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 household’s net worth should equal 10% of the age of the primary breadwinner times your household’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. 🙂 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. 🙂
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. 😀
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. 🙂
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. 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. 🙂
Random Useless Fact:
Pesticides can threaten biodiversity and are harmful to the environment.