Do you have any idea what your current net worth is? Could you even tell me how to calculate your current worth? If you haven’t the slightest idea, don’t feel bad. It’s not a common point of conversation in our daily lives. However, it is very important to know the importance of your net worth for your future.
I have a friend that loves to live in the moment. He “owns” a house, a boat, and two very nice vehicles that he and his wife drive daily. When you read this, you might not think that his expenditures are all that extravagant, but with only a meager salary, these purchases have absolutely killed his net worth (and now, I’m not using the word “killed” in a good way here). He has refinanced his house multiple times and pulled out equity in the process. His boat and vehicles are all financed and as a whole are worth approximately what he owes on them.
Net Worth = Assets – Liabilities
The net worth calculation is very simple. You take your assets (the value of all your stuff, including your cash in the bank) and subtract all of the money that you owe (your house loans, car loans, credit cards, etc.). Unfortunately, my friend’s asset number is smaller than his liability number, which means that his net worth is negative! While I shake my head at the thought, I think this is incredibly common in our world today. We all want to look successful, and we want to impress our friends with our stuff, even if it means taking out a loan to do it. All of this borrowing just gives us a net worth of zero, or even worse, a negative number.
So Why is Net Worth Such a Big Deal?
Mainly, the importance of net worth is for compounding interest. You know the phrase, “the rich get richer”? Well it could be you if you just stopped buying all of your stuff on credit! In order to make a sizable amount of money, it really helps if you work to build up your assets and reduce your liabilities. In other words, pay off your debt and buy things that don’t depreciate in value (or depreciate very slowly like a used car vs. a new car). Once your net worth starts growing, you’ll have more options to increase your wealth and have an easy, carefree retirement!
So Where Do You Rank With Your Net Worth?
This is the question that you’ve all been waiting for. What is the average net worth for your age? Are you better than average or are you lagging behind?
According to CNN’s Net Worth Calculator, here are the average net worth values by age:
- Age 25-34: $8,500
- Age 35-44: $52,000
- Age 45-54: $98,000
- Age 55-64: $180,000
- Age 65+ : $232,000
Forbes insists that the numbers are more like the below figures, which are actually fairly close to CNN’s assessment:
- Age 45-54: $117,900
- Age 55-64: $179,400
- Age 65-74: $206,700
This might seem like a lot of money to some (especially the $200k mark), but think about how long you could survive on this lump sum of money if you kept your lifestyle the same as what it is now. Let’s say you spend $30,000 a year, which is pretty easy to do. This money wouldn’t even last you for 7 years!
I was baffled when I saw these figures. If you rank below these averages, you are going to be in some serious trouble when you get older. Rather than live on spam and hot dogs, perhaps you’d like to pay attention to your net worth now.
The Best Net Worth Plan: by Financial Samurai
Sam (the owner of Financial Samurai) assumes that after the first year of one’s full time job, they can begin maximizing their contributions in their 401(k) or Roth IRA. By taking this route and assuming a very manageable interest rate, one could easily have a net worth of over $2 million by the time they reach the age of 65! Now that’s a radically different chart. Where do you rank on this one and what do you think you will have earned by the time you are 65?
- Age 22: $0
- Age 23: $17k
- Age 24: $35k
- Age 25: $60k
- Age 30: $182k
- Age 35: $331k
- Age 40: $521k
- Age 45: $764k
- Age 50: $1.1 million
- Age 55: $1.5 million
- Age 60: $1.9 million
- Age 65: $2.6 million
I believe that Sam has it right, what about you? Do you rank well by Sam’s standards? Do you think his numbers are fair?