tag:blogger.com,1999:blog-5523671.post115758258483184200..comments2023-10-25T03:40:43.931-07:00Comments on Ne Cresin so Arthaey: Calculate Your Expected Net WorthArthaey Angosiihttp://www.blogger.com/profile/17107174886837969594noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5523671.post-1158073763200892342006-09-12T08:09:00.000-07:002006-09-12T08:09:00.000-07:00I too have issues with the formula, but I believe ...I too have issues with the formula, but I believe the authors of the book try to use it in two ways:<BR/><BR/>1) To explain a common trend among the millionaires they interviewed. They find that most wealthy people invested at least ten percent of their wealth. <BR/><BR/>2) For the multitudes who wonder if they are track to become wealthy, the formula may be useful. However, it only works if you have been working for about ten years. A doctor or lawyer fresh out of school with little savings, school loan debt and a high initial salary will appear to be destitute with the MND formula.<BR/><BR/>I suggest taking to heart the spirit of the formula, which is to say that you need to save at least 10% of your income in order to become wealthy. Do this and gradually develop more investing acumen over time. As this happens the formula becomes irrelevant for other reasons, namely you will develop a more personalized sense of what is required to live well on your investments. No one can create a formula to answer that question but you.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5523671.post-1158022057709435452006-09-11T17:47:00.000-07:002006-09-11T17:47:00.000-07:00Debbie said: I use a spreadsheet.Thanks for postin...<I><B>Debbie said:</B> I use a spreadsheet.</I><BR/><BR/>Thanks for posting how you take into account changing income levels! I've made myself <A HREF="http://www.arthaey.com/Expected Net Worth.xls" REL="nofollow">an Excel spreadsheet like you describe</A>. Do you have any other suggestions on how to make my spreadsheet better?Arthaey Angosiihttps://www.blogger.com/profile/17107174886837969594noreply@blogger.comtag:blogger.com,1999:blog-5523671.post-1158002790255726972006-09-11T12:26:00.000-07:002006-09-11T12:26:00.000-07:00Yes, the simple formula from _The Millionaire Next...Yes, the simple formula from _The Millionaire Next Door_ is too high in the early years (because, as you said, you haven't had time to earn that much) and too low in the late years (again, as you said, because of all the compounding). (Being in my middle years, the two formulas you provided work out to be about the same for me.)<BR/><BR/>I also have a problem with basing everything on current gross income. This is what makes the calculation simple, but it's so sad that when you get a raise it suddenly makes your net worth look worse.<BR/><BR/>What I do is go with the assumption that I should be saving 15% of my income (like millionaires do, according to that book) and earning at least 8% on my investments.<BR/><BR/>I use a spreadsheet. In the left-hand column, I list the year, starting the first year I had a job.<BR/><BR/>In the next column I list my income for that year. This is the hardest part since I didn't start this until I had already been working a couple of decades, so I just took the figures from the statement the IRS sends out each year. I don't, therefore, have all my babysitting earnings, etc.<BR/><BR/>In the next column I list what the net worth should be at the end of that year. For the first year, that would just be 15% of the income for that year (=[income]*0.15).<BR/><BR/>For the other years, I assume the net worth from the previous year grows at 8% AND that I save 15% (=[previous year's net worth]*1.08 + [this year's income]*0.15).<BR/><BR/>This method gives me a number that's a little higher than the other two but still quite reasonable.<BR/><BR/>To calculate my expected net worth in future years, I assume my income increases at 3% per year (based on inflation) for a conservative estimate. You have to be careful, though, because those numbers will look bigger today than they will later because of inflation. To get that same number in today's values, assume your salary stays the same each year.Anonymousnoreply@blogger.com