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Shooting Par Financially

Jennifer Openshaw

I think this is so true about most of life -- the career, the home-remodeling project, the spring-break road trip. It's also true with your personal finances.

Now, the beat-to-death wisdom heard from financial professionals is to set goals -- goals for wealth, college, home, retirement. If realistic, the goals give something to check your progress against.

OK, fine. But here's what's missing: Just how the heck do you set those goals?

I'm not a "keep up with the Jones'" kind of person.

But I do like to know how I'm doing. And I do think it's important to look at what others like me have achieved.

In golf terms, that's how I would set my par.

But I like the idea of doing better than the rest -- achieve more, do better, have a nicer home, retire more comfortably. So that's my financial birdie.

But before I can try for birdie, I need to know what par is.

That brings me back to the basic question: What is my par for this year? For next year? Five, 10 years from now?

Click here for the video version of this story from Jennifer Openshaw.

These are tough questions.

To answer, I like to look at financial benchmarks for the general public -- and better yet, for people like me.

So far those benchmarks have been elusive. Here are the best three I've found:

• Millionaire Next Door Formula

  Market research experts Thomas Stanley and William Danko gave us the best empirical formula to date.

  According to their research (offered in their 1996 book Millionaire Next Door), your par net worth should be a tenth of your age, times your annual income [(Age/10)*annual income].

  If you're 42 earning $100,000, that's $420,000 ($210,000 if you're 42 earning $50,000). If your net worth is twice that ($840,000 and $420,000 in our example), you're a "prodigious accumulator of wealth." That's your birdie.

  And if half that, you're an "under accumulator of wealth." Bogey.

  This benchmark serves well, but it factors in only age and income, nothing else. Still, I like it and use it a lot.

• Federal Reserve Survey of Consumer Finances

  Published every three years by the Federal Reserve, this complex and rich study dimensions wealth by several factors, including demographics, asset class ownership and debt profiles.

  The most recent version, from 2004 data published last year, shows a median net worth for all U.S. families of $93,100.

  But it gets more interesting.

  Here, for example, are median U.S. net worth figures, cut across two simple demographics:
  
  
  
  

  Age
  Less than 35 years	$14,200
  35-44	$69,400
  45-54	$144,700
  55-64	$248,700
  65-74	$180,100
  75+	$163,100
  Education
  No high school diploma	$20,600
  High school diploma	$68,700
  Some college	$69,300
  College degree	$226,100

  This just scratches the surface; I'll be back to share more in future articles.

• A.G. Edwards Nest Egg Score

  The clever nest-egg score is an intrepid venture toward creating a single credit-score-like figure to evaluate your wealth accumulation performance. It evaluates your conditions for saving, factored by income, some simple demographics and your wealth accumulation to date. Essentially, it reads how effectively you've saved given your situation.

  Although not as direct as other wealth benchmarks, like a credit score it helps to see where you stack up. You can get your score for free and compare it with national averages. While there's more to learn about how to deploy this feature in your own planning, hats off to A.G. Edwards for providing it.

The Stanley-Danko formula doesn't take much into account besides income and age, but it is a tantalizingly simple benchmark. The others bear further study and understanding, which I will share in future articles.

Find your scorecard, tee up, and stay tuned.