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AS I PULLED UP IN my used Subaru wagon to the high school drop-off line with two grumpy teenagers on the first day of school, I noticed something was different.
Because of the pandemic, our sleepy, semi-rural town in upstate New York had seen an influx of Manhattanites and Brooklyners over the past year. My Subaru was now bracketed by a shiny Tesla sedan and a polished Mercedes SUV. The usual collection of less flashy cars and trucks seemed to be missing.
The thought then buzzed through my head: Was our sacrifice worth it?
After arriving as a Bangladeshi immigrant on a snowy Boston evening in 1980, I had somehow managed to stumble, fall, get up, run, stumble, rumble, fall, rise, fall and then bootstrap myself into the American upper-middle class. I could afford a fancy car, but every sage piece of financial advice I’d read advised me not to fall into that trap.
As a result, I have sacrificed some markers of affluence. Those savings were plowed into investments that will hopefully allow me to reach retirement earlier. But was I fooling myself? Was the sacrifice worth it? Where was our household compared to similar households?
After a career negotiating commercial contracts, I knew the best way to answer that question was to benchmark myself. Federal Reserve data available online, combined with the incredibly helpful financial blogging community, would allow me to do so in a matter of minutes.
Every three years, the Federal Reserve publishes its Survey of Consumer Finances that contains a wide array of household financial data. From this information, we can painstakingly craft useful calculators, data sets, charts and graphs. Unfortunately, I have no idea how to do any of that. Fortunately, there are many bloggers who do.
For example, the smart people at DQYDJ.com, short for “don’t quit your day job,” have created a handy net worth calculator that will compute your net worth percentile based on the latest Fed survey. If you’re wondering, the median net worth in America is $121,411. Based on DQYDJ’s calculator, our net worth puts us in the top 5% of American households. Wow, I thought, we’re doing great.
On the other hand, we should be doing great. Our household income is far above the U.S. median of $67,463. My wife and I are a college-educated, dual-income household in our prime earning years. It makes no sense to compare our net worth to the average kid coming out of college or to a recent retiree. The question is, how are we doing compared to our peers?
Again, smart bloggers have already crunched the data. Over at OfDollarsAnd Data.com, one of my favorite bloggers, Nick Maggiulli, has spliced average net worth data to control for education and age. According to Nick’s numbers, the median net worth of a household headed by a college-educated 45-to-54-year-old is $488,000. This doesn’t take into account, however, the wide range of incomes that a college-educated person might enjoy.
It would make no sense to compare a working actor’s salary to that of an actuarial data scientist, even though both might have degrees from a top-rated college and be the same age. Here, Nick obliges us again by revealing that the net worth of a household headed by a college-educated 45-to-54-year-old is $1.3 million at the 75th percentile and $3.8 million at the 90th percentile.
For the tech-savvy, there’s a myriad of new apps that will not only calculate your net worth, but also do so on a daily basis. I’ve heard good things about Mint and Personal Capital. I use an app called Status that will calculate my net worth percentile compared to peers based on my region, homeownership status, credit score and income range.
As you can tell, the hard data exist to benchmark your financial condition. Everyone, regardless of income, should try it out. If you don’t feel like crunching numbers online, there’s a formula that I first discovered 20 years ago while reading The Millionaire Next Door by Thomas Stanley and William Danko. According to the book, your net worth should be your age multiplied by your gross income, divided by 10. If you’re age 45 and your household gross income is $100,000, your net worth should be $450,000 (45 x 100,000/10).
That’s your benchmark. If you’re close or above it, that’s great. What if you’re way below? That can easily happen if you’re early in your career and are just starting to save. But if you’re in your 40s or 50s and falling short, you need to come up with a plan.
Meanwhile, if you’re twice the benchmark, perhaps you should be imparting your financial wisdom to others. Stanley and Danko call these people PAWs, or prodigious accumulators of wealth. My goal has always been to reach the vaunted PAW status. I think I’ll get there in the next few years. That will have made the sacrifices worth it—and part of the thanks will go to my trusty used Subaru.
Tanvir Alam has been practicing corporate law for more than two decades, but you shouldn’t hold that against him. He lives in New York’s Hudson Valley with his patient wife and two skeptical teenagers. Tanvir is interested in personal finance and travel, and is trying desperately to become a runner.
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African immigrant here, with a $3000 Ford though surrounded by Teslas, giant luxury trucks, etc.. I used to have an old Subaru 😉
We started in USA age 30 with $1000 and a suitcase. Now we have PAW status – but it’s not enough to keep me from waking in the night with dread that we’ll run out of money in retirement.. and I don’t feel anything like wise..
For most of our career we’ve followed the sensible Subaru and save path, however now I have to ask – What’s the benefit of moving from the 5% level to say the 3% point? – (The 1% will keep moving and we’ll never get there, and I wouldn’t know what to do if I got there.)
Great article, thank you for the links. The Millionaire Next Door was one of those watershed books in my financial education and has made a lasting impact. (Also, A Random Walk Down Wall Street.)
I’m sure this type of analysis exists out there somewhere but I would like to see the difference in costs related to hanging on to your quality older car versus buying (or leasing!) a new luxury model. I’m always shocked at the amount of highly-priced machinery on the roads and I wonder if those people really understand how much more it’s costing them in terms of purchase price, rapid depreciation, interest, yearly excise tax, insurance. And I”m not just talking about the Land Rover crowd; the number of people driving these oversized, customized expensive pickup trucks is amazing.
If you were to invest the amount you saved by making the frugal purchase choice, I wonder how material the difference is over time, taking into account the higher maintenance costs of an older car. I assume it’s very much the right decision but would like to see the numbers.
It took me years to allow myself to buy up to luxury, but I always buy used and then run them into the ground.
Thanks again.
This article may answer your question, at least in part:
https://humbledollar.com/2020/12/ode-to-a-civic/
Well, if you buy one now it would be the corolla hybrid. A snippet:
“Despite its ranking, the Toyota Corolla Hybrid is a good car. … With 50 mpg in combined city/highway driving, the Corolla Hybrid yields some of the best fuel economy estimates in the hybrid and electric car class. There’s also a user-friendly infotainment system and a host of standard safety features.”
Hard to beat and under $30k.
To me it is so impressive that American freedom provides such opportunities for self-improvement to so many people. Unfortunately, many home-grown Americans do not make the effort required that most immigrants would take advantage of and elevate themselves.
For Mr. Alam, it appears he could be driving a pricey whatever if he simply chose to write a check, but most likely it will be his sons spending their inheritances on Ferraris in the spirit of a home-grown American.
Thank you very much for the comment. I think immigrants have a different perspective because they’ve seen some alternatives to the U.S. America is certainly not perfect and not for everyone, but the hyper capitalist system we have is good for those who seek to gain economic prosperity.
I’ll give you three examples of things that I find amazing. First, we have robust property rights, a fairly lax regulatory system and a federal system of bankruptcy. This makes it easy to start a business, fail, and move on to the next business. This encourages risk taking. If you want to start a business in Brazil or India, good luck with the government. If your business fails in Asia, most Asian cultures look upon you in shame. In the U.S., we shrug our shoulders and say, keep on trying.
Second, America has an amazing transportation system. Perhaps, not as good as China but amazing nonetheless. My late dad used to marvel at the wide, clean highways of America. Once this backlog of Covid shipments clears from our old ports (those do need upgrading), we should be humming. With China as the exception, I’ve never seen a better transport system than the U.S.
Third, we have a giant vacuum cleaner educational system. Our system is essentially designed to suck up talent, feed it into a monstrous college system, and produce workers for large, international businesses. Yes, we’re snobby, but my experience has been that once you get into the corporate world, nobody gives a crap about where you went to school. Is our system ridiculously expensive? Oh my God, yes. We’re off the charts expensive, but our system is basically a factory that molds sheer talent (all kinds of talent) into business people.
I think if you grow up here, you can’t see it because you don’t know any alternative.
As for my son (and my daughter), I highly doubt they will be buying Ferrari’s only because they LOVE minivans. I kid you not. I drove a Honda Odyssey for a decade. My kids loved that car. They could stretch out, watch movies, sleep, and eat. It was like driving a living room for them!