How much is enough?

In The Millionaire Next Door, Stanley and Danko define a target net worth for an individual or couple: Your annual earned income (salary, business income, interest, investment income) times your age divided by 10. For example, if you have an annual income of $75,000 and you are 40 years old, your net worth 'should' be $300,000 ($75,000 * 40 / 10).

But the MND computation isn't really for goal setting. Rather, it's intended as a guide to tell you whether you're a PAW (prodigious accumulator of wealth) or a UAW (under-accumulator of wealth). Stanley and Danko's research attempts to identify the characteristics of PAWs (Midwestern tightwads driving old cars and living in small houses) and UAWs (doctors and lawyers driving BMWs and living in tract estate houses).

The financial services industry, at least at the high end, isn't really interested in your net worth but your 'investable assets'. (In fact, a common tactic of financial advisers, when confronted with a client or prospective client with a lot of worth tied up in his primary residence, is to suggest that the client take out an interest-only mortgage to free up the value of the house to be managed by the advisor. There's even a mortgage company, Thornburg Mortgage, that makes a specialty of lending through high-end financial advisers. More on this rant at a later date.)

The best source of information about the net worth of American families that I've been able to find is the Federal Reserve's Survey of Consumer Finances. This is an in-depth study of the financial situation of U.S. households that the Fed conducts every three years. The most recently published data is from the 2001 survey (2004 is to be published in the first quarter of 2006). For anyone interested in consumer finance, this is a must read.

If you're wondering how you're doing, take a look at the income and net worth data from the top:

The 10% of U.S. households with the highest incomes had a median income of $197,000 and a median net worth of $833,600. The next 10% of households, those with incomes between the 80th and 90th percentile, had a median income of $99,000 and a median net worth of $263,000.

The 10% of U.S. households with highest net worth had a median income of $128,500 and a median net worth of $1,302,000. The next 15% of households, those with a net worth between the 75th and 90th percentile, had a median income of $70,000 and a median net worth of $430,000.

Here's the rest of the data.

By income:

           Median Income   Median Net Worth
Bottom 20%:  $10,000          $8,000
Next 20%:    $24,000         $37,000
Next 20%:    $40,000         $62,000
Next 20%:    $65,000        $141,000
Next 10%     $98,000        $263,000
Top 10%:    $197,000        $833,600

And by net worth:

            Median Income   Median Net Worth
Bottom 25%:  $20,000            $1,000
Next 25%:    $35,000           $41,000
Next 25%:    $51,000          $156,000
Next 15%:    $70,000          $430,000
Top  10%    $128,500        $1,302,000

All these numbers are in 2001 dollars.