In last Wednesday’s link round-up, I pointed to an article over at Gen-Y Wealth in which RJ has listed 20 financial milestones you should reach in your twenties. “I like this list,” I wrote, “and I’d actually love to see similar lists for different age ranges. People could use it as a sort of road map to where they ought to be.”

What sorts of milestones were on the list? Things like:

  • Pay off your student loans.
  • Build an emergency fund.
  • Learn to negotiate.
  • Set a target retirement date.
  • Learn to give.

Like me, a lot of GRS readers found RJ’s list of financial milestones useful. Often, there’s no real way to know if you’re doing things “right”. How much should you be saving for retirement? How much should you have in your savings account? How soon should you buy a home? Get married? Have children?

Obviously, there’s no single right answer to any of these questions. Everyone is different. We all have different strengths and weaknesses, and we all have different goals. Because of that, no single list of milestones is going to be applicable to everyone.

Still, it’s helpful to have some sort of road map. A road map lets you gauge your progress, and can help you know when you’ve lost your way. In fact, I think a lot of folks — including me — would love to be able to compare their financial progress to some sort of standard checklist like the one RJ provided.

One way to do this, I suppose, would be to sort through the economic data collected by agencies like the Federal Reserve and the U.S. Census Bureau. (Every three years, the Fed conducts its survey of consumer finances, which is a gold-mine of info about how Americans spend money.) But this only works if you’re resourceful and like digging through data. Besides, you’d have to construct your own benchmarks from the numbers you found.

One useful benchmark
I may have encountered other lists of milestones in the past, but I can’t remember them. The one benchmark that’s stuck with me — and it’s not really a milestone like the kinds RJ describes — comes from The Millionaire Next Door by Thomas Stanley and William Danko [my review].

The authors suggest a simple way to gauge where you should be on your financial journey:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

Some of that sounds like jargon, but it’s actually fairly easy to understand. Here’s my attempt at a translation:

  1. Calculate your annual pre-tax household income.
  2. Divide your age by ten.
  3. Multiply these two numbers together.

Ignoring inheritance, your expected household net worth is the product of this calculation. So, if you and your spouse are about 35 years old and you make $80,000 a year, your calculation would look like this:

$80,000 x (35 / 10) = $280,000

If you’re 35 years old and your household income is $80,000 per year, your expected net worth is $280,000.

Prodigious accumulators of wealth
Based on this equation, Stanley and Danko classify folks into three categories:

  • A prodigious accumulator of wealth (or PAW) has more than twice the expected net worth for her age. In the above example, her net worth would be over $560,000 instead of $280,000.
  • An under accumulator of wealth (or UAW) has less than half the expected net worth for his age. In our example, his net worth would be $140,000 or less.
  • And an average accumulator of wealth (or AAW) falls somewhere in the middle.

The interesting thing about this formula is that it adjusts based on life circumstances. Somebody working minimum wage at a coffee shop can still be a prodigious accumulator of wealth if he manages to set aside a large portion of his paycheck. And a highly-paid doctor can still be an under accumulator of wealth if she spends every penny she earns.

When I first read The Millionaire Next Door, I dismissed this formula as silly. “It leaves so much out!” I thought. Part of the problem was that I was an under accumulator of wealth. (I was 35 years old and earned about $50,000 a year. My net worth ought to have been $175,000. It was much, much less.) I didn’t want to like any rule of thumb that basically told me, “You suck at saving!” — even if it was true.

In time, though, I’ve grown to like this benchmark. I think about it often, and I now believe it’s a useful barometer for gauging financial health. I wish I could find more useful benchmarks like this one.

Note: Unsurprisingly, by getting out of debt and learning to save, I’ve improved my net worth — and left behind my days as an under accumulator of wealth. Whew!

Benchmarks vs. Milestones
As I say, Stanley and Danko’s forumla isn’t really a milestone. It’s not an event like buying a house or paying off student loans or starting a Roth IRA. Instead, it’s more of a benchmark, a standard you can judge your progress by.

I’d love to find more financial benchmarks like this, and more milestones like those that RJ listed last week. (I’m not really looking for financial rules of thumb, which I consider a different beast entirely.) In fact, I’ve started a text document to collect these milestones and benchmarks. So far, though, the document contains only a link to RJ’s blog post and the quote from The Millionaire Next Door.

Do you have a favorite financial benchmark or milestone? How do you use it? How has it helped you? (Or do you find these sorts of things useless?)

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