I was 23 years old, fresh out of college, and I just started my first big boy job making $33,000 a year. (It wasn’t a ton, but in the peak of the recession I was just happy to have something to build up my experience and hopefully land a better job later in life.)
I had debt – it wasn’t that much compared to some of the messes people make today, but I owed my parents $12,000 for the last year of college that I couldn’t quite afford (FYI – being a 5th year senior is NOT the way to go). Since I was a finance major, I was naturally curious about my net worth and where I stacked up against all the other 23 year-olds in the world. Much to my delight, I had just picked up the book, “The Millionaire Next Door” and found a net worth formula that could answer the question, “What should your net worth be at your age?”!!
Perfect! Just what I was looking for!
They did it with a formula… and to be honest, it immediately made me sick to my stomach…
According to them, I should have had a net worth of $78,200…
I was about $90,000 behind.
What Should Your Net Worth Be At Your Age?
I didn’t realize it at the time, but this book wasn’t helping me discover my target net worth at all….
First of all, this book was written back in 1996, when it wasn’t expected that everyone go to college to get a degree like today. So, there were plenty of people that were already earning money when they were 18 years old, which made it easier to amass an early net worth that was positive instead of negative…
Second, the equation is a bit flawed. It works great if you’re about 40 or 50 years old, but not so well if you’re 20 and almost equally as poor if you’re 70.
Lucky for you, I have updated the formula so you can use it to make sure you’re on track financially.
Here’s the new and improved target net worth formula:
Target Net Worth = (Age – 25) x (Annual Income) / 3
Let’s use an example so you can get comfortable calculating your net worth. It’s super easy. Trust me.
Example: Bob and Karen’s Target Net Worth
“What should your net worth be at your age?” Bob and Karen often wondered. Well I say we put the formula to the test!
Bob and Karen are each 35 years old. He earns $45,000 a year and she makes $55,000 a year – all before taxes.
So what’s their target net worth?
Bob and Karen’s Target Net Worth = (35 – 25) x ($100,000) / 3 = $333,333
Bob and Karen are fairly young, but if they want to retire with dignity, they’ll need a net worth somewhere in between $2.5 million and $3 million when they retire. A current net worth of $333k will put them on track for that.
By the way, if you’re young (like 22), your number is going to be negative, and that’s okay! you’ve probably got some student loans and that’s a totally fair place to be! Just work toward getting it positive and keeping up with the formula!
So what’s their actual net worth today?
Anyone’s net worth can be simply calculated by adding up everything they own and then subtracting everything they owe. In financial speak, they would say, “Add up your assets and subtract your liabilities”.
Here’s what Bob and Karen own:
- A house that’s worth $300,000
- Two cars that are worth $30,000 total, and
- Retirement accounts with a value of about $100,000
And then this is what they owe:
- $200,000 on the house, and
- $20,000 on the cars
All together, their net worth is ($430,000 – $220,000)… They’re worth $210,000.
Not too shabby, but they’re a little bit behind. I would suggest that they pay off those cars, starting putting a bit more into their investment accounts, and then work to pay off their house!
What Should Your Net Worth Be At YOUR Age?
So what about you? What should your net worth be? Are you on track, or are you falling hopelessly behind?
If you’re falling behind, it’s time to make a game plan. You’ve got to learn to live on less, earn more, and invest more!
If you’re ahead, good for you! But you’ve also got to learn to live a little. Don’t forget to take some nice vacations and move up in car if you want to. You’re only on this earth for so long. Enjoy yourself!
What about you? How are you doing vs. your target net worth?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.