Money we've made versus money we have kept

[laurence]

So I was just thinking, lolling on the beach of mission bay with the family and I did some quick math in my head to realize we (DW and I) have made about $850,000 in our working lives. Our net worth is about $375,000 if you don't include the cars (which I don't since they depreciate to nothing eventually). I was actually pretty proud of the fact that of every dollar we have earned, 44% of them are still around, especially when you consider we've probably paid close to half of those dollars back in taxes.

Now sure, that doesn't tell the whole story, investment returns, capital/real estate appreciation, the effects of inflation etc. But it was a fun thought. Does that mean at some point I may have more money in net worth than I ever earned in my life? Of course, then we get into the debate of what I mean by "earn" (paycheck vs. return on an investment etc.)

Just letting my mind wander on a Sunday afternoon...

 

[dex]

I did a similar calculation and I figured that I have about the same amount of gross income I earned.

In other words - I lived, paid taxes and have all the money I earned... the key point is that these are inflated dollars. I'm guessing that I would have about 50 to 65% of constant dollars.

 

[REWahoo]

Laurence, interesting calculation. I looked back over 42 years of earnings on our SS statements and calculated our net worth (portfolio plus our house) when I retired was about 46% of our lifetime gross incomes. Don't know if that's good or bad, but it is an interesting exercise.

 

[laurence]

Definitely, the inflation factor is key, but I know we all like different ways of measuring our treasure. Also, it's interesting to think that even someone who deals strictly in cash and pays no taxes, and stays "off the grid" may be doing no better than you, since they can't take advantage of our investments!

 

[maddythebeagle]

I thought there was a poll awhile back on a similar calculation.....and it was subdivided by age....I will try to look for it...

 

[Alan]

I feel totally inadequate if I look at NW versus what I have earned in total.  Even going back a mere 13 years and my NW is less than my total gross earnings by a cool half million  .  Looking at my current income verus NW and doing the wealth calculation from the Millionaire Next Door.  I have done this calculation since I read the book a few years ago.  (and back-dated it) A prodiguous saver will have a NW greater than his age times gross income divided by 5.  So if you are 50 with an income of $100K, you should have a NW of $1M if you are an over achiever according to the book.

In a tracking spreadsheet I include this calculation compared against to where I should be and every year hope to be closer to this target.  I've only got figures to '94 when I was at a paltry 37% of this finger in the air target and I am now at 69% which I always felt pretty good about as my AGI has gone up a factor of 2.1 in this 12 year time frame.

How do others compare to this target?

 

[NinjaPigeon]

A prodiguous saver will have a NW greater than his age times gross income divided by 5. So if you are 50 with an income of $100K, you should have a NW of $1M if you are an over achiever according to the book.

That equation never made sense to me. According to that logic I should be approaching half a million in NW when I haven't even earned a quarter million over my lifetime. The problem is it's a linear equation, and earnings are a quadratic. So it fails to account for the first 15 or so years of zero income, followed by several years of large salary hikes.

It actually suggests that I should have magically had an extra 100k in the bank the day I switched to a higher income job.

 

[tryan]

Does that mean at some point I may have more money in net worth than I ever earned in my life?

Yup, that can easily happen. 20 years in mega corp average salary ~50k (started at 22k; ended at 107k). So ~1M "earned/slaved" dollars from mega corp. FIRE'd last year with NW +2M.

It was all real estate for us; so I guess one could argue lot's of that is "earned/slaved" too ... but that number would be impossible to calculate.

 

[cute fuzzy bunny]

Yep fun exercise. According to my social security statements I made roughly $3M in wages life-to-date.

Unfortunately I dont think I kept hardly any of that. Most of my net worth is from stock and real estate investments.

 

[SteveR]

... A prodiguous saver will have a NW greater than his age times gross income divided by 5.  So if you are 50 with an income of $100K, you should have a NW of $1M if you are an over achiever according to the book.

How do others compare to this target?

The past few years have been complex to say the least. Taking our current salaries and current NW (not including houses and other "stuff") we would be considered "over achievers" according to the calculation. As for the other calculation done by Laurence, gathering all the numbers and making the adjustements for life changes over the past 30 years is way too much work. 8)

 

[Texas Proud]

The question is what do you include in 'wages'....

I would include the company payments to my defined benefit plan as it is based off of my salary...

I would include the company match of my 401(k) as it is based off of my salary...

I say this as my 'cash balance' account is over $70K and I have not put in one cent... does not seem right to list it all as NW with no wage implications...

What I need to exclude is the housing and other 'benefits' that were on my W-2 when I was an expat... it was taxable wages, but I did not see a dime of it....

 

[Alan]

The question is what do you include in 'wages'....

I would include the company payments to my defined benefit plan as it is based off of my salary...

I would include the company match of my 401(k) as it is based off of my salary...

What I need to exclude is the housing and other 'benefits' that were on my W-2 when I was an expat...  it was taxable wages, but I did not see a dime of it....

Excellent points.  If I include the value of the defined benefit pensions I'm owed then NW would be much higher ( 14*annual pension payments is a calculation I've heard is a decent estimate), then that would add another $750,000 and suddenly I feel a little better  :

I was also an ex-pat for 5 years so I also agree about the allowances that appeared as earnings on my W-2.  Now I feel much better. 

In reality, wherever you start from you should give yourself a target to aim at that is reasonable for your own circumstances and not worry about what has gone by in the past .... and then measure progress, 'cos wivout feedback yer won't have a decent control loop.

 

[MasterBlaster]

The net worth relative to your total income is not really all that meaningful unless you normalize it by age.

Perhaps a more useful yardstick is Thomas Stanley's (The Millionaire Next Door) definition of success.

The MND yardstick is below...

1. Your household income (include realized capital gains but exclude income from inherited wealth)

2. Your age (if both spouses work, average your ages)

3. Multiply your income by your age

4. Divide line 3 by the number 10 to get the expected net worth for someone with your age and income

5. Take your assets and subtract inherited wealth

6. Total all of your debt

7. Subtract line 6 from line 5 to arrive at your net worth

8. Divide your net worth (line 7) by line 4 to get your final score

If you scored 2.0 or higher, you rank in the top 25% of wealth builders and are one of Stanley and Danko's PAWs (prodigious accumulators of wealth). 1 to 1.99, you rank in the top half of Americans in your wealth building prowess. 0.51 to 0.99, you’re a below average generator of wealth 0.50 or lower, you are one of Stanley and Danko’s UAWs (under accumulators of
wealth).

 

[MasterBlaster]

Here is yet another ballpark guide to where you should be in savings and debt relative to age.

A twist on this topic was discussed quite a bit here:

http://early-retirement.org/forums/index.php?topic=5883.msg104168#msg104168

 

[dmpi]

I just computed mine. If you include my house in the NW, We still have 92% of all the money my wife & I have ever made. I guess that's not too bad. We are better savers than investors.

 

[justin]

I'm a 0.47 on the Millionaire next door scale - an underaccumulator of wealth. The main reason is that me+DW are an average of 1.5 years out of grad school, so we have had very little time to earn money. Although the portfolio is bouncing around the $200,000 mark - not bad for a couple in their mid 20's. Our annual income also doubled less than a year ago when DW got a job after the first little-un was born.

In other words, the Millionaire next door scale works better for those in the middle or latter part of their working life and not so well for those recent college grads.

Net worth as a percentage of total lifetime earnings is probably around 50-66% depending on what you count as "earnings". Probably won't be too many more years until that ratio goes to 100%.

 

[SteveR]

...The MND yardstick is below...

If you scored 2.0 or higher, you rank in the top 25% of wealth builders and are one of Stanley and Danko's PAWs (prodigious accumulators of wealth). 1 to 1.99, you rank in the top half of Americans in your wealth building prowess. 0.51 to 0.99, you’re a below average generator of wealth 0.50 or lower, you are one of Stanley and Danko’s UAWs (under accumulators of wealth).[/i]

Did the math and came out at 3.89, I guess that puts us in the uppity level of prodigious accumulators.

As for the other chart...we are on track but I would need to add some additional debt to keep the ratio balanced.

 

[laurence]

We are at 1.1, we fall victim to only being anywhere near this income level for the past 3 years, yet the formula acts as if it was 30!

 

[Gumby]

I read the Millionnaire Next Door and was struck by the same thought -- their metric for savings prowess ignores history. It may work well when one has been in a steady state earnings position for 20 years, but large changes in salary, both up and down, are not well accomodated by the model.

For example, due to recent success in the job market, by their metric I am an abysmal UAW. Before that I was a slight PAW, and if I quit tomorrow and worked at minimum wage, I would instantly be a super PAW.

IMHO, looking at what you had to work with over the course of all your years of working versus where you ended up is a far better metric.

 

[Texas Proud]

Right now I am at 1.9...

Hmmm... maybe I should quit, get a much lower paying job and 'boost' my savings up to the 3 to 4 range...

 

[Jay_Gatsby]

Unfortunately, my percentage of saved/earned isn't that great...roughly 36%, but then again I paid a great deal of money in taxes being a single guy without a mortgage. If the stockmarket starts to perform, then I'll see that percentage creep up. Likewise, after my fiance and I get married and buy a house, the percentage should rise.

 

[rw86347]

The problem is it's a linear equation, and earnings are a quadratic.

Exactly! I even tried to get stanly's email address to point this out!

 

[scrinch]

DW and I have a networth that is 1.16x our lifetime accumulated "salaries." Of course the "salaries" don't include 401k contributions (either ours or employers'), pension cash-out, or investment earnings. Take out the 401k and pension effects and the ratio drops to 0.77x. DW and I are in our mid-40's.

I guess this is what happens when you live below your means. The means eventually accumulate.

 

[spideyrdpd]

Isnt it more about when you start savings more than lbyms. The rich Barber discusses this using twins as an example. The one that starts investing sooner ends up with a much larger account then the one that starts later and invests more.
Using the rule of 72 and getting 7 % your money would double every ten yrs or so. So a dollar saved would then be 8 dollars in 30 yrs. Get 10% and now your talking about 16 bucks.
A penny saved.....

 

[renferme]

Don't even want to think about, because after my divorce I was left with virtually nothing. Have built up a pretty decent portfolio since (about 12 years).