Find Out How Your Net Worth Ranks Compared To Average Savings By Age And How To Grow Your Money Faster
- Two quick ways to determine if you’re building enough wealth.
- How your “why” makes or breaks your wealth growth.
- 12 essential questions that reset your financial priorities.
Are your plans for wealth and financial freedom on target, or behind schedule?
Below is a quick and dirty self-test that will show you, at a glance, how your wealth building measures up.
I also include a few tips to improve your future results.
But before we can start, we must first agree on the best financial measuring stick to use.
The obvious answer is net worth, but it's not that simple. There are some nuances that must be considered…
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Average Savings By Age: A Quick Way To Measure If You're On Track For Building Wealth
Is a 30 year old with a $50,000 net worth necessarily less successful at building wealth than a 60 year old with $200,000?
The 60 year old has a lot more money, but a lot less time.
How do you take into account age differences, inheriting money, lifestyle differences, and lifetime earnings differences?
In “The Millionaire Next Door” by Stanley and Danko, the authors provided a reasonably workable formula for judging your success or failure at building wealth. The formula is as follows:
“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.”
This formula is hardly revolutionary because it’s little more than a twist on the classic 10% savings rule. It’s a tried and proven formula based on sound mathematics.
While it isn't perfect because there are many additional considerations such as inflation, taxes, and interest rates to factor in, it does provide a useful approximation that serves as a quick, simple, and easy-to-calculate snapshot of how well you’re progressing toward financial freedom.
For example, if you were a 35 year old earning $100,000 per year with no inheritances, then you should have a net worth of $350,000 because ((35 x 100,000) / 10) = 350,000.
A person in this situation would be considered “on track” for reasonable wealth accumulation. He isn’t a super achiever, but he isn't lagging either.
Now it’s time for you to calculate your number using your age and earnings.
Have you calculated it yet? If not, please do it now before reading on.
Are You An Exceptional Wealth Builder?
Stanley and Danko went on to create two variations to their basic formula.
People whose net worth is twice as large (>2X) as the formula would indicate they are prodigious accumulators of wealth (PAWs).
People whose net worth is less than half their expected number (<.5X) are considered under-accumulators of wealth (UAWs).
These two benchmarks are as good as any at cutting to the chase and telling you how your personal financial management skills and investment skills are measuring up. Are there valid criticisms about the accuracy of the analysis? Absolutely yes! However, they are useful benchmarks considering it's a simple rule-of-thumbs.
Remember, judging by results is often harsh, but always fair.
“It is the sign of a weak mind to be unable to bear wealth.”– Seneca
How are you doing? What were your results? Are you a PAW, a UAW, or are you stuck somewhere in between?
This is your wake up call. You’re being given a health check-up on the journey to retire early and wealthy. Is your financial strategy sick, or are you looking like a world class runner?
Are you on track or behind schedule?
I've run quite a few scenarios using Stanley and Danko's formula, and I've concluded being a PAW is a very realistic, if not conservative, standard for satisfactory progress toward achieving normal financial security and retirement.
I encourage you to test this formula yourself and run your own scenarios. It doesn't take long to figure out how anything less than a PAW is living on financially shaky ground.
Why? Because true financial freedom results when your passive income exceeds your expenses.
If you look at the results of PAW status and apply current interest and inflation rates, you’ll quickly see that for many situations and assumptions, you wouldn’t want to retire with anything less than PAW status.
For example, a 60 year old married couple with $100,000 annual salary would need to have $1.2 million or greater to be PAW's.
Not a bad sum, but take out home equity and multiply the remainder by the current interest rates. You’ll find you’re getting pretty thin for someone accustomed to living on $100,000 per year. (See the How Much Do I Need To Retire ebook for a complete analysis)
They aren't going to starve, but abundance wouldn't accurately describe their situation, either.
In other words, PAW status is a reasonable minimum threshold of wealth building you should aspire to.
“Early to rise and early to bed makes a male healthy and wealthy and dead.”– James Thurber
It’s worth taking the time to evaluate your progress. You’re being given a sneak preview into your future while you still have time to take corrective action to improve your situation.
If you’re a PAW then congratulations, you’re doing great.
If you’re less than a PAW, then this course will show you exactly how to play the wealth building game smarter in the future and improve your status.
How To Accelerate Your Wealth Building
Avid readers of this site already know I diverge from conventional financial experts when teaching you how to accelerate your wealth building.
The reason is simple – the traditional approach rarely works.
Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.
Stanley and Danko make the classic mistake of immediately focusing on the “how-to's” to help people understand what it takes to get wealthy.
They teach you how the millionaires became millionaires. That’s the focus of the bulk of their book.
In fact, that’s what most wealth educators focus on. They teach you how they achieved financial freedom and which particular path to wealth worked for them.
The focus is on the mechanism – not the cause. Below are some common wealth building themes taught by popular gurus.
- Leverage is the key to building wealth.
- Wealth exists within the tax code.
- You must develop your competitive advantage.
- Find your niche and your passion: your wealth will follow.
- Invest in the stock market.
- Invest in real estate.
- Build your own business.
The assumption in most wealth building courses is that the path is the key – not the person.
Teach any student how you did it and they’ll duplicate your success. Give them the tools and they’ll have what they need to put them to good use.
Sorry, but I’ve coached many clients to financial success over the years, and that’s a fatally flawed assumption. It just doesn't work that way.
The reality is humans aren't computers. You can’t input X and get a predetermined output of Y.
Just because one person followed a particular path to wealth doesn't mean anyone else can duplicate their success using the same strategy. Humans aren't that simple.
“All prosperity begins in the mind and is dependent only on the full use of our creative imagination.”– Ruth Ross
If it was that simple then everyone who wants wealth would already have it. The internet and your bookstore are filled with more “how-to” courses on investment strategy and wealth building techniques than you could consume in a lifetime.
Everything you need to know already exists in print, yet you aren't wealthy. Something besides “how-to” knowledge must be necessary since there’s no shortage of it. But what’s missing?
The reality is learning any particular path to wealth won’t do you any good until you first learn how to get on the path and stay on the path in the first place.
You’re the cause of your wealth (or lack thereof) and getting clear on your commitment to building wealth is the critical first step that will make or break your success.
The how-to mechanism will naturally follow when your commitment is clear.
Without a clear commitment, no amount of “how-to” can help your success.
In fact, when I first began coaching clients, I made the exact same mistake as everybody else. I naively believed that teaching people the “how to’s” of building wealth would work for them just like it worked for me.
Just show people the tricks of the trade and they’ll emulate the success of the teacher.
Needless to say, it didn't work. What I learned is that “how to’s” aren’t what most people need to succeed.
What separates people who achieve wealth (PAWs) from those who don't (UAWs) is the “why”. You must get crystal clear at a deep, emotional level what this journey to wealth is all about for you.
Here are 12 questions you can ask yourself to gain clarity.
- What does building wealth mean to me?
- What will I get by becoming wealthy?
- How will financial freedom positively impact my life?
- How can I build wealth congruent with my deeper values?
- What price will my family pay for not building wealth?
- What price am I paying today because I'm not financially free now?
- What will my life look like once I have financial freedom?
- What are the obstacles that have kept me from building wealth up until now? How am I going to overcome them?
- Why should I prioritize my time, energy, and money to make financial freedom happen above other activities competing for my limited available resources?
- Why go through all the effort? Why not just relax and enjoy the day?
- How can I build wealth and still lead a balanced and fulfilling life?
- What’s wealth building really all about for me and how does it fit into my life?
“Wealth is the slave of a wise man. The master of a fool.”– Seneca
Clarity around questions like these will strengthen your commitment to building wealth. This will motivate you toward consistent and persistent action.
Your drive for wealth must become deep enough to prioritize the actions necessary to reach the goal.
If your “why” isn't strong and clear enough to make building wealth a priority, then it won't happen.
Life will always distract you with something else more important. It’s as simple as that.
Having the “how to's” without the “why” is like owning a car without gas in it. You won’t get very far or go very fast because the “why” is the fuel that creates action.
Without fuel, the vehicle is a motionless, clump of metal.
When you get the “why,” then the “how to’s” will follow. That’s the great, unspoken secret that I learned in coaching people like you to build wealth.
The “why” is what drives you to take action, and the “how-to” is the tool or mechanism by which you implement the action.
A tool without the impetus to use it is useless. A driven person will persevere until he finds the right tool – and that makes all the difference.
That’s why successful people persist in their success despite changes in market conditions that might force them to abandon or replace their “how-to” strategy.
They just correct and adjust their plans because the “how-to” is merely a mechanism or tool, and their drive is the real reason for their success.
The drive that results from their commitment to financial success causes them to find solutions no matter what gets in their way.
Conversely, you can give a proven formula for building wealth (perfect for current market conditions) to an uncommitted coaching client, and they’ll still fail.
Again, the “how-to” strategy is just a mechanism or tool. It’s not the critical element that leads to wealth.
PAWs choose many different paths to financial freedom, but the common denominator they share is a strong “why” that firmly commits them to building wealth.
Stanley and Danko missed that essential point, but that’s why they’re wealthy.
How To Find Your “Why” For Building Wealth
Many people are fortunate and find their “why” on their own. No course is required.
I discovered my “why” when I was in high school, and I’ve coached others who were equally clear about their “why”.
Unfortunately, this is the exception rather than the rule. They're the lucky few who can build wealth using how-to information.
The rest (likely you) get stuck in a frustrating loop where they learn great information but fail to implement successfully.
They know what to do, but they just don't do it “for some strange reason”.
That's why commitment based on a compelling “why” is the make or break step to financial freedom. Unfortunately, it’s a step that’s seldom completed.
The reason it’s the make or break step is because life is filled with distractions, and most people have conflicting values and desires that muddy the process of gaining clarity about building wealth.
While the information necessary to complete the process on your own is available, it’s spread out among various sources and disorganized, making it hard to assimilate.
That’s why I wrote a step-by-step system that walks you through the process of developing your personal “why” so you can successfully build wealth.
It's a complete course of instruction showing you everything you need to know, and it includes the support systems you need to put it into action and produce tangible results.
Remember, this self-test is your wake up call. Are you on track to financial security? Either you’re a PAW, or you're not. The results never lie.
Anything less than a PAW means you’re behind the curve which puts financial security for you and your family in jeopardy.
Don't take my word for it. Run the numbers yourself. The results will speak for themselves.
If you keep the financial habits you have now for the next three years, where will you be three years from now? Five years from now? Ten years? What are you going to do differently?
When you get clear on your commitment to building wealth by knowing your “why,” then you’ll transform the results you produce.
I've done it with numerous clients, and it can work for you too.
You can learn more in this course here.
"Discover The Comprehensive Wealth Planning Process Proven Through 20+ Years Of Coaching That Will Give You Complete Confidence In Your Financial Future"
- Get a step-by-step action plan to achieve financial independence - completely personalized to you.
- How to live for fulfilment now, while building wealth for the future.
- No more procrastination. No more confusion. Just progress and clarity
Expectancy Wealth Planning will show you how to create a financial roadmap for the rest of your life and give you all of the tools you need to follow it.
Lance @ My Strategic Dollar
Awesome article! I like how you applied the millionaire next doors logic and then went deeper into examples. Well written!
Great article. Net worth is all savings and property less debts. The older you are you will own a home and hopefully have no debts. Your income needs are less. Doing that math. I am doing quite well. I did the same using what my salary was at age 50 when I retired. I found out I was doing more than fine then as well. And then I had house debt, and others. I have no debts since I reached 62. This formula is good to check as you age as well.
Insightful and substantive, as always.
4.55x the formula for our family. I would agree, 2x is conservative. Why seems pretty easy to me though, who would want to continue to sacrifice their time in to earn other’s wealth?
Does this mean a 15 year old should have $150k saved up? A 21 year old just finishing college, $210k? Todd, you’re a smart guy – this formula needs to be further adjusted based on a starting age. Perhaps 15 x (Your Age – 21)?
As I stated in the post, it’s just a rule-of-thumb and therefore extremely limited. Regarding your criticism, I don’t know of too many 15 or 21 year old’s analyzing their savings rate as related to their income (not the target market for the post). And as long as you’re picking details, it’s age multiplied by income for the numerator so if they’ve been students their whole life then the answer is zero (not the numbers you listed) so it will actually work well in your example anyway (but I get your point and agree). So yes, if you want to take the analysis seriously then you need to go beyond simple rules-of-thumb using my Ultimate Retirement Calculator and the information in my book “How Much Money Do I Need To Retire“. But IMHO, I still stand by the idea it’s a useful rule of thumb, as far as rules of thumb go. Another rule of thumb is based on spending instead of earnings. It’s 25 to 33 times first year spending in retirement. It also has limitations, but is a similarly useful rule of thumb. To get more exact requires my calculator and book. Hope that helps!
This method might work for those in previous generations, but it’s completely unrealistic for most Millenials who are struggling to accumulate wealth due to student loans and high rent prices. Most can’t even afford to purchase a home even if they wanted to due to the crushing load of student debt they took to achieve even the most basic credentials entitling them to an entry-level job in this world. Maybe by the time they’ve reached their mid-thirties they will have been able to get out from under this mountain, but even then their net worth will likely still be far below this stated standard. In most urban areas, where young people migrate and where a 35 year-old could be expected to have reached a $100,000 salary, their rent is easily pushing 40-50% of a single person’s income. If your a DINK (dual income no kids) you might achieve this standard, but overall there are a lot of qualifiers necessary to reaching PAW status.
An entire generation is essentially handicapped. If your response is “We’ll these are the numbers and they aren’t changing because circumstances are hard” then its clear that our future as a country is only more inequality and paycheck-to-paycheck living for its citizens.
I disagree with you 100%. State your limitations and you shall have them. I personally know many in the millennial generation doing better than previous generations because they’re better educated with access to better information thus making wiser decisions than those before them. If you look for the cup half empty then that’s what you’ll see. Are there problems and challenges? Yes, of course. But there has never been a better time to build wealth and achieve freedom if you know what you’re doing. I recommend you see the discussion in my related post on this site “How Any Can Achieve Financial Freedom In !0 Years or Less“. It will either open your eyes to other possibilities, or irritate the daylights out of you.
This post was really interesting especially the part where you question yourself with them 12 questions.
I’ve just tested myself in a practical way to really just self-review why wealth building is important to me using these questions and I must admit some of the questions make you think deeply.
After completing my test I can already feel an emotional attachment to why I actually want to achieve a specific level of wealth going forward and this is from just completing that practical test.
My unlimited goal for wealth isn’t to live a life full of expensive materials it’s more about securing a financial future for a life of comfort where I can support myself and family as time progresses without having to rely on the system or anyone else for financial aid.
I’ve also always been interested in learning how to make money work for me from investing. For now, though, I’m just increasing my capital value learning my trades which I will be leveraging for the future.
I’m going to keep my practice sheet with your questions and my answers and place it where I can see it and read it daily.
Thanks for sharing.
How one can calculate her networth if she is only in above the middle ground of total networth for her age because she put two brothers to University and built a house for her parents and until now still support her family financially ?
It’s still counted the exact same way. The math is the math. I hear all your reasons, but money doesn’t care about reasons. It obeys math. I’m not trying to be insensitive, but that’s just the inviolable reality of how this works.
What about someone who will be getting a pension (teacher)? Granted, the states seem to be whittling them away, but they have about 10 years to go before retiring and will be getting about 55% of salary based on last few years average salary.