Feb 172020

What should your net worth be?

Author Thomas J. Stanley, first published his Wealth Equation in the book, Marketing to the Affluent. He states that your householdโ€™s net worth should equal 10% of the age of the primary breadwinner times your householdโ€™s annual realized income.
So your expected net worth = (Age)x(0.1)x(Income)

If you are in the Balance Sheet Affluent category, also known as “prodigious accumulators of wealth”, then your net worth should be twice the expected value.

In short, you will be considered affluent if your net worth is 2x the expected result based on this equation. ๐Ÿ™‚ This is not a perfect indicator of affluence as it usually becomes easier to accumulate wealth as people progress further in their careers. But it’s a good place to start looking at how you measure up to others in similar situations. Give the Stanley Wealth Equation a try for yourself and see where you land. ๐Ÿ™‚

When it comes to reaching a net worth of a million dollars by age 60, a good rule of thumb is to save and invest 5% of your income in your 20s, 10% in your 30s, 15% in your 40s, and 20% or more during your 50s.


A passive way to increase your wealth

Wouldn’t it be awesome to grow your net worth without having to think about it? Well there’s a practical way to do this. ๐Ÿ˜€

According to Stanley, to build up a large amount of wealth you can simply live in a neighbourhood where your income is among the highest. For example, if your household income is $120,000 then you should live in an area where the median value of a home is less than $400,000. By doing so there’s a good chance that your income will be in the top 20% in that neighbourhood. Then you can live and consume as though your income was 20% or 30% lower than it actually is. Save the difference. Accumulate your wealth. And you will not feel like you’re missing out on anything in the meantime. ๐Ÿ™‚

Living on less than you earn is pretty easy in this situation because people who live in the same area tend to have comparable fixed costs anyway. For example, many families who on the same block will pay similar rent. Property tax rates are also similar. Many residents will drive similarly priced cars, and shop at the same local grocery stores. Do you want to be the only household on the street with a $240,000 McLaren GT parked in the driveway while everyone else drives $30,000 sedans or $50,000 SUVs? Probably not. You’ll stand out like a sore thumb. Your neighbors will be jealous and think you’re a total snob. And you’ll be the designated target for any neighbourhood crimes such as vandalism, theft, property damage, or burglary.

So living in an area where your income is in the top quintile almost forces you to live within your means and save more. The average savings rate in Canada is only 3%. It’s higher in the U.S. at roughly 8%, but still on the low side. Where you live matters a lot to your wealth building potential.ย  If you live in a modest neighbourhood compared to your income you can easily keep up with your neighbours, while still maintain a large savings rate. ๐Ÿ™‚


Random Useless Fact:

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Phia @ Freedom 101
02/17/2020 10:22 am

Great article! I totally agree with your suggestion to live in a neighbourhood that is well below your means. We chose to do so because we wanted our housing costs to fall far below our means in order to facilitate paying it off – but it definitely had the added effect of keeping us very comfortable with our existing lifestyle.

AND I had a good laugh about your McLaren comment – we DO have a neighbour who has about $600,000 of vehicles sitting in his driveway. It’s very out of place, and he gets nothing but eye rolls from the community when he races up and down our street in his lambo. (His need to be noticed also occurs with Halloween, Christmas decorations, etc.) If nothing else, it is an ongoing source of entertainment for us! LOL.

02/18/2020 6:00 am

Based on the provided equation our expected networth would be $600K… Hummm… We are just shy of $2M and growing at an annual rate of 9.2% over the last 15 years O.o. Live on less than you have coming in, control the use of debt, and invest the rest ๐Ÿ˜‰ – Cheers my friend I’m approaching 9 years of of choosing not to work now and still wearing a smile each and every day…

02/20/2020 9:33 am

One of the best sayings I’ve heard on this: “Money talks, Wealth Whispers” ๐Ÿ˜

02/21/2020 10:52 pm
Reply to  Phil

I agree that equation is waaaay off, im 43 and if i only had 86000 id seriously consider hanging mysel, Because id need to work another 30 years instead of the 7 . Iv also managed to save half my income sense i was 15 and still do even with 2 kids .

Financial Independence
02/23/2020 12:53 am

Lets assume I am in my 70s and working for $100K a year. This will lead that my net worth should only be $700K.
Is it net worth aside of the pension fund and main residential property?

I also found than in less affluent neighbourhouds is where people spend a lot of money on their cars. It is not unusual to see somebody living in $300 K property and driving
a Porsche.

I agree in principle that to save you need to spend less than you earn and increase percentage of your income stashed aside. Its easier at certain point of income.

02/28/2020 5:42 am

It seems i fall at the exact number not including equity in house,or other physical valuable things.