Most people are desirous of retiring rich and early. Unfortunately, not everyone succeeds at it before they grow old and die. Many work hard their entire life and never get the chance to enjoy much. Some retire with a meagre pension that sometimes is denied them.
To avoid turning out this way, take practical steps towards making your dreams of financial freedom a reality. But how do you do this?
The easiest way is to monitor your net worth at various stages of your life and career. After all, wealth creation is all about growing your net worth methodically.
What is your net worth?
We often hear about the net worth of CEOs and some of the world’s richest people. You might think that discovering yours is unimportant. But trust me; net worth calculations is not something reserved exclusively for a select few. Everyone should know theirs.
Whether you make a living as an entrepreneur, a government worker, or as a staff in a private institution, it’s a good idea to keep track of your net worth. You really need to start if you haven’t already.
To find out your net worth, subtract your liabilities from your assets.
Net worth = Assets – liabilities
It’s true that some people may not be able to tell the difference between the two. Most acquire lots of liabilities and think of them as assets. So, before we proceed, let’s distinguish what your assets and liabilities are.
What is an asset?
An asset is anything you own that can put money in your pocket. If you sold all your possessions, what would they yield?
Your assets include:
- Current market value of your real estate holdings.
- Current market value of your business.
- Cash in your savings and/or current accounts.
- Current market value of your investment accounts, including mutual funds, individual stocks and bonds, insurance policies, and so on.
- Your retirement savings.
- Current value of your cars.
- Other items of value, such as jewellery, furniture, artworks, and so on.
What is a liability?
You guessed right… A liability is anything that removes money from your pocket. Liabilities are debts, basically. They include:
- Personal loans
- Business loans
- Car loans
- Mortgages on your home and/or rental properties
- Credit card debt
- Student loans
- Medical debt
- Judgements or liens against you
It is not advisable to measure your financial progress based on your monthly income alone. Why? Most of what you earn might not be going into your savings or used to make investments. They could be used for expenses, in which case you really don’t have much to your name.
However, there is an easy way to quickly calculate your net worth:
Net worth = (Age X Pre-tax income)/10
The flaw in this formula is that it doesn’t consider your debts.
What good is it to track my net worth?
Your net worth reveals your overall financial health. It helps you figure out how much to spend and save every year till you reach your retirement age.
Tracking your net worth makes you more purpose driven. How? You’d realize whether you are making progress, retrogressing, or just financially dormant despite breaking your back working hard all the time. Afterwards, you can decide on what changes to make so as to improve your current financial status, be it good or bad.
If you’ve been making, say 500, 000 naira yearly for the last 10 years, and you have a net worth of 2 million naira, it shows you have some serious financial issues.
Therefore, tracking your net worth will let you know when you are deviating from the path towards achieve your goals of financial freedom and make timely decisions on how to get back on track.
Net worth benchmarks based on your age
After you have calculated your net worth, as described above, it could turn out to be negative or positive. If it is negative, the best response is to not fret. At least you’ve taken the first step in the right direction and can start making plans to change your status quo.
If you have only just left school or recently begun your career and haven’t gone far in it, it is expected that you may have a low or even negative net worth, especially if:
- You pay rent, bought a house on mortgage, or make other considerable expenses.
- Recently just started saving for your future.
It is advisable to set net worth milestones at different stages of your life, right from your 20s till the day you retire.
In your 20s
It’s a brutal wake-up call for most people when they step out into the real world. It’s even worse if you don’t have anyone to support you financially.
At this stage, you should focus more on managing your expenses and debt. After you’ve got your first job, begin immediately to build your net worth.
Although it may sound too soon, it is also a good idea to start saving for your retirement once you are able to. Even if the firm you work for provides a retirement plan for employees, you should open an account for your retirement savings.
In your 30s
The financial decisions you make in your 30s determine the net worth you can achieve later in life. Most people get married at this age and have a family to take care of. The wise thing to do is create a budget to keep track of your spending.
At this age, aim to have at least half your salary saved up in your retirement account. Assuming you make 500, 000 naira, have 250, 000 naira stashed away.
In your 40s
At this age, you should have two times your annual salary saved up. If your salary is 500, 000, your net worth should be 1, 500, 0000 naira.
It is expected that you make real estate investments. Aside from putting money in your retirement account, real estate investments are a great way to boost your net worth. Your real estate holdings can appreciate in value over time.
In your 50s
By the time you are in your 50s, your wealth should be growing exponentially based on several other investments you’ve made in addition to buying real estate and your retirement savings over the years.
Aim to have a net worth of four times your annual salary at this age. This is possible if you began saving and investing right from your 20s. If you began much later, the solution would be to save more aggressively.
You may have children that are in their teens or early adulthood. Encourage them to cover some of their expenses on their own. Not only can you to save more towards your retirement, your children will also start off on the right path as they realize the importance of saving and money management. This might not be the case if you give them whatever they ask for whenever they ask for it, even after they’ve reached a certain age.
In your 60s
Your net worth target in your 60s should be set at 6 times your annual salaries, or more, based on what your needs will be after you retire.
Your expenses should be less now, since you might be living alone with your spouse. The last of your kids could be in college or even making a living already. If so, you can save about 85 per cent of your income for your retirement. You might need to save more if you would like to travel the world when you retire, or will need money to carter for some health issues you may have.
On the other hand, if you are as strong as an ox and don’t expect you will be making much expenses after your retirement, you can save less than 85 per cent of your annual income at this age.
Also, if you would rather retire early than keep working when you are 70 or older, ensure you have a considerably high net worth in your 60s. To help you reach your goal, capitalize on your investments and find ways to lower your cost of living.
Consider getting disability insurance. This is very important, especially if you have health issues. The insurance replaces the income you’ve lost when you are no longer able to work during these years leading up to your retirement. This way, you can avoid depleting your net worth even as you cover your medical bills.
After you’ve retired
When you are retired, you can stay comfortable with the resources accumulated all through your work years. Even then, still keep on building your net worth.
From your 20s to when you clock 30, you are at your extreme net worth growth phase. When young and unmarried, it’s possible to double your net worth quickly. You have plenty of time to learn from your mistakes and therefore should take a lot of calculated risks.
When you are between the ages of 30 and 35, you have either achieved financial freedom, or you know you are on the right path to it. Your income should be much more than it was in your 20s, which means you can increase your savings and investments.
Between the ages of 35 and 40, you must have gained a lot of experience and respect in your line of work. Reduce the risks you take because you have many dependents now. You may also need to create an extra budget for the upkeep your parents, who may have reached retirement age. Acquire many risk free assets. Diversify your net worth in real estate, stocks, bonds, and your own business.
From 41 to 55 years of age, you’ve grown your wealth to a sizeable value that needs to be protected. You may begin to be more conservative and hoard your cash. But you should avoid being too conservative. Find ways to generate passive income streams and optimise your existing investments.
By the time you are 56 to 70 years of age, you should have achieved your financial dreams.
To ensure that you can meet your net worth benchmarks, be more interested in taking action to improve on your current status rather than fold your arms and complain about how harsh the country is.
Use these net worth-building ideas to achieve your financial goals and have a wonderful life:
- No matter how much you earn, always have spending, savings, and investment budgets. Even if you don’t have anything to invest in yet, still make an investment budget and keep the money till such a time you find something to invest in.
- Always save at least 20% of your monthly income.
- Get a job that pays more.
- Start your own business.
- Have a side hustle, and build multiple streams of active and passive income.
- Cut your expenses
- Avoid or reduce debt as much as possible.
- Make investments and take calculated risks.
- Set actionable goals every year.
We hope you’ve found this content useful as you work towards making your financial dreams a reality.
Editor’s Note: This article was written by Tobenna Nnabeze.