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?
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?)
Posted by: rob | February 20, 2007 at 11:43 PM