 2014, 8:00 am

    I do track my net worth meticulously, and have been for about a year. However, I don’t benchmark it against anything. All I really care about is the income my portfolio generates, not the overall number. Though, when I need an ego boost, I do compare it to others’ in my age group (I’m 23), just to remind myself of how good I’m doing 🙂

    • retirebyforty September 30, 2014, 9:32 am

      Great job at your age. Tracking the income is a great way to look at it. It’s more relevant if you want to retire early.

  • nicoleandmaggie September 30, 2014, 8:59 am

    Nope, I don’t! And I’m always pleasantly surprised when I tally everything up. Set and forget works for us. I’m sure we’d spend more if I kept closer track of our finances because I’d feel like we could loosen up more, but that wouldn’t make us any happier.

  • supernova72 September 30, 2014, 4:15 pm

    I do as well mostly because I have a Will and wanted my sister to know where I was at in case I get hit by a train. Coming up on 30 yrs at a megacorp and been trying to save in the ol 401K as close to company match early on and now to the pre-tax max.

    Far from rich and this is not bragging rights but just north of $1M now close to 54 in age. Our early retirement is 55. Hmm…

    One question I had was how to treat my defined benefit pension plan? Financical Samuri says Yes count it in your net worth. So far I haven’t included but now realize to get my monthly pension would cost me about $650K in the form of a lifetime annuity if I do the reverse math on immediateannuity.com

    I see many more folks on Earlyretire.org that have closer to $2M. Part of me says its all relative and the other part says they’ve saved “more than me”. Ha!!

    • retirebyforty October 1, 2014, 11:12 am

      I think you should count your pension in your net worth as well. I’m not sure how to give it valuation, though. I guess going with the annuity is good. When can you draw on your pension? 65?

      • supernova72 October 1, 2014, 1:21 pm

        I can draw at 55 which is the earliest date. 60 yrs old is considered “full retirement”. There is a slight penalty at 55 but not too bad actually. Our pension will be frozen to new accruals in 2016 so that is a driver as well.

  • john s. October 1, 2014, 1:53 pm

    On a slightly different topic — Glad to see the reference to “The Millionaire Next Door” and your realization that it is still a great and very relevant book on personal finance. Co-author Bill Danko is a former neighbor of mine and I interviewed him for a couple of publications I was freelancing for at the time when the book began to take off on the NY Times list. I’m guessing that anyone who follows this site would thoroughly enjoy the book.

  • MoneySheep October 6, 2014, 3:54 pm

    I have done extensive scenarios to estimate the amount I need to retire. I am comfortable that 20x spending amount is right multiplier. So if I cut down on my spending needs, I can retire early. The spending is increase by the average inflation rate in retirement.

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