The Money Mustache Community
General Discussion => Share Your Badassity => Topic started by: clarkfan1979 on October 15, 2018, 01:17:25 PM
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I think MMM people should have a fairly large ratio of net worth to income. I will go first.
Married with one kid. Wife is 35, I'm 39 and kid is 17 months.
Our income for 2018 will be around 88K, which is very representative of the last 7 years.
My full-time salary was 65K
Wife part-time was 7K
Rental Income was 16K
Our current net worth is around 565K.
Real estate equity: 475K
401K Balance: 105K
Cash: 15K
Student Loans: 30K
565K/88K= 6.42
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Isn't that figure dependent on how long you've been working/receiving income?
My savings rate is anywhere from 50%-70%, but my ratio is close to 1:2 as I have been working for approximately a year.
A person who has been working 40 years of their life making 50k per year, now 65 years old with 50k net worth (not looking good for retirement anytime soon) would have a ratio twice what mine is.
Not a very useful statistic for making comparisons, in my opinion. Unless i'm misunderstanding.
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Isn't that figure dependent on how long you've been working/receiving income?
Yup. Also makes people who've had recent, significant increases in income look comparatively bad.
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A more interesting ratio is to compare net worth to total earnings.
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Isn't that figure dependent on how long you've been working/receiving income?
Yup. Also makes people who've had recent, significant increases in income look comparatively bad.
Or someone with a high income and savings rate, who may be ready to FIRE before reaching an impressive ratio. We will likely pull the trigger around the time we reach OP's ratio.
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A more interesting ratio is to compare net worth to total earnings.
Our lifetime earnings is around 1.162 million of W-2 wages.
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I don't bother with the net worth calculation because I'm going to drawdown from my stash using the 4% rule, not from my net worth, that includes my house that I will continue to live in and will not be included in the 4% calculation.
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So we need a metric that takes into account progress towards FI in the numerator, and the denominator is your "FI number" + whatever debts you started with when you started tracking.
FI Progress Ratio: (Debts paid off + Savings/Investments)/(FI number + starting debts)
You'll need to calculate at least a rough estimate of what you need to be financially independent, and define a starting point for tracking your progress.
Let's say you started with $200k debt and calculate you'll achieve financial independence at a net worth of $1M. You've saved $100k into a 401k and paid off $100k of the debt:
FIPR: ($100k loan payoff + $100k in 401k)/($1M needed for FI + $200k starting debt) = ($200,000/$1,200,000) = ~17% of the way there!
For me personally, household ratio of net worth/income is ~1.5, but FIPR would be:
($20k debt payoff + $200k investments/savings)/($820k FI# + $20k debt)=220k/820k= ~27%
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I like your metric, Spoonsor, because you can compare it to how long you've been working towards FI and see if you're on track. If my FIPR is 14% after ten years and I'm 40, the prospects of reaching 100% in time to FIRE are pretty low so I'd better change my ways.
Our net worth/income is about 4.4 and our FIPR is betweeen .45 and .67--we disagree on the FI number needed. ;-)
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Love your metrics Spoonsor - simple math - clear path. Here is a little twist on the story for ya:)
So if I understand it correctly: $2K mo x 12mo = $24K x 25 = $600K = my FI#
I am RE and IRL I have $3,1K mo. which already includes medical coverage for life and has some COLA.
Debt $7,7K - Sav/CD $32K
I am basically working backward and saving ~$1.8-$2K mo. until I've reached $50K sometime in 2019 at which point I'll drop the savings to $800 ad infinitum - done.
Of course, there is a Mr. R. with a 401K/inv, a paid for house and no debt which brightens the picture considerably. Without MMM we would have made some stupid decisions and pulled out significant monies from the 401K for a home improvement project which we scrapped and morphed into an update with another final bathroom renovation taking place soon.
Who knows what foolishness I'd have embarked upon - instead I learned about implications of spending (even when you think you have it to spend).
MMM saved both our asses just in time - we'll be comfortable in retirement. Two more years for him and counting ...
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Since I don't know what I'll make this year, I'll use last year.
NW/income=15
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Ours is 7.11
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My net worth/gross income = 0.9
Would be 1.7 if the amount I paid to my student loans was added to my net worth. I'm relatively low income (for this forum) and have only been out of school 4 years.
FI Progress Ratio: (Debts paid off + Savings/Investments)/(FI number + starting debts) = 0.11
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Net worth is hovering around 30K, annual income has recently increased to 80K. 28F single-player in workforce for about 3 years. 40>48>65>80 for base pay at each job I've had in those 3 years.
So it's .375.
That said, I have a savings rate of between 50-60% and almost have my law school loans paid off, so I'm getting there.
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I got a better start with retirement savings than my wife.
So with me by myself, age 29, I'm at about a 2.0 NW to income ratio.
With the two of us combined, we're at about a 1.0 NW to income ratio! She's been making good money (more than me) but we did spend a ton of money in recent years on paying off debt, buying a house, furnishing it, and travelling more than average.
Oh well. We'll never be ideal mustachians as long as we're married, so I take comfort in knowing that at least we're doing much better than most of our age group, still shooting for FI in early-mid 50s.
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4.5:1
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Isn't that figure dependent on how long you've been working/receiving income?
Yup. Also makes people who've had recent, significant increases in income look comparatively bad.
One of the reasons I'm not a fan of the Millionaire Next Door formulas. They basically only work for people 40-55 who started their careers in their early 20s and had fairly steady incomes.
DW just got an 11% raise yesterday. We apparently became worse savers because of it, even though we're planning on banking 100% of it (post-tax).
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3.76. I only started making a significant income and saving a substantial portion thereof about 9 years ago (at then-age 39).
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A/S/R
39/F/8.5
About half my NW is my house and separate property, the other half is my retirement and "cash". I used my base salary + some overtime (my overtime usually pushes me over 6 figures, but I have a pretty good base, especially for my area.)
I've seen people try to put pension in their NW, but I've never figured out how that works. My pension isn't worth much if I cashed it out. I'd get less for a cash-out than I would in my first three months of taking it when I retire. But, it would replace 36% of my income if I work until I'm 57.
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Around 25:1.
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Gross income to NW at least 10 to 1
Take out taxes, new savings invested annually more like 20 to 1
Brings the question, "Why the Hell am I still working?"
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7.5:1 (but doesn't include future value of pension; it's 14:1 if I include that).