Yesterday, we talked about net worth. I linked to a couple of fun calculators and then told you do something more interesting. Today the Weakonomist will show you an alternative to net worth.
What do I compare my net worth to?
My goals for net worth are entirely different than most. I would like for my net worth to be capable of generating more income than my salary by age 40, so that I no longer rely on regular work to pay the bills. To illustrate what I mean: If I make $50,000 a year at age 40 (I hope not!), I want my net worth to be able to do that same. That doesn’t mean it will, because many assets would be tied up in vehicles or a home, neither of which generate income. But if I sold everything and invested it, I would want a $50,000 return. Given conservative returns (7%), my net worth would need to be just a bit more than $700,000. I think of 40 as a freedom point. I wouldn’t stop working of course (I doubt I’ll ever), but at that point my assets are capable of working as hard as I do.
This type of goal serves a major purpose. I can only assume that my cost of living will fluctuate with my pay. Better pay, nicer car, nicer house, etc. Because of this, I must keep my net worth in line to whatever living situation I am in and accustomed to. So long as I’m staying on track for my 40 y/o goal, I feel whatever I have left can be used to enjoy the finer things in life. If you base your net worth on that CNN Money tool, you aren’t accounting for lifestyle changes; and those medians are not in line with anyone in a position to retire.
And how do I compare?
Alright then penny pincher, are you in line to hit your freedom point? It’s too soon to tell, but I would guess no. My retirement accounts are on track to cover about half, but I’m still just a year out of college. I have to figure out a way to increase this. To make sure I’m closer to my goal, I can increase my automatic deductions for retirement. But I still need another plan to grow other assets. Once my car is paid off, those funds formerly reserved for payments can begin growing long term savings. I can also look for new ways to decrease my current spending (running out of ideas there). The easiest thing to do is to increase income without upgrading my lifestyle.
What conclusions can be drawn from this?
In the next 5 years or so, I have to increase what I’m making without an increase in what I’m spending. This means that I am not yet in a position to upgrade my lifestyle with upgrades in income. Accepting this fact allows me to proceed with the goal of increasing my income. Of course my plan all along was to do this, but putting it in print feels like a contractual agreement. Remember this is just my goal, and its a lofty one. If you’re over 40 and not close to my metric that doesn’t mean you’re in bad shape. Just create a goal and work towards it.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
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