Ratio of total income to net worth

[Milton]

The first step in the Your Money or Your Life plan suggests that you "make peace with your past" by tallying up every cent (okay, dollar) you’ve ever brought in. You are then told to calculate and contrast your net worth. The idea is to ask yourself "where did all that money go?" ... which may lead to you to question your wasteful spending habits.

I went through all of my tax returns from the first one (filed at age 17) to last year's, threw in my estimated pre-tax employment and investment income for 2007, and was very pleased to see that my lifetime gross income from all sources totals only 66% of my current net worth. To me, that's a persuasive demonstration of the power of compounding.

 

[walkinwood]

That's quite amazing! Congratulations
As of the end of 2006, my net worth was around 63% of what we've earned so far (according to our SS statements).

 

[Razor]

Mostly due to the appreciation of my home, employer stock program and 401K my ratio is about 90%

 

[furpants]

Interesting way to evaluate what you've done with your money...

I noticed that Milton used I / NW and walkinwood used NW / I, which sort of confused me at first. Razor didn't specify which ratio he used.

Anyway, congrats on a great job, Milton!

 

[LOL!]

Your annual statement from the Social Security Administration is useful in this calculation.

 

[Nords]

Your annual statement from the Social Security Administration is useful in this calculation.

I'd say it's darn near essential since I didn't save those 25-year-old tax returns.

But we do have all our Leave & Earnings Statements, even the ones from our plebe years, so we broke ours down by taxable & tax-free. Our salaries (taxable earnings) are 48% of our net worth, and our total salaries & allowances (non-taxable) are 65%.

Hey, Berkshire Hathaway's having a pretty good year.

 

[Spanky]

approx. 75%.

 

[AltaRed]

Off the wall... Why would anyone keep tax returns beyond the satute of limitations? I can't get rid of the stuff (and a whole lot of other paper) fast enough to suit me.

 

[Linney]

The first step in the Your Money or Your Life plan suggests that you "make peace with your past" by tallying up every cent (okay, dollar) you’ve ever brought in. You are then told to calculate and contrast your net worth. The idea is to ask yourself "where did all that money go?" ... which may lead to you to question your wasteful spending habits.

I did this exercise a few years ago but have conveniently forgotten about it since the results were less than flattering. I've always been a saver but only really hit my stride with LBYM in this last decade.

I did use this technique with our son, however. At the end of a year I showed him his end-of-year bank statement, noted how much he received in the past year for allowance (about $800, this is for an older teenager mind you) and smiling expressed my hope that he got good value from the things he bought with all that money. He repeated back "$800?" "Yup", and I showed him the bank statement as proof since we manage his allowance via auto-transfer twice a month. The look on his face was priceless! And.... I noticed in the years since we had that little exchange that he has chosen to save more of his money and use it to buy things that he reallly really wants to have. And his savings account balance is pretty respectable too. Sometimes the little lessons on finances really do work....

 

[Maurice]

Interesting - my total vested financial assets as of 10/31 are equal to 99.857% of the money I'd earned through the end of 2006. I know thats not what we're supposed to be calculating here but the numbers were so close I couldn't help but notice.


My actual net worth including home equity is about 134% of the money I've ever earned. Pretty cool, especially if you consider that I've probably paid a 30-40% of that income in taxes. Considering that, my net worth is over 200% of the my total lifetime net income.


That has two explanations - growth in asset values as well as 'founder shares' in an IPO that have never been taxed or counted as income.

 

[OAG]

No records of total income but 30 years of Gross Retired Pay (Military) and 7 Years of SS totaled and and divided by current "net worth" is 32%. Must be pretty close since I did not earn much after "retirement" and conversely did not save much up to the point of "retirement". If I include "interest earned" into the total income number it goes "down" to 48%. Interesting exercise. Of course if one "discounts" it for inflation, drop in the value of the dollar, etc., etc., it gets kind of discouraging, but as long as we are eating "real" food all is well.

 

[d]

my nw is 114% of what ss reports as my lifetime "medicare earnings" ... but these earnings are understated due to the previous earning cap ... "soc sec earnings" are even more grossly understated.

 

[RunningBum]

Interesting way to evaluate what you've done with your money...

I noticed that Milton used I / NW and walkinwood used NW / I, which sort of confused me at first. Razor didn't specify which ratio he used.

Anyway, congrats on a great job, Milton!

And it looks like Milton even included investment income and perhaps even realized capital gains so that's even more impressive. I guess he's got a lot in a 401K, long held assets, and/or unexercised stock options.

I guess back in 1999 before I exercised stock options I had about 300% net worth over total SS taxed medicare earnings. I had to exercise much of those at the highest rax rates in 1999 and 2000 so that picture changed quickly, then I didn't diversify well so the bubble tagged me too.

Now I'm at about 62%, but the good news is that probably 75% or more of my net worth has already been taxed.

 

[Nords]

Off the wall... Why would anyone keep tax returns beyond the satute of limitations? I can't get rid of the stuff (and a whole lot of other paper) fast enough to suit me.

Force of habit, lack of time. Just stuff 'em in the box and get on with life.

Now in ER we have the time to take care of that stuff, but there's so much else I'd rather be doing than combing through old paper records. I throw out the oldest stuff only when it's necessary to fit the new in the box. Good thing I didn't just buy a bigger box.

Speaking of "statute of limitations", I never would've thought to keep an 18-year-old record of the sale of a home in order to document the deferred cap gains on the potential sale of a subsequent home. An extremely experienced realtor did me a big favor by asking that question, and I just happened to have it on file. Now I know to save it.

I did use this technique with our son, however. At the end of a year I showed him his end-of-year bank statement, noted how much he received in the past year for allowance (about $800, this is for an older teenager mind you) and smiling expressed my hope that he got good value from the things he bought with all that money. He repeated back "$800?" "Yup", and I showed him the bank statement as proof since we manage his allowance via auto-transfer twice a month. The look on his face was priceless! And.... I noticed in the years since we had that little exchange that he has chosen to save more of his money and use it to buy things that he reallly really wants to have. And his savings account balance is pretty respectable too. Sometimes the little lessons on finances really do work....

It's made a big impression on our "only the best shampoo will do" teenager.

Another effective tactic was having her calculate how much of her life she's willing to work (at $8.50/hour before taxes) for clothing & toiletries. Wait'll she has to figure out her gas money, too... I've told her it's not about persuading Mom & Dad anymore, it's about deciding if she wants to spend the rest of her life working for that stuff.

 

[Milton]

And it looks like Milton even included investment income and perhaps even realized capital gains so that's even more impressive.

Yes, I included everything except unrealized capital gains.

I guess he's got a lot in a 401K, long held assets, and/or unexercised stock options.

Unfortunately, I don't get stock options.