Net worth—what you own minus what you owe—is the primary financial engine driving the achievement of financial goals and, ultimately, your future standard of living.
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Why? Because as you get older, you produce less income by working, ultimately relying on income generated by your assets, plus government entitlements like Social Security, to live. Obviously, your net worth should be as high as possible, and the true amount of net worth needed is geared to your own personal goals and chosen lifestyle.
A useful and specific benchmark comes from researchers Thomas Stanley and William Danko and their seminal work The Millionaire Next Door (Longstrcct, 1996). Stanley and Danko found that average net worth for the households they researched was a function of income and age and that it amounted to a persons Age times the Annual Income, all divided by 10. So if you’re forty-five years old and have an annual income of $50,000, your net worth should be $225,000 [(45 x $50,000)/10J. If your net worth is more than twice this figure (S450,000), you are a Prodigious Accumulator of Wealth (PAW), and if your net worth is less than half ($122,500), you are an Under-accumulator of Wealth (UAW).
So get out your calculator, add up your assets and debts (including house, retirement plans, insurance policies, etc.), and figure out where you stand! Are you a PAW, UAW, or somewhere in between? The Stanley/Danko benchmark is a good place to start for setting financial goals.
