In my last article Use a Personal Balance Sheet to Determine Your Net Worth I introduced the topic of a personal balance sheet, which I have been using since 1994. Now let’s explore one’s net worth by age.
We frequently think of increasing our wealth by adding more assets, but we can also increase our wealth by reducing liabilities, e.g. what we owe.
In your 20’s
Most individuals in their 20s have just finished school and have assumed loans for attending school. They have saved little and may even have credit card debt. At this point in time you have a negative net worth, hence your liabilities exceed your assets. You have your first job and you are making significantly more money than you have before. An urge may be to spend all this money, but you should first pay off the debt you owe. You can improve your net worth by paying down the debt as fast as possible. Forgo the Starbucks coffee. Stay in one or more nights a week and use that savings to pay off the debt.
In your 30’s
You have gotten married; you’re making two incomes and are beginning a family. This is a big transition decade. For a period of time your net worth increases because of the dual income. You can start putting away money in a 401k or an IRA. At this point, you have a child and your expenses increase. You may even buy a home. You have enough for a down payment, but you also take on a mortgage. Consequently, the surge in net worth diminishes due to the reduced savings and the purchase of the home.
In your 40’s
Your income has begun to rise but expenses are high due to managing a family. You are thinking about sending kids to college. This is important to make sure that you are saving and putting away more for retirement and for your children’s education. There is an urge and maybe a hurdle to spending. You will have to be diligent in saving the money you make. Your liabilities, especially your mortgage, should be declining. You can choose to pay down more debt or increase your assets. Both will increase your net worth. A lot of your growth in net worth is dependent on saving more than you spend. These may take a complete reconfiguration of how you look at saving and spending. For an alternative viewpoint, check out Mr. Money Mustache, where the family lives on just $25,000 and both the husband and wife are “retired”.
In your 50’s
This is probably your prime earning years. You could be saving the most, but you might also have high expenses if you are funding your children’s education. By the end of your fifties, you should be accelerating your savings and therefore your net worth. You should have little debt.
In your 60’s
You are deciding when to retire. It may depend on when you can pay off your house. With any luck, the stock market and your other assets have increased in value. Your net worth has increased. Deciding when you should retire may also depend on how much income you think you need and how much can you safely withdraw from your investments. A common rule of thumb is to have 20 to 25 times the income you want for retirement saved. You may be able to offset this with social security, pension or other income.
In your 70’s
You have chosen to retire or love your job and therefore continue to work. Your debt is gone and giving you complete freedom to choose to work or not. Your net worth may decline in some years as withdrawals and a decline of investments may cause a reduction in some years. If your net worth increases you may consider giving more to charities and or children and grandchildren.
Some financial advisors may suggest decreasing stock exposure, using the rule of thumb called “the rule of 100”. However, it may be better to start out with fewer stocks and increase stocks in your portfolio as you age. Better yet, you may also look at the valuation of the stock market and decrease stock exposure, as valuations get extremely high. Either way you want to try and smooth your glide path of your net worth.
In your 80’s
With some good investments and minding some of the hazards of investing, you have started to deplete your net worth. We all know, amongst people who have seen a larger depletion in net worth due to health expenses, that there are ways to reduce this impact. Or you can decide that your net worth is strong enough to pay health care expenses as they arise.
The components of your net worth change over the years. You can be in control and make better decisions by updating your personal balance sheet. Tracking your net worth and your assets’ growth gives you a view of how well you are accomplishing goals. It is not the year-to-year growth that is important, but the process you undergo in attaining your goals.
To learn more about James Cornehlsen, view his Paladin Registry profile.