How to judge your net worth without comparing it to averages

A net worth figure compared with an average for your age tells you where you stand among people who are not you: different incomes, different cities, different starts, and different years in which a house was bought or not. Judge the figure by three ratios that are about your own household instead: net worth as months of your own spending, the change over the last year as a share of your take-home income, and the share of that change that came from money you kept rather than from markets. Each answers a question the average cannot, and each has a direction that is good regardless of where the number started. A $48,000 net worth judged by the three comes out well on two and short on one, which is a plan rather than a grade.

Why the averages don't apply to you

An average net worth for people in their thirties includes households with two professional incomes in cheap cities and one income in expensive ones, people who inherited and people who paid for school, people whose net worth is mostly a house that rose in value and people who rent by choice. The average is the middle of a spread so wide that being above or below it says almost nothing about the decisions you made. A median narrows the spread and still mixes the same lives.

What the average also cannot do is give you a direction. A household above it can be spending more than it earns; one below it can be saving a fifth of its income and on the way past it in five years. The ratios below have directions, and the directions are the point.

The three ratios

1. Months of spending. Net worth divided by your baseline monthly spending. It says how long the household's total resources would last with no income, and it puts the figure in the household's own units; see How to find your baseline monthly spending for the denominator.
2. Year's change as a share of income. Net worth now minus net worth a year ago, divided by the year's take-home income. It says how much of each dollar earned became wealth, which is the savings rate seen from the balance sheet.
3. Share of the change from money kept. The part of the year's change that was contributions and debt principal, divided by the whole change. It says how much of the progress was yours and how much was the market's, which is the part that will not necessarily repeat.

A worked example, $48,000 judged three ways

Net worth is $48,000 today and was $38,400 a year ago. Baseline spending is $4,300 a month, and take-home income for the year was $58,000. Over the year, $6,000 went into savings and investments and $1,800 of debt principal was paid; the rest of the change was market movement.

Two of the three read well and one is worth working on: the change as a share of income is strong, and most of it was earned rather than given by the market, but eleven months of spending is a figure that would not survive a long gap in income, and the household knows which number to move next year. No average by age was consulted, and none was needed.

What each direction means

• Months of spending rising means the household is becoming harder to knock over. It rises with saving and with lower spending, and it falls with a large purchase or a bad market year.
• The year's change as a share of income rising means a larger part of each paycheck is being kept. This is the ratio most directly under the household's control, and the one to compare with last year's.
• The share from money kept is a check on the other two. A year in which net worth rose 20% of income with 30% of it from contributions is a good market year that flatters the household; the same 20% with 90% from contributions is the household's own doing and will repeat.

Compare with yourself, on a schedule

Compute the three once a year, in the same month, from the same sources: the net worth reading, the baseline, the year's take-home, and the year's contributions and principal. Write them in a row under last year's. The comparison that matters is vertical, this year against last, and after three years the rows are a record of whether the household's decisions are working, which no table of averages could produce.

Common mistakes

• Reading the average as a target. It is the middle of lives unlike yours, and it has no direction.
• Judging the level without the change. A large net worth that fell this year and a small one that rose 20% of income are not in the order the levels suggest.
• Crediting the market. A year of investment gains is not a year of saving, and the third ratio keeps the two apart.
• Using gross income in the second ratio. Take-home is the money that could have been kept.
• Using this month's spending instead of the baseline. A cheap month inflates the months-of-spending figure; the baseline does not.
• Computing it monthly. The ratios are yearly by nature, and a monthly reading measures noise.

Common questions

What should my net worth be at my age? The question compares you with households unlike yours, and it has no useful answer. Ask instead how many months of your own spending your net worth represents, what share of this year's take-home became wealth, and how much of that was your doing. Each has a direction that is good at any starting point.

Is my net worth good? It is good if the three ratios are moving the right way year over year: months of spending rising, the year's change a larger share of income than last year, and most of the change from money kept. A household that can say yes to those is doing well whatever its level.

How do I compare with last year if I didn't track net worth then? Reconstruct it from last year's statements, which most accounts provide, and start the row. The second and third ratios need two readings; the first needs only today's.

Does a house make these ratios misleading? The house counts at its current value with the mortgage as a liability, so a rise in the home's value raises net worth without any saving, and the third ratio shows that as market movement rather than money kept. That is the correct reading: it happened, and it was not the household's doing.

How often should I compute the ratios? Once a year, in the same month. The monthly net worth reading is for the trend; the ratios are for the yearly judgment, and they change too slowly to mean anything more often.

How Zypper handles this

Zypper supplies the first and second ratios' inputs from one page. Net worth is computed from every account and charted over time, so today's figure and the figure a year ago are two points on the same line, and the change between them is read rather than reconstructed; connected accounts update every day and manual accounts contribute the balance you set. The cash flow page charts income against spending for the year, which is the take-home figure and the baseline in one view, and the transfers into savings and investment accounts are recognized as movements between your own accounts, which is the contributions figure for the third ratio. See Net worth tracking and Cash flow for the details, or get started with Zypper to judge your own number by your own ratios.