Americans have a funny relationship with money. We, as a society, celebrate the ostentatiousness with which the Kardashians live their life on TV. They are famous because they are rich, have cameras, and show a little vulnerability so people feel like they can relate.
TV is entertainment. It's an escape. It's fun. I don't begrudge that or them.
But it becomes dangerous when you start internalizing that, confusing net worth for self worth, and bringing that thinking out of the experience.
Your net worth is a lot like your weight.
It's a single number that does an adequate job of capturing your financial health but it's not the most important.
You can calculate it quickly, especially when using a free tool like Personal Capital, and accurately with much work.
But you can't compare yours with someone else's without knowing a lot more information. The average lineman in the NFL is over 300 pounds – is that a healthy or unhealthy weight? Now factor in their average height of 6′ 5″. And how quickly they can cover 40 yards (around 5 seconds).
Your net worth is valuable to know, net worth benchmarks are valuable to compare against, but it is just one metric. A valuable metric but not the ultimate one.
The One True Benchmark
Before you see these five net worth benchmarks, I want to share the only true “benchmark” that matters.
We all start at different points. I was fortunate that my parents emigrated to the United States, were well educated and employed full-time for my entire life, and were able to provide financial assistance in college. I graduated with $35,000 in student loan debt but that's nothing compared to some of my peers.
I had it good.
So when I point to my net worth in my twenties, that's a function of my good luck. I chose a degree that was in demand (Computer Science), got a good job in a strong industry (defense), and my net worth improved each year.
And that's the one true benchmark – me vs. last year. Me vs. 5 years ago.
Understand your own financial progress. Over a five year window, your net worth should increase. Year to year it might fluctuate, but the trend should be moving upwards.
That's it. That's the one true benchmark. Yourself.
Also, home equity plays a role in net worth but it's not always clear how you should value your home. I set it to be the purchase price and never touch it. It's not ideal but it's simple. Here are a few other ways to determine how much your home is worth.
Now, onto these benchmarks.
1. Positive Net Worth 10 Years After Graduation
(I say graduation but I mean 10 years of “full earning potential” — so if your career involves relatively low paying residencies or internships before “full earning potential,” take that into account)
This first net worth benchmark is more about managing your debt than anything else.
That first year you're out in the real world is an expensive wake-up call. If you rent an apartment, expect to put down the first and last month's rent plus a security/cleaning deposit. If you don't yet have a car, expect to get one to help you get around unless you're fortunate and live near mass transit. Depending on your level of fiscal prudence in school, you may have some credit card debt too.
All that will result in a negative net worth. Aim to get that to a positive within ten years of graduation.
The wildcard in this benchmark is student loan debt. Like a car loan, it's an enabling debt. With a degree, you'd expect to get a higher paying job than without. It's also like a car loan, buy too much car or too much college and you'll be paying for it.
This benchmark is meant to be a target – push hard for this. You are not a failure if you don't achieve this. You are not a success if you do. It's merely the beginning.
2. Net Worth by Age and Income
The Millionaire Next Door has my favorite equation for how much net worth and it's based on your pre-tax income (excluding inheritances and other one-time events):
It's very simplistic but benchmarks are supposed to be simple. It has a tendency to be high early on (the first 5-10 years of full time work) and doesn't account for geographic costs of living. Or fluctuating income. Or a million other things.
If you are 25, make $50,000 a year pre-tax, then you “should” have a net worth of $125,000 according to this equation. If it's your first year working, that's unlikely. It's also unlikely if it's your third year working and you live in Manhattan!
It's still a good measuring stick because it accounts for income and age.
3. Net Worth by Age
This chart comes from the Federal Reserve Bulletin's Survey of Consumer Finances from 2013 [PDF]:
If you want to know how you're doing compared to your peers, it's on the chart!
|Age of head (years)||Median Net Worth (2013)|
|36 – 44||$46,700|
|45 – 54||$105,300|
|55 – 64||$165,900|
|65 – 74||$232,100|
The ranges are very wide, a lot can happen in 9 years, but they give you an idea of where the population is.
This is the most recent published version of this survey. A 2016 edition was completed but the results have not yet been published.
4. Average Savings Rate
If your net worth is equal to assets minus liabilities, assets play a pretty big role, right? How do you get those assets up without incurring liabilities? Saving money!
The average savings rate of Americans, according to the Federal Reserve Bank of St. Louis, is around 5.5% at the time of the original publication in March 2017 (it's since risen to 6.0% in November 2018). That means for every $100 earned, only $5.50 goes towards things like a savings account, retirement accounts, etc. This is a pre-tax figure, so savings is income minus “outlays” (expenses) and taxes.
Of course, how much you make matters too. The more you make, the more you save…. right? Generally, but not necessarily.
To recap – average is 5.5% but you should adjust for income too. 31% of all respondents saved 0% and 27% of all respondents saved between 1-5%, but that leaves 41% savings 6%+.
5. F.T.I.- F&*% This Index
When your FTI > 1,000 – tell your boss to … pound sand.
He retired with an FI of 1435 – at the age of 41 with a net worth 35 times his expenses. You are financially ready to retire when your FTI is over 1,000 so he had plenty of breathing room.
At it's core, it's an expenses driven ratio with a nod towards your mortality, represented by your age.
This only applies to the money side of readiness. If you enjoy your job, it's low stress, it's not a bad way to live to keep working. I like to work because I enjoy learning, being productive, and growing through challenges. Removing the financial stress and pressure makes it all the more enjoyable.
Just because you can retire doesn't mean you must retire.
It's also a more conservative “FU number” figure than the 4% safe withdrawal rule (which is arguably not all that safe anyway).