Tuesday, June 3, 2008

Net Worth Comparison

I have found that posts about net worth are very popular in the PF blogosphere. Perhaps it is people's natural curiosity -- wanting to assess how one is doing compared to others. When you read new blog, do you find yourself asking questions like: How old is this blogger? How much does this person make? Am I doing better than them?

One of the most popular posts at PFStock asks the question: Are You Wealthy? This post examines a formula from the book The Millionaire Next Door. For your reference, the formula is repeated here:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

From this formula, I used the example of a 40 year old who makes $100,000 a year. In this case, the expected net worth of that person is $400,000.

In addition to this formula, I want to mention a couple of other websites to look at. CNN Money has a Net Worth Comparison Tool that asks you to enter your age and annual income. It then gives you the median net worth a particular age or income level. In the case of the 40 year old making $100,000 a year, the median net worth based on age is $44,875 and based on income is $363,125. You can see that although it is a realistic scenario, these median values are very different. The result is also much different from the Millionaire formula, and it does not tell you what your net worth should be. But, it does give you an idea of how you compare to others based on age and income.

Another website that I would like to mention is NetworthIQ. This site has compiled a set of Net Worth Statistics based on what its members have reported. In the case of a 40 year olds, the median net worth was $462,658. And for for those making $100,000 a year, the median net worth was $260,828. This data was current as of 1/26/2008. In addition to age and income you can compare net worth based on education, occupation, and state of residence.

Some would argue that the NetworthIQ data is not a good representation of the population as a whole. This is because the net worth people report is not audited, and you can see only what people choose to disclose. Arguably, there are those who may have overestimated the value of their home, cars, and personal property in order to inflate their net worth. But taken with a grain of salt, one can still find some usefulness in the numbers.

So there you have it: three ways that you can compare your net worth to others. Enjoy.