Sponsored Links..

Great Offers

Search

  • Google
    Web FMF

Disclaimer


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. All posts are © 2005-2009, Free Money Finance.
Blog Widget by LinkWithin

« MND: Millionaires are Frugal | Main | Four Decades to Prepare for Your Retirement »

An Easy, 3-Step Wealth Score

I recently posted on the formula that The Millionaire Next Door uses to determine what a person's net worth should be. There was lots of discussion over this formula with several people suggesting alternative ideas. So when I saw this article on Money Central that helps determine a wealth score, I just had to post on it. Here's the summary:

A key ratio -- net worth divided by lifetime earnings -- provides a telling gauge of your financial progress, no matter how big your paycheck.

Here are the details:

Step 1: Add up your lifetime earnings. You don’t have to go searching for your old tax returns; just use the handy summary Social Security sends you every year, a few months before your birthday.

Step 2: Calculate your net worth. This measure of wealth is basically the total of all your assets (investments and property) minus your liabilities (your debt).

Step 3: Divide your net worth by your lifetime earnings. This is what all your labor has achieved for you in terms of tangible wealth.

Rick Ulivi, a fee-only financial planner in Orange, Calif., likes to have his clients do this calculation. He wants to see the following ratios:

  • For young clients early in their careers, the desired ratio is somewhere between 0 and 25%.
  • For clients in midcareer, he wants a ratio between 25% and 100%.
  • By the time they’re ready for retirement, the preferred ratio is 100% to 200%.

Exceeding these ratios is great, of course -- just not very common.

Surprisingly, these calculations were very similar to what some Free Money Finance readers were suggesting. Do you think this is a good way to measure wealth?

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83451bcbd69e200d8342457f153ef

Listed below are links to weblogs that reference An Easy, 3-Step Wealth Score:

» What are You Worth from David V. Lorenzo
Here is a good post from Free Money Finance on Net Worth. There is more to life than money but if you measure it, you tend to manage more effectively. Give this method a try and see if it helps [Read More]

» Net Worths of Financial Bloggers, October 2005 from Free Money Finance
Here are the net worth's of personal finance bloggers that I've collected for this month (in the order that I discovered them): My Open Wallet -- $245,124.76 MMB's Personal Finance Journal -- $180,198.72 Financial Baby Steps -- $2,164.67 Consumerism Co... [Read More]

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

How does this accommodate for inflation?

Ie - Saving 10% of $20,000 30 years ago should be worth a whole lot more than the $2K it shows on paper now..
(Or do you feel that the percentages even that up?)

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Site Sponsors



FMF Twitter Updates

    follow me on Twitter

    Associations



    Money Blogs

    Stats