Let’s face it. If you are working hard to build your portfolio and become financially independent, it often becomes difficult to find the motivation to continue. In the beginning it seems like you are making little or no progress. Even as you progress and start to build up some balances in your accounts, the amount you receive in income from investments still seems small. If it took you 10 years to save up $50,000, how can you possibly get to $1 million or more? So how do you figure out how well you are doing compared to those around you who are driving the flashy cars and taking the expensive trips?
First realize that if you have no debt (or the only debt you have is your house loan), you are doing spectacularly well compared to most people around you. That guy who gets a new car each year is probably in debt up to his eyeballs. Most people have student loan debt that never gets lower, credit card debt in the tens of thousands of dollars, and second mortgages or HELOCs on their homes. If you have managed to avoid such debt or at least been able to pay it off, you are way ahead of the game. You are also ahead of the game since you have more money to spend and save then your neighbor since you aren’t paying all of that interest.
To find out how you are doing compared to others who are saving and investing, you can use a formula Thomas Stanley used to find what he called “the prodigious savers” in his book, The Millionaire Next Door. In his research he needed to separate those who simply had high incomes but would be bankrupt within a month if their paycheck stopped from those who truly had wealth and would stay wealthy. In some cases people may not be wealthy currently, but their behavior is such that they will become wealthy in their lives.
Thomas Stanley used the following formula to find if people were these prodigious savers:
Net Worth > (Yearly Income)* Age / 10
Mr. Stanley found that there were a relatively small number of individuals who met this criteria.
To use this formula, first figure out your net worth. This would be the sum of your home equity, the yard-sale value of your household items, the value of antiques and art works, the value of bank and investment accounts including retirement accounts and pensions, the value of your vehicles (private party resale), and the value of any other assets minus any loans or debts you have.
Then, take your yearly gross income, multiply by your age, and divide by 10. For example, a 40 year-old who makes $60,000 per year would multiply 40 by $60,000, then divide by 10, for a total of $240,000.
If your net worth exceeds this figure, you are a prodigious saver and are doing what is needed to become wealthy.
Note that the formula works less well when you first start working since it takes a little while to build up a savings. Nonetheless, it is a good measure by which to evaluate your progress.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.