How do you know the health of your wealth?  Are ahead of the curve or are you behind? Do you need to be saving more or do you need to ease up and be less frugal?

The most complete and accurate way to answer these questions is to reference your financial plan (i.e., a formal, written, date-specific, dollar-specific retirement accumulation plan).  But a quick, “back of the envelope” approach is to use the Wealth Equation.  This metric was created by Dr. Thomas Stanley, noted researcher and author of the Millionaire Next Door.

Here’s the formula:

Expected Net Worth = 10% x (your age) x (your gross income)

So if you’re a 50 year old making $150,000, your Expected Net Worth is $750,000 (=0.1*50*150000).  If you’re a dual-income family, you would use your total family income and average age of the two earners.

Now take your Expected Net Worth and compare it to your actual Net Worth (don’t know your actual Net Worth? see our special offer below*).  Create your Wealth Index by taking the ratio of those two numbers:

Wealth Index = (Actual Net Worth) / (Expected Net Worth)

 Your Wealth Index tells you where you fall into the following categories:

• Under Accumulator of Wealth (UAW)                  Wealth Index ≤ 0.88
• Average Accumulator of Wealth (AAW)           0.88 < Wealth Index < 1.84
• Prodigious Accumulator of Wealth (PAW)           Wealth Index ≥  1.84

Continuing with our example above, imagine that you are that 50 year old with an actual Net Worth of $937,500.  Then your Wealth Index is 1.25 (=937500/750000) which puts you at the moderately high end of the Average Accumulator of Wealth (AAW) category.

Ideally, you want to be a Prodigious Accumulator of Wealth (PAW), in other words, a hyper saver who is consciously building a tremendous amount of wealth.  If you’re a PAW (i.e., you have a Wealth Index at or above 1.84), Dr. Stanley calls you “balance sheet affluent” because you have an army of dollars working for you and you’re doing a great job of accumulating assets.

If you’re a AAW (Wealth Index between 0.88 and 1.84) you’re probably right on track.  If you’re a UAW (Wealth Index below 0.88) you’re likely behind the curve and need to save more and spend less to grow your financial health.  Remember you want to be saving between 15% and 20% of your gross income to fund your retirement.

A note to younger folks:
If you’re in your 20s and 30s (or even early 40s), your expected net worth in the Wealth Equation may be a bit too ambitious since Dr. Stanley designed this for people in their 50s and above.  It still serves as good general reference point.  For younger savers, Dr. Stanley suggests the following approach to ramping up your retirement savings:

• In your 20s, save at least 5% of your income
• In your 30s, save at least 10% of your income
• In your 40s, save at least 15% of your income
• In your 50s, save at least 20% of your income

We would urge you to try to accelerate this so you’re saving 15% to 20% as soon as possible to assure you will enjoy a happy and well-funded retirement of 30+ years.

*Need help calculating your actual Net Worth?  Send us an email at info@nstarcapital.com and we’ll send you a free tool to calculate it quickly and accurately…forever!)