To gauge performance, you need to have net worth benchmarks. Otherwise, you have no idea whether you are outperforming or underperforming the masses. With net worth benchmarks, you can also retire early for greater happiness if you wish!
Even if your net worth is up 20% one year, it may be not be so great if the S&P 500 is up 28% and you're still young. At the end of the day, everything is relative in personal finance. To achieve financial independence sooner, you must outperform your peers or at least, the average.
Net worth benchmarks will help you stay disciplined in growing your net worth over time. Further, net worth benchmarks will change as you age and have different financial objectives.
Net Worth Goals Change As You Age
When I was in my 20s and early 30s, my net worth goal was to always grow my net worth faster than the S&P 500. This is easier to do the less money you have thanks to aggressive savings.
Now in my 40s, my goal is to try and earn a return equal to at least 2X the risk-free rate of return. With the 10-year bond yield at around 4%, my net worth target return is only about 8%.
The more money you have, the more risk averse you tend to become. At least that's my experience. Further, there's no need to swing for the fences when hitting singles and doubles can provide for a healthy lifestyle.
If you've escaped the rat race, the last thing you want to do is have to get back in, especially if you have young children. Your goal in retirement is capital preservation and steady income.
For example, you can invest your entire $300,000 portfolio in the S&P 500 to earn potentially $45,000 (15%) or lose $45,000 one year. Losing $45,000 is not a big deal if you're making a decent salary and are willing to work for many more years.
But if you have a $5,000,000 portfolio and are approaching retirement, shooting for a 15% return is unnecessary. Potentially losing $750,000 in one year would be extremely painful!
If you can comfortably live off $300,000 a year gross, then you only need a 6% return. And shooting for a 6% return (a ~40/60 stock/bond portfolio) will likely protect you from losing more during bad years.
Let's review various net worth benchmarks you can follow to gauge your net worth performance. My hope is for all of you to outperform.
Net Worth Benchmarks To Gauge Performance
Here are the best net worth benchmarks to consider so you know you're on track to achieving financial independent.
1) The S&P 500 Index. If you live in America, the easiest and most common net worth benchmark is comparing your portfolio's return with the 500 largest stocks in the country. The S&P 500 represents 14 different industries, thereby thoroughly representing the economic health of our nation. Wherever you live, just use your country's largest stock index as a benchmark.
2) Risk Free Rate Of Return Times A Multiple. The risk free rate of return is the 10-year bond yield, which changes every single day. You need to figure out a reasonable multiple on that bond yield because you are guaranteed to return the yield if you put all your money into Treasuries.
What rate of return over the risk free rate (equity risk premium) do you require? My simple formula is to take the latest 10-year bond yield and multiply the figure by 2-to-4.
3) Sector Specific Exchange Traded Funds (ETFs). If you work in the real estate industry and invest in REITs and homebuilders, then you should consider benchmarking your financial performance to a homebuilder ETF such as ITB, XHB, or PKB.
Let's say you work in pharma at Pfizer. Then consider ETFs such as PJP, IHE, XPH. If you work in finance and own your bank's shares as part of your annual bonus, then maybe indexing yourself against XLF is a good idea. Whatever industry you are in, there is an index or an ETF for you to use.
More Net Worth Benchmarks To Consider
4) Consumer Price Index. The CPI is produced by the Bureau of Labor Statistics and is often maligned as an unrealistic gauge of inflation. The CPI should be considered the base case benchmark for everyone to beat.
In 2022, inflation soared by 9%. As a result, your net worth benchmark had a higher hurdle. Thankfully, inflation is fading again, so your inflation net worth benchmark is lower in 2023 and beyond.
5) The Case-Shiller Home Price Index. The Case-Shiller Home Price Index has risen to be the authoritative benchmark for real estate performance. The Index breaks down home price growth by region.
Given we've discovered that a lion's share of the median net worth in America consists of property, then the Case/Shiller Index should be a relative good barometer for the median American. Home prices have been accelerating during the pandemic.
Coming out of the pandemic, investing in real estate is one of the best moves to make. Inflation is picking up. Therefore, you want to own a real asset that inflates with inflation while the cost of debt whittles away.
My favorite way to invest in real estate is through Fundrise, the pioneer of private eREITs. I've personally invested $810,000 in real estate crowdfunding to diversify and earn income 100% passively.
If you are an accredited investor, another fantastic platform is CrowdStreet. It focuses on individual real estate opportunities in 18-hour cities. 18-hour cities tend to have lower valuations, higher yields, and faster growth. Both platforms are free to sign p and explore.
Owning rental properties and public REITs are also a great way to profit from inflation. However, rental properties require maintenance and time. Publicly traded REITs can often be more volatile than stocks.
6) Hedge Fund Index. Hedge fund managers are supposed to be masters of the universe. Unfortunately, in a bull market they generally lag because of their mandate to hedge. They have absolute return goals where investors expect them to continuously make money even during recessions.
One of the most widely followed hedge fund ETFs is HDG. The HDG is designed to reflect hedge fund industry performance through an equally weighted composite of over 2000 constituent funds. Recently, HDG has performed quite well to many investor's surprise.
Alternative Net Worth Benchmarks To Track Performance
Besides the above traditional net worth benchmarks, here are more alternatives to consider.
1) Your Parents Financial Situation At Your Age.
Ask your parents what their circumstances were at your age. Did they own a home? A car? What was their savings level, salary, net worth? It may be a fun exercise to have a candid financial conversation with your parents.
Be sure to use an inflation multiplier to get a like-for-like comparison. It could be interesting to get some subjective thoughts about their financial situation compared to yours.
2) The Neighbor You Despise.
Comparing yourself to your neighbor is one of the most common, yet worst ways to compare your financial situation. You don't really know exactly how they got their money. So comparing could drive you nuts! Whenever we see a new car in our neighbor's driveway, it's hard not to feel envious. We wonder whether they got a great bonus at work or in my neighbor's case an inheritance.
My neighbor is 26 years old and rides a brand new $10,000 motorbike. He also has a couple sports car because he has no living expenses living at his parent's house. His parents travel back and forth between their two houses. He probably has an embedded net worth of $2,300,000 because he will inherit his parent's house when they pass.
He would be OK if he didn't leave his motorbike running outside every morning, rumbling the entire street with noise. But he still lights firecrackers at night with his other deadbeat friend because he has nothing better to do.
3) Balance Sheet Affluent Formula.
Another net worth benchmark is the balance sheet affluent formula. This formula was created by Dr. Thomas J. Stanley, author of Millionaire Next Door.
The formula is: 10% X Age X Income = Expected Net Worth. In other words, your household’s net worth should equal 10% of the age of the main breadwinner times your household’s annual realized income [adjusted gross income is a good substitute].
If you are in the Balance Sheet Affluent category, also known as prodigious accumulators of wealth, your net worth should be twice the expectation. Hopefully that's all of you Financial Samurai readers!
I firmly believe many Financial Samurai readers can and will achieve a $1,000,000 net worth by age 50 by aggressively contributing to their pre-tax retirement savings, investing an additional 20% of their after tax savings, owning a primary residence, and working on a side hustle.
Another great net worth benchmark combines your finances with your love interest.
Building wealth is generally easier if you have a life partner. Many have wondered whether they should just double the net worth figures in the above average person chart above if they are a couple. That's one way to do it if you believe in equality.
Or, you can take a hybrid approach like I've done below. Read the article about various ways to calculate an above average couple's net worth benchmark.
If you're really gung ho, then you might want to try and earn a top 1% income level for your age group. Then shoot for a top 1% net worth as well. There are plenty of people who make a lot of money. But they blow it all due to a lack of financial discipline.
Shoot for a $1,000,000 net worth by 35. At age 50, shoot for a $5,000,000 net worth. And by age 60, shoot for a $7,000,000+ net worth. These numbers are roughly 13% light because nowadays top one percent income is over $400,000 a year.
If you're feeling unmotivated, then you can always follow the mean (average) retirement account savings of American families by age based on 2019 data. This is a low net worth benchmark to consider given the median American isn't that wealthy.
The sad part of this chart is that it's much higher than the median retirement account savings of families by age. The median 56 – 61 year old only has $17,000 saved. I hope you guys all agree that the below figures are not very inspiring.
Best Net Worth Benchmark To Follow
Given everything is always changing, you need a dynamic net worth benchmark to follow. Therefore, I think the best net worth benchmark to follow is the annual performance of the S&P 500.
So long as your net worth is growing in line with the S&P 500's performance, you're making progress. During down S&P 500years, hopefully you'll be able to still outperform or still grow your net worth through aggressive savings.
If you are close to retirement or retired, I think the best net worth benchmark to follow is 2X-4X the 10-year bond yield. The 10-year bond yield encapsulates everything from inflation expectations to equity and real estate return expectations. Once you're close to winning the game or have won the game, it's important to dial down risk.
Feel free to take a look at my net worth targets by age as well. It will keep you honest and motivated to always stay on track financially. If you are really enthusiastic, you can see my extreme net worth targets by age as well.
Assign Meaning To Your Numbers
Having more money tends to be better than having less money. But after a certain point, more money means nothing, and can often bring about misery if too much time is spent chasing the almighty buck.
Write out your financial objectives, make a plan, track your net worth, benchmark its growth against your comparison of choice, and go about living as full a life as possible. If the numbers are good enough for your lifestyle, that's all that matters.
Since 2012, my #1 goal has been to earn enough money from my investments and my writing to never have to work a day job again. In order to do this, I had to figure out a way to generate as much passive income as possible.
Today, with two kids and a non-working spouse, my goal is to consistently generate at least $300,000 a year in passive income until my kids graduate from college. This may sound daunting, but that's the challenge I've set for myself!
Invest In Real Estate To Grow Your Net Worth Further
Real estate is my favorite way to grow your net worth because it is a tangible asset that is less volatile, provides utility, and generates income. The one-two punch of rising rents and rising property values over time is a powerful net worth builder.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for all investors to invest in high-quay residential and industrial real estate with just $10. Fundrise has been around since 2012 and focuses its investments in the Sunbelt region, where valuations are lower and rental yields are higher. The real estate platform has over 500,000 investors and manages over $5 billion. It is my favorite platform.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$380,000.
Best Way To Track You Net Worth
The easiest way to track you net worth is with Empower, the best free financial tool online today. I've used Personal Capital to track my net worth, analyze my investments, check for excessive fees, and plan for retirement since 2012.
All you've got to do is sign up, link up your financial accounts, and then you can see everything in one place. There's no rewind button in life. Stay on top of your finances today.
Readers, what do you benchmark your net worth performance to? What are your main financial objectives? What other net worth benchmarks can you think of?
Net Worth Benchmarks To Ensure Proper Growth Over Time is a Financial Samurai original post. Join 65,000+ others and subscribe to my free newsletter if you want to achieve financial independence sooner, rather than later.