What is wealth, really? When we talk about “the 1%,” we are usually referring to the top 1% of earners, which is an important measure. But wealth isn’t really measured in income- how much you make is one thing, but how much you HAVE is far more meaningful. Remember the old expression, ‘You can’t have your cake and eat it too’? This applies to money too, friends. You can’t spend your money and have still have that money- the money you spend is gone. If you want to accumulate wealth, you have to hang on to (and invest) it. Having a large net worth is better than having high income, because it takes money to make money, and money makes more money. Income is worthless if you have nothing to show for it. When evaluating financial health, income means very little to me- everyone makes money. Keeping it is a skill which requires discipline and desire- a far sexier measure. My % position in net worth was far higher than my position for income for many, many years. This measure doesn’t care about your privilege or your background or what you do for a living- it’s all about your choices.
So what is net worth anyway? Net worth is a snapshot of what you own. You can calculate yours easily by adding up the value of everything you have (home, cars, investments, bank accounts, etc.), and subtracting everything you owe (mortgage balance, auto loan balances, credit card balances, and other debt). The median household net worth in the US is $97,300. But an estimated 69% of adults in the US have less than $1000 in savings, and 34% have no savings at all. According to the Economic Policy Institute, almost half Americans have no retirement savings either. Approximately 14% have negative net worth- meaning they owe more money than what they own. These numbers are staggering, and these scenarios are totally avoidable!
I care about net worth because the difference between high-earning and high net worth is financial freedom. If you’re spending all of your money, it doesn’t really matter how much you make. You’re enslaved to the earning to keep up with the spending, and there is no freedom in that. I have friends who make six figures, but spend everything they earn and have virtually no savings or assets. Their large paychecks allow them to live in nice homes, drive expensive cars, buy new clothing and accessories at will, and take lavish vacations- they “look” rich. But if the income ends or diminishes, there is no way to sustain the lifestyle, and the stress of keeping up can be crippling. Not to mention, the prospect of retirement without savings is frightening, especially when you’re accustomed to high spending. I also know many people who earn more humble paychecks, but have hundreds of thousands, sometimes millions, saved. One woman in particular who is in her 50s earned an adjusted average of $15/hour (or about $30K/year) for her entire career, but has saved over $600K for her retirement. She will retire in a few years and live comfortably for the rest of her life at her current lifestyle, thanks to her disciplined spending and saving habits.
Interestingly, there are a LOT more high-earners than high-net worth folks, because it’s easier to make more money that to keep more money. This is why when we look at affluence, net worth is much better measure than income. Net worth is a measure of how much “extra” a household has accumulated.
According to the 2016 Survey of Consumer Finances from the Federal Reserve, the top 1% of (individual) earners is $300,577. But the top 1% wealthiest by net worth have an astonishing $10,374,030. Even the top 10% have $1,182,390. It is somewhat unexpected that while there is some correlation between wealth and income, it is relatively low. This is likely because a large net worth is attainable by everyone, regardless of income (although having both makes it easier). Low earners can accumulate far more than their high-earning counterparts, making net worth a more “honest” measure, impacted more by choices than by circumstance.
Now, these rankings are across all individuals and households in the US, which means that we are comparing 80-year-olds to 20-year-olds. While there are wealthy individuals at every age, someone in their 70s has had a lot more time than a 30-year-old to accumulate wealth, and someone in their 40s has had more time to accumulate skills and experience to justify a higher salary than a worker in their 20s. A basic and common guideline to how much you should have saved throughout your life is this:
By Age: 30 you should have: ½ your annual salary saved
This takes into account equity in your assets as well, so you should take the equity in your home and other assets into account. If you’re 35 years old and you earn $75K per year, you should have a net worth of at least $75K. If you want to be in the top 1% for net worth at 35, you’ll need to have just over $1.5M stashed, for comparison. You can see that this guideline accelerates over time- that’s because your net worth will accelerate the more you have accumulated. This guide will likely leave you able to retire and continue to live comfortably at your accustomed lifestyle for the remainder of your life. However, I recommend doubling these numbers, which will help you achieve financial freedom sooner and guarantee a comfortable retirement.
If you’re behind the proverbial eight ball on this measure, do not despair! I sincerely hope to capture the interest of Millennials in their 20s and early 30s with these figures, because millionaires truly are created early. But if you’re late to the game, there is no better time to start than right now. With the power of time, you can make choices today that will greatly ease your burden down the road, and every single dollar counts. In our “keeping up with the Joneses” society, paying attention to and nurturing your own net worth is one of the most important steps you can take toward a bright financial future.