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and what do you have to show for it?

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I don’t know if any of you have read Your Money or Your Life, but there’s an exercise at the beginning where you have to add up all the income you’ve ever had, and then calculate your net worth. I was a little bored on the train the other week, so I had a go at this in rough.

I ended up with approximate figures of £150k in income after tax since the age of 18 (including wages, bonuses and major gifts) and a net worth of about £12k (depends on share prices so could well be less, but good enough for an approximation). This means that of all the money that has come into my hands as an adult, I have about 8% of it left.

That’s not a lot, especially when you consider that since I graduated, I’ve saved about 20% or more of each pay cheque. To be fair, I assumed that house prices have gone down, and my house is now worth as much as my mortgage, whereas I had a £10k deposit. Also, although I save quite a bit of money each month, some of that is planned savings for specific things like travel, or home maintenance.

Still, to see how I’m doing in the great scheme of things, I calculated my anticipated earnings across my lifetime (assuming only that I get a cost of living increase each year). This came out as £2.6M, but the pot of money that I need to retire on is nearly £1.7M. I need a net worth to total life income ratio of approaching 65% in order to retire.

I’m not panicking yet though. One of the key factors in becoming wealthy is allowing time for the magic of compounding to take place in a good way. A lot of the planned for growth in my net worth is going to be caused by earning interest on the interest rather than me saving three quarters of my income. Although saving more probably wouldn’t hurt.

Anyway, has anyone else done this exercise or something similar? And if so how did your numbers come out?

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17 comments for “and what do you have to show for it?”

  1. As usual, a brilliant post and a very good point about compounding interest!

    Posted by Frugal Trenches | September 22, 2008, 8:53 pm
  2. I love that book (it was the first “personal finance” book I ever read), but despite having thought about it several times, have refused to do the exercise. I have a feeling I would be quite upset by it. Why yes I’m a big wuss.

    Posted by guinness416 | September 22, 2008, 8:59 pm
  3. Plonkee - If I did that I would get sick, after putting 3 kids through a collective 42 years of private school and 4 years each of college. I’ve got a decent net worth but oh what could have been.

    Posted by Mr. ToughMoneyLove | September 22, 2008, 10:16 pm
  4. I think that is the kind of exercise that would drive me loopy, as I like having accurate data and I don’t see how that would be possible without an incredible amount of detail into my past. I think it’s better to look at the future and see how far ahead you can plan. I try four or five years, but I find my spreadsheet constantly evolving because changes occur that I can’t anticipate!

    Posted by Shaz | September 23, 2008, 8:46 am
  5. I’m quite happy to go on approximations most of the time, and I like to have a good handle on quantities so I find this sort of thing fascinating. But as so often happens, I’m not sure what to do with the resulting information.

    I guess it does show me that I have had more money come into my life than I think I have. I’m also grateful that I do, at least, have some of it left.

    Posted by plonkee | September 23, 2008, 10:54 am
  6. wow! positive net worth! (marvels.)

    Posted by neimanmarxist | September 23, 2008, 12:44 pm
  7. It’s not that exciting. I’m just lucky that I’m a bit slow on the uptake, and never caught on to the consumer debt trend.

    Posted by plonkee | September 23, 2008, 2:22 pm
  8. I, like Guinness, skipped this exercise when reading the book because I’m not sure I want to know the answer. Maybe I should just be brave and do it…

    Posted by Looby | September 23, 2008, 3:17 pm
  9. Your figures look good compared to mine Plonkee. I’ve made an average of about £30k a year over my working life (7 years since I left uni) and my net worth is probably in the negative (4 houses).

    How did you work out that you need £1.7m to retire? Have you read the 4HWW?

    Posted by Uncommonadvice | September 23, 2008, 4:39 pm
  10. Nice article. Yep, you said it right — power of compounding in a nice manner can work wonders.

    If anyone’s interested in reading a post on Power of Compounding — http://www.theorangepaper.com/saving-money/power-of-compounding.html


    Posted by Austin, TheOrangePaper Guy | September 23, 2008, 6:37 pm
  11. Plonkee, I don’t think I could do that exercise. I would find it too depressing!

    Posted by Miss Thrifty | September 23, 2008, 7:52 pm
  12. You might find it’s better to know than not know.

    One of the things that it’s supposed to do is highlight that you are capable of bringing in a lot of money.

    The £1.7m assumes that I’ll need an income of £21k in retirement. Using the 4% rule and inflation adjusting it, by the magic of spreadsheets I get a target of £1.7m.

    It’s just a ballpark figure, I assume both it and my lifetime earnings predictions will change.

    Posted by plonkee | September 23, 2008, 8:10 pm
  13. Hmmm, interesting. I think as long as you have a good reason for a negative amount, that possibility is less devastating. Though, always better to have a positive amount!

    But, what value to place on a family picture at Macchu Picchu with the sunrise? :)

    Posted by deepali | September 23, 2008, 9:53 pm
  14. I reckon that costs in the region of £2,000 per person. If you have the money, probably worth it.

    Posted by plonkee | September 24, 2008, 6:24 am
  15. Well, we spent less than that (cheaper to fly from the US than the UK!). I count my savings towards my net worth. :)

    Posted by deepali | September 24, 2008, 11:21 pm
  16. Yes, flights to South America are expensive from the UK. But, on the upside it’s cheaper to fly to lots of places in Asia and Africa.

    Posted by plonkee | September 25, 2008, 11:47 am
  17. This is why the advice to ‘pay yourself first’ is so pertinent. If you can chisel out 10% or so a year, you’re saving a fair bit of a working lifetime even before compound interest (hopefully) does it’s thing.

    Posted by Monevator | November 12, 2009, 10:03 am

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