Net Worth Mulitplier

[runewell]

Let X be your total net worth, include everything (investments, retirement, house, car).
Let Y be your gross income.

What is X / Y ?

For me it is 3.5-3.8 depending on bonus.

If I recall correctly, the book Millionaire next door thought this was a good indicator of how well off you were financially.

[schildi]

about 5x. working for 12 years, so it's still growing.

[whoisjohngalt]

If I recall correctly, the book Millionaire next door thought this was a good indicator of how well off you were financially.

I wonder if there is some kind of "rule of thumb" depending on your age. I would think if your number is the same at 60 as it was at 20, it wouldn't be a good thing.

Lena

[runewell]

The book expected it to go up with each decade. I remember being on par in my 20's and early 30's but later decades seemed like lofty goals.

[illinicheme]

DH and my multiplier is roughly 1.5 at age 32/34. It's low largely because we both spent our early-to-mid 20s working for a pittance in grad school. Our total income is nearly four times what it was 6 years ago, so I'm hoping our net worth will start going up much faster than it used to!

[wodehouse]

6.6. But I am 58 so I would expect a high ratio.

OTOH, my income has gone up considerably over the past 8 years so the ratio now is probably lower than it might have been otherwise. But then my net worth is also higher versus that other hypothetical parallel universe.

[Deleted]

About a 10.

LOL, probably the ONLY time someone would call me a 10!

[Deleted]

for my it is about 2.9

[formerexpat]

This formula penalizes young people that increase their income quickly. My number is less than 2.

I like using the net worth / cumulative earnings formula better. It tells you, as a percent, how much of your total income that you've saved. It also gives you the benefit of compound interest and shows you the impact of saving earlier as you reach >50 years old.

I'm at about 33% right now but about 10% of my cumulative earnings went towards student loan debt, credit cards my wife had when we met and our wedding. I hope none of those expenses are recurring!!

[DVM gone riding]

mine is still less than 1

lena there is a linear formula in the book that figures out if you are a SAW or an UAW that is dependent on your age but not corrected for the young

[thyme4change]

Mine is about 3, if you use household income.

[Deleted]

As previously mentioned, there really isn't any value to this unless you're somehow factoring in age.

The Millionaire Next Door has some formula in there for calculating appropriate Net Worth...not sure if this is based on that. Anyhow, the formula they use only works well for a small age range. It's a good book, but the net worth formula they use has little value.

[2girlzdad]

About 9. I'm 43 yo, wife is 41. 1.8 mm net and income about $200 k.

[Gardening Grandma]

Ours came to 12. We are in our 60's.

[dancinmama]

11.9 with a huge drop in our home's value in the last couple of years. I did not include the value of our cars or any other depreciating assets (besides our home).

[blackcard]

A perfect 3.0 for 2010.

[whoisjohngalt]

Thanks dvm.

In addition to what expat is saying if you are retired, your "income" might be much lower, but hopefully net worth is high at that point, so I think that number will be kind of deceiving. No?

Lena

[schildi]

Feb 21, 2011 15:55:10 GMT -5 formerexpat said:

This formula penalizes young people that increase their income quickly. My number is less than 2.

I like using the net worth / cumulative earnings formula better.

Expat, can you explain that formula?

[blackcard]

schildi, I don't know how someone is penalized either? Before I got married my NW was Zero. I had 20k in assets and 20K in debt. DH came to the table with almost 100K in savings and no debt. We were 24 and 26. Our combined incomes have now almost doubled in 7 years.
Back then, when first married, we would have been 80/80 or 1.0. Now 3.0.
Maybe now I see the formula flaw? Maybe not?

[formerexpat]

Expat, can you explain that formula?

Explain my formula, or my belief that the OP formula penalizes young, high earners?

The formula of net worth / semen earnings ends up calculating the total amount that you've saved out of the total amount that you've earned.

Assuming no increase in value from markets / dividends with a 20% savings value, and static income of $50k until year 5, your savings looks like this:

age income savings semen savings semen %
23 $50k $10k $10k 20%
24 $50k $10k $20k 20%
25 $50k $10k $30k 20%
26 $50k $10k $40k 20%
27 $100k $20k $60k 20%

Your cumulative percent doesn't penalize you for the fact your income doubled in year 5. Using the OP formula, the ratio would be 0.6 which only decreased by 0.4 because the person's income shot up quickly.

ETA - not sure how to make that data in table format[/size]

[phil5185]

Assuming no increase in value from markets / dividends with a 20% savings value, and static income of $50k until year 5, your savings looks like this:

But what if the opposite happens - ie, markets & divs drive the semen savings to $1.25M at age 50 (a likely outcome with a $10k/yr input)? And your semen W2 earnings was $50k X 25 = $1.25M? Then the 'semen %' goes to a 100%.

[formerexpat]

But what if the opposite happens - ie, markets & divs drive the semen savings to $1.25M at age 50 (a likely outcome with a $10k/yr input)? And your semen W2 earnings was $50k X 25 = $1.25M? Then the 'semen %' goes to a 100%.

That's the point - the semen% rewards early investment by counting the compound effect. You've worked for 25 years, spent 80% of your salary on living expenses and your net worth is 100% of your cumulative income. I don't think the percentage should stop at 100%; I think it's a better gauge of how much of your total income during your lifetime that you've saved and put to work and in the end, it will also [in theory] show the value and reward for saving early and taking risk.

The MND formula [which I always thought was (cy earnings x age)/10] only works for a short period of time.

My formula can be taught to a 16 year old who just started working. This formula will clearly show the impact of the debt a young person takes for college and when modeled with LT historical rates of return, will show the importance of saving early and often.

Just my opinion and what I came up with in my models to track my progress since the MND formula places me in the UAW category. [/size]

[schildi]

Expat, yes, that is the explanation I was looking for. I have been using that same method, and I agree that the Millionaire next door formula (similar to the OP's) penalizes the young, and is very "soft" on the older people. I mean: somebody who is say 20 and worked for one year should have twice his income saved. Kinda tough to do on your own.

Using the cumulative formula, we are at about 60% after 12 years of being in the working world. We got there despite low returns. Yes, that method has more meaning, but is more difficult to compute. Well, not really more difficult to compute, but ask a 50 year old: most won't remember how much they made 20 or 30 years ago, and would have a hard time coming up with the sum of earnings number.

[schildi]

Feb 21, 2011 20:29:44 GMT -5 blackcard said:

schildi, I don't know how someone is penalized either?

blackcard: expat is right, the young(er) do get penalized by the MND formula (see my post ^). I was asking him about the cumulative formula he was talking about.

[formerexpat]

Well, not really more difficult to compute, but ask a 50 year old: most won't remember how much they made 20 or 30 years ago, and would have a hard time coming up with the sum of earnings number.

Excel does make it a lot easier and more fun to complete my financial analysis and projections.

Using the cumulative formula, we are at about 60% after 12 years of being in the working world. We got there despite low returns.

That's awesome to have that base set up for when the markets do take off to complete that 30 year cycle.

I've got an option in my model that calculates what happens if the next 20 years is the 14.5% per annum return needed to get 10% annual compound after accounting for the 1.5% return of the past 10 years. I'm getting that base built up as quickly as possible to see through the completion of this 30 year cycle.

Even if you believe the 30 year cycle from 2001 to 2031 is likely to yield just 7% [which would be unprecedented], then the next 20 years would have to be 10% per annum.

BTW, totally agree about being too soft on older people with the MND formula. Wonder how many paper over achievers there were from heavily RE weighted couples that now find themselves skinny on retirement savings?[/size]

[phil5185]

That's the point - the semen% rewards early investment by counting the compound effect. You've worked for 25 years, spent 80% of your salary on living expenses and your net worth is 100% of your cumulative income. I don't think the percentage should stop at 100%; I think it's a better gauge of how much of your total income during your lifetime that you've saved and put to work and in the end,

OK, I get it. And that was my experience - at one point 10 or 15 yrs before I retired I realized that my semen salary since college was at $1M. And at that point I had >$1M, more than I had earned. I didn't keep track - but when I retired my NW was way more than 100% of my semen-life-W2 earnings.

[schildi]

Brings up a good question: what do you use, "real" gross earnings or W-2 (Box 1) income. In 2010, those two numbers are > $30,000 apart for me.
Yeah, I think my net worth at some point will be more than what I have earned cumulatively over my career.

[DebMD (banned)]

Feb 21, 2011 18:12:43 GMT -5 @2girlzdad said:

About 9. I'm 43 yo, wife is 41. 1.8 mm net and income about $200 k.

Welcome New Poster 2girlzdad !!

Posts: 1
Karma: 1
[you're exalted]

[robbase]

I like don't think the OP's formula is from the millionaire next door

[formerexpat]

Brings up a good question: what do you use, "real" gross earnings or W-2 (Box 1) income.

I've always used box 1 of the W2, but then again, I haven't had rental or business income come through my 1040.

I guess if your situation warrants, line 22 of the 1040 [total income] might be a more appropriate metric.

Personally though, I'm a fan of allowing the compounding impact from reinvested interest and taxable gains / dividends positively impact your ratios. It's the reward for saving. [/size]