Wealth building is a lifelong game that everyone gets to play but only a few manage to win.
And while hard work can give you a head start, it is often not enough to land you the pot.
You must also factor in a certain degree of planning and commitment, whereby you take practical steps throughout your adult life to monitor, maintain, and methodically grow your net worth.
What’s Your Net Worth?
Your net worth is what’s left after you’ve settled any liabilities you may hold:
- Personal loans
- Business loans
- Car loans
- Mortgages on your home and/or rental properties
- Credit card debt
- Student loans
- Medical debt
- Judgements or liens against you
Net Worth = Assets – Liabilities
Your assets include, but are not limited to:
- Cash savings.
- Current market value of your investment accounts: stocks, bonds, mutual funds, insurance policies, etc.
- Current market value of your real estate holdings.
- The total current value of your business.
- The depreciated value of your cars.
- Other items of worth such as furniture, artwork, jewellery, etc.
Why Track Your Net Worth?
Most people make the mistake of measuring their financial success based on their monthly earnings alone. While you might be ‘comfortable’ in that sense, most of what you earn might be plowed entirely into various expenses, none of which are income-yielding. So by the end of the day, you find that you have little to your name.
Keeping track of your net worth, therefore, helps you measure your overall financial health.
And you will be better able to spend, save, and invest judiciously, month by month, year by year until you reach retirement age.
And as you work hard, you will have a better sense of whether you are actually making financial progress or simply treading water. It opens your eyes to the things you must do differently to improve your current financial status, be it good or bad.
Tracking your net worth will thus ensure that you don’t drift from the path to your financial freedom, or to get back on course if you are already off-course.
Net Worth Benchmarks to Strive for Based on Your Age
From 20 years of age, right until the moment you retire, there are certain milestones you should target.
To determine your net worth based on your age, use this formula:
Net worth = (Age X Pre-tax income)/10
PS: Notice that the above formula does not factor in debt. However, it will suffice for this exercise.
Between 20 and 30 years of age:
In your 20s, it’s often not unusual to have a low or even negative net worth. Many at this stage are still in school or just got their first job. You should do your best to keep your expenses minimal and avoid acquiring bad debt.
Between 30 and 40 years of age:
Your 30s represent a significant benchmark that will set the pace for your financial status for the rest of your life.
It is a crucial stage during which most people get married and have dependents to care for.
It would help to stick to a healthy budgeting plan and save as much as you can – have at least half your annual salary saved up and start seeking out safe and solid investment opportunities.
Between 40 and 50 years of age:
In your 40s, you should have twice your annual salary stashed away.
Real estate investments should occupy a good portion of your investment portfolio, as they tend to be stable and can appreciate over time.
Between 50 and 60 years of age:
By the time you are 50, your wealth should have grown significantly if you’ve been saving and investing prudently right from your 30s.
At this stage, you are meant to have four times your annual salary saved up, coupled with a steady cash inflow from various investments you’ve made so far.
However, if this isn’t your case, it’s never too late to start. Double down on your budgeting efforts and start setting money aside more aggressively.
PS: See the last two stages above (i.e., 30s and 40s).
From 60 years of age to retirement:
In your 60s, you should now have 6 times your annual salary saved up. You should also have health plans in place to ensure that you can cater to any medical needs you may have.
Since your kids may already be all grown up and no longer under your wings, your expenses would be much less, meaning that you can set aside up to 80% of your earnings per month, thus further securing your financial well-being for when you finally retire.
Ideally, your net worth should be considerably high at this stage.
In conclusion:
When you are between the ages of 20 and 30, you are young and have time to sample different trades to find what you are good at.
Since you most likely have no one to feed but yourself, you have the opportunity to make mistakes and learn from them.
When you are between 30 and 35 years of age, you can no longer afford to be reckless or take unnecessary financial risks.
This is the time to start acquiring risk-free assets and building up your net worth. You can start your own business, acquire real estate and stocks.
From 41 to 55 years of age, you’ve grown your wealth to a sizable value that must be kept secure.
And by the time you are 60, you will have achieved your financial goals.
To help ensure that you gain financial freedom by the time you’re 60, here are 5 things to keep in mind:
- See if you can establish a passive income stream.
- Strive to save at least 20% of your salary each month.
- Set actionable financial goals every year.
- Ensure that you keep a strict savings, spending, and investment budget.
- Whatever you do, try your best not to lose money. This is important.