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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!
Hey, Subaru man,
Great article, well done. I have never found so many links to helpful websites in one place. Thank you for those. And yes, just about every educated citizen wants to know how they measure up in salary and savings. Not everyone needs nor wants to be at the top, nor even the top ten or twenty percent. But it is useful to know where you are in the big picture so you can make the decision to be happy now, or do you need to work/save at a higher level. Having good statistics is empowering.
Thank you for the comment!
Loved the piece and the links and the thought of your time-worn Subaru. I like to think not how we measure up but how much (most of us) have. I recall feeling on top of the financial ladder with my first real job, only to learn on the evening news that I hadn’t even reached the middle class. A useless metric when put in the context of the rest of the world.
Thanks for an interesting article and great links. Another Subaru driver here, and always great to see mention of The Millionaire Next Door—it was eye opening for a lot of us.
You’re very welcome Andrew! That book has been my financial bible for many years. I had grown up thinking millionaires were like the people I saw on “Lifestyles of the Rich & Famous with Robin Leech”. I had no idea that millionaire status could be attainable for many Americans.
When you hit $5 million, you can buy a nice 2-year-old luxury car at 50% off the new price, if you want to. An expenditure like that will no longer have much impact on your overall financial position.
I realize that but I still struggle with the decision. Then I begin to think it could be my last car before the keys are taken away , so that sways me more.
My brain always fries at these kinds of calculations because we both have pensions coming. My husband is already retired and drawing a pension from a state government job (and still working in the private sector), and I’ll retire from a public university job with over 30 years of service with a very nice pension. Both of our pensions will have full survivor benefits. Between our two pensions and eventual Social Security, we may never need to touch our savings.
That’s all great for us, but I’ve never understood how to consider it for net worth. If, for example, at least one of us lives for 25 years after retirement, would the amount be 25 x the annual payments (which will also be adjusted for inflation)? On the other hand, if both of us got run over by a bus tomorrow, the pension would be worth—well, not nothing to our estate because we contributed to them, so our heirs will be due some payout, but obviously way less than if we received them for 25 years. Similar types of questions about home equity. We also have term life insurance set to end right around when we retire.
Anyway, if you don’t consider our pensions, our savings are good but way behind that Thomas Stanley calculation, but if you do consider them, we’re way ahead.
This may all be just a thought exercise to defend why we have two late-model Audis, though, after years of driving sensible Toyotas and Hondas while raising our kids…
This is a very good point and I always struggle with how to value pensions and Social Security. I’m not sure how to apply that to a net worth calculation but you could use it to see how much you’ll need in retirement.
You can deduct the yearly pension amounts and Social Security from your annual household budget. Once you get that number, you could multiply it by 25 to compute the amount necessary for your retirement nest egg and compare it to what you have. This is application of the 4% Rule, which is a bit controversial these days.
Also,I love Audis! My retired mother-in-law traded in her used Ford for an Audi and she loves it. I drove Hondas for years, the best headache-less cars I’ve ever owned.
Go to immediateannuities.com. The calculator on their website can help you estimate the value of a pension .
You are definitely on the right path if not already there. I’d also add that playing around with a compounding interest calculator can give you an idea of where you will be in 10, 20, 30 years. The numbers can be staggering if you are doing well. Of course I like to use all sorts of growth numbers to see where we’ll be – just because the past 20 years have been booming doesn’t mean the next 20 will, but then again they may still be fabulous. That’s why I like a best/worst scenario range.
But once you reach your goals don’t be afraid to spend money on things you enjoy (car, vacation home, travel, whatever brings you joy). You won’t be young enough to enjoy it forever. If you never enjoy it and leave it to your kids and grandkids they will spend it (shirtsleeves to shirtsleeves in 3 generations). Or you can enjoy it and still leave a little to them. IMO the best legacy you can leave them is financial literacy and a paid for higher education.
Thank you for the comment! You may like the monte carlo simulator on a site called Portfolio Visualizer. I’m always amazed by compounding. Understanding linear relationships seem to come easily to humans but compounding relationships are always hazy to me. It’s staggering what compounding can do.
There is one thing I splurge on: travel. I will keep doing that while my children are still living with us. Best investment I’ve ever made.
If you keep driving that Subaru, you will be very wealthy! Great piece. I loved the linked articles too.
Thank you Ben!
The Dollars and Data charts are most interesting. You may be preening yourself to be in the top 3% of household net worth, only to discover that compared to people with similar age and education, you’re not even in the top 10%!
The median wealth of college-educated retirees is really quite high. Even those over 75 have considerable assets – no retirement crisis here.
Nick Maggiulli does a great job with the data. Once you see the hard data, the importance of a college education becomes so much clearer. The difference over a lifetime is staggering.
I just wish U.S. colleges did a better job of keeping costs down. I think public universities, for the most part, are doing a better job of increasing enrollment while trying to keep a lid on tuition. Elite private colleges need to do a lot more. The chance I got as an immigrant kid from a public school may not be there anymore.
When I was attending a university class in the late 1990s, the professor was bragging about what a good pension he was going to have. He said that their pension plan was over-funded so instead of the plan not getting contributions until it was just funded, they changed the formula so the plan wasn’t over-funded. In other words, all the future retirees (and maybe the current ones, I don’t know that) would receive an even higher pension than they otherwise would. And the taxpayers were contributing every year since the plan was no longer over-funded. I wondered if he even understood that what he was saying was offensive to the taxpayers taking his class.
But nowadays, blue-collar guys who have their own business can make plenty of money. If you’ve got a plumbing business, or you do cement or pave roads, you may be a an uneducated sort in boots and jeans, but you will make lots of money.
Some of the”blue collar guys” who do work on our house have bachelor’s or higher from good schools . They took over a family business. Not afraid to get their hands dirty . And yes, they make a lot of money .
I totally agree. We did a small basement renovation this summer and it was nearly impossible to schedule an electrician or plumber. They are incredibly in demand. Our contractor also needed more help and advertised for an entry level construction worker at $30/hour. No takers.
As more skilled trades people retire in the next few years, I think there’s going to be huge demand.
Parents maybe better off saving money they had earmarked for college, and instead funding a trade education for their child, and then taking their college savings to fund their child’s new business. A skilled plumber with a truck and tools could make a great living.