Do you ever wonder if you’re on track when it comes to your money? A few weeks ago I published a post about what your net worth should be at 30. The truth is, life at 40 is so much different than life at 30, it’s crazy! A decade can change so much when it comes to your finances.
By the time you’re in your 40’s, you probably feel like you’re in a bit more of a stable place with your finances. Debt, like student loans or a mortgage, may still be something you’re dealing with – but it’s less looming than it was in your 20s or 30s. You’ve probably progressed in your career, have started a family, and have been steadily building your wealth for the past decade or so.
All of these things point to financial progress!
Looking for a clear way to check in on how you’re doing? Calculating your net worth, and tracking it semi-regularly, can help you to see whether your efforts to work your wealth are paying off.
Calculating Your Net Worth
Calculating your net worth is easier than you think. You start by pulling together a list of your assets. This is everything from the cash in your bank accounts, to the value of your car or home, to the value of your investments. Once you have your assets listed, you list your liabilities. In your 40s, your liabilities are likely:
Now, you take your total assets, subtract your total liabilities, and voila! You’ve just calculated your net worth.
How Often Should You Check Your Net Worth?
Honestly, your net worth isn’t going to fluctuate a ton week-to-week, or even month-to-month. Sometimes you’ll see a big jump after paying down a loan or knocking out a credit card. We’re usually just looking for slow and steady growth as you work to pay off your liabilities and increase the value of your assets. So, checking your net worth yearly, or as often as once a quarter, can help to give you a good idea of your big-picture.
Why Is Your Net Worth Important?
Your net worth doesn’t necessarily define your financial life. It is, after all, just a number. However, watching how your net worth grows or changes can be a pretty good predictor of your financial progress over the years. For example, if you feel like you and your spouse or partner have been making great progress paying off your mortgage, but your net worth is still steadily declining every quarter, that’s a problem. This could mean that you’re not paying as much toward your mortgage each year as you think, or maybe you’re taking on more debt in other areas of your life – even as you pay your mortgage off. Regardless of the reason, you may be fooling yourself about the progress you’re actually making toward your goal of becoming debt-free.
On the other hand, looking at your net worth may give you a bit of a confidence boost! Many people beat themselves up about their financial decisions, or are worried that they’re not doing enough to grow their wealth. When they see that their net worth is solidly positive and climbing year after year, it’s a relief! In these cases, checking your net worth can be a great way to remind yourself that you truly are making a big effort to grow your wealth and pay down debt. Keep it up!
Knowing your net worth is a great way to track where you are, and what financial trends are happening in your life. More than that, though, checking your net worth can help you to decide what you need to do in order to get where you want to be. This is especially true in your 40s! You still have plenty of time before retirement, which makes now the ideal time to look at your net worth, set goals for growth, and put a strategy in place.
What Should Your Net Worth Be At 40?
Everyone’s financial situation is unique, and your net worth is going to reflect that. There’s no one “right” net worth to work toward when you’re in your 40s. Your net worth goals should be based on your lifestyle goals – not just an arbitrary number you want to grow your wealth to.
That being said, there are a few ways to determine whether you’re “on track” with your net worth.
Rules of Thumb
There are a few rules of thumb that people follow when setting a net worth goal. The first is a catch-all equation:
Ideal Net Worth = [Your Age – 25] x [⅕ x Annual Gross Income]
Let’s look at an example. Let’s say you’re 43 years old, and you make $100,000 a year. Using the above equation your ideal net worth would be $360,000.
$360,000 = [43-25] x [⅕ x $100,000]
Another common rule of thumb when it comes to net worth goals is to have a net worth of 2x your annual salary by the time you’re 40 years old, and 4x your annual salary by the time you turn 50.
Using our example above, if you’re now 43 and your salary is $100,000, you should have a net worth of almost $300,000.
Looking At Your Net Worth History
Although these rules of thumb can be helpful to give you a target ballpark for what your net worth should be, it can also be helpful to look at your net worth history to set future goals. For example, if your goal has been to pay down your debt over the last decade, you may not have been saving as aggressively.
Now that your debt is close to paid off, you’ll be able to put more toward saving for retirement, or for other big-picture goals. Knowing that your debt has taken up a big chunk of your net worth in the past, you’ll be able to set goals for exponential saving and growth now that debt payments aren’t eating up your monthly cash flow.
What Does it Take to be Above Average?
According to the Financial Samurai, the average net worth for a 40 year old in America is approximately $80,000. The above average 40 year old, on the other hand, has a net worth closer to $660,000. That’s a huge gap!
To move yourself into that financially successful, “above average” demographic, you can do a few things:
- Watch your spending. Remember – the goal is to grow your wealth, not burn through any cash you have sitting around.
- Prioritize debt repayment. Debt can be a net-worth-killer. Prioritizing debt repayment over the next several years, and then focusing on staying out of debt is key.
- Negotiate your salary. The more you earn, the more cash flow you’ll have to grow your savings and pay down your liabilities.
- Focus on saving. You can’t boost your net worth if you don’t start growing your savings! Even if you’ve already maxed out your 401(k), there are so many different ways you can save for retirement, or other future goals. Take advantage of them!
- Leverage compound interest. Compound interest acts like a rolling snowball for growing your wealth. You start with a small amount, but as you continue to contribute, and your interest grows your contributions, your wealth will start to multiply exponentially. Take advantage of compound interest by focusing on investing consistently, contributing to your workplace retirement account, and finding high-yield savings vehicles for your money.
Working with an Advisor Can Help
Looking for additional ways to grow your net worth? You might be feeling like your finances are a black hole right now. Figuring out how to continue making progress, and grow your net worth, can be time consuming. The worst part is that, all too often, when you’re going it alone, it’s easy to fall off the bandwagon. Even if you create a well-researched, airtight plan for your family to start growing your wealth, it’s easy to get off track.
Working with an advisor can help. A fee-only financial planner can act as your accountability partner, making sure that you’re always working with a money map that balances saving for the future while enjoying your life in the present. They can also help you to develop a strategy for everything from your daily cash flow to your retirement investments. If you’re ready to find a partner who’s on your side in your fight to grow your net worth, reach out! We’d love to talk to you about how financial planning can help.