Net Worth Increasing by More than Your Expenses

Here's a great comment in response to my post titled Net Worth Increasing by More than Your Salary where it was suggested that people should work towards the point of getting their net worth to increase by more than their salary:

I think a better (and more achievable) goal is to try to get to a point where your net worth increases by more than your EXPENSES for the year. This involves trying to both 1) increase your gains and 2) lower your expenses.

If one can sustain this level of net worth growth, retirement is within reach. This is the basic idea in the book "Your Money or Your Life".

Good point. I should have thought of this myself.

The one thing I would add is that you want to get to the point where your net worth BY ITSELF increases more than your expenses. For instance, my net worth will increase by more than my expenses this year, but much of that increase was due to my saving -- in my 401k and other investment accounts -- in addition to the simple growth of my investments. I think that's the same issue the second commenter was addressing when he left this note:

Nigel makes a great point about comparing to expenses, but I would also suggest being mindful of which items are counted as part of the net worth statement. A home is an asset, in as much as you can convert it into money, but if 20% of your net worth increase comes from the home then the numbers are deceiving. Your residence won't generate passive income.

To refine the definition a bit more, I would use expenses as the denominator and dividends as the numerator. In retirement will you be content to live with the volatility of +/- 15% market swings? Maybe your portfolio will be weighted with boring bonds and treasuries.

A lot of advisors suggest targeting a 4% return. Put another way, you should have investments worth 25 times the amount you expect to draw in a given year. (I could go on, but I'll stop there)

That's a fairly decent formula, though I might suggest dividends plus investment growth as the numerator.

Anyone else want to add their thoughts to this discussion?