As promised I have started to look at how your net worth should change depending upon you age. Also as the Millionaire Next Door formula was quite crude I have looked around the internet to see if there are any other ideas for how your net worth can be calculated and I came across this interesting way of calculating net worth from The Simple Dollar blog, it has a slight tweak compared to the Millionaire Next Door. The target Net Worth formula is (age -27) x Annual Pre-tax income / 5 compared against the Millionaire next door formula of age x Annual Pre-tax income/10.
I like the way the simple dollar formula looks at giving a more realistic net worth while you are young so have used this as a basis to create a formula the replace the 27 number with 30 giving a new net worth calculation as a (age -27) x Annual Pre-tax income / 5.
Take a look at the table below that show the difference to net worth as you get older. The table is based on a 20 year old now and then looks at how their net worth should change based on their wages increasing by a target wage growth of 2%.
|Age||Average Salary||Millionaire next door||Simple Dolar||The Normal Person|
As you can see from the above using a 20 year old on average annual pay that is increasing at an wage inflation rate of 2% gives a few different answers. The Millionaire Next Door shows a net worth of £52300 with the simple Dollar net worth being £-36610 and The Normal Person Net Worth being £-52300. I think both the simple dollar and the normal person give a more accurate measure of the net worth for some one that is younger.
As we then go to the same person at an older age of 65 we can see that their net worth when they are old will be £414374 for the Millionaire Next Door, £484499 for the Simple Dollar and £446249 for The Normal Person.
Even though at a younger age we have quite a wide variation in estimated net worth they seem to pull closer together the older the person is. I personally prefer the Simple Dollar or The Normal Person estimated net worth target Hopefully this will help set a target for you future net worth. You really just need your age and wage and you can then project your potential net worth based on a 25 wage growth.
Maybe you could use these formulae and look at what your target net worth should be for each of the different formulas. Let me know what you think and if I can help you with anything in the comment section or on our facebook page.
The Normal Person