# How Rich are You? Find your Net Worth, Spending, and Savings Rate

Mr. Money Mustache can tend to get a little high-level at times, talking about all these *feelings* and *philosophies* that underlie the proper path to wealth.

But you can’t just smile your way to the top – there are real numbers at work in the background, whether you understand them or not. These can gang up and torture you (as in the case of a person with a crushing 60-hour workweek who maintains a paltry 10% savings rate), or they can boost you right out of a mandatory work sentence in unprecedented time.

This is especially relevant in the wake of the annual spending article. which always brings up a lot of questions about how Mustachians accumulate wealth so quickly. So let’s start with the big picture, which is how to become wealthy:

**Financial Independence in 3 Easy Steps:**

- Figure out how much money you are taking home and subtract the amount you are spending.
- Be sure to keep all that surplus money at work, by paying down high interest debt first and then investing the rest.
- Once the total value of all your investments reaches 25-30 times your annual spending, paid work is now entirely at your discretion. For life.

So with this post, let’s explain these three fundamentals of rapid wealth accumulation the MMM way, so the schooling will be there for all future students.

**Net Worth**

We’ll begin with the end in mind. Net Worth is a bit of a degrading term, as it incorrectly implies a person is only worth the amount of money he or she has accumulated. But you can use this for motivation, since as a Mustachian your figure will tend to be unusually high.

The overall formula is easy:

**The Value of everything you own (-subtract-) The total of all your loans**

The details are equally easy, although sometimes debated. So I’ll tell you the way I happen to think about it:

- You
*do* - All 401(k)s, IRAs, savings plans, and other hidden assets are included
- All mortgages, loans, credit card balances and other nonsense get subtracted
- Don’t bother with depreciating consumer stuff like your cars, furniture, or Apple products, unless you are willing to sell them right now.

Let’s start with a deliberately twisted example:

Joe Consumer (age 33) is a Washington DC Lawyer pulling down $250,000 per year.

He has a condo he paid $517,000 for with a current market value of $580,000 and a mortgage of $460,000. He also has a BMW 535i sedan that cost him $61,300 including tax a few years ago, payment is $539 per month and remaining balance is $43,000.

401(k) balance is $50,000, IRA is $27,300 and he has $90,000 left on his Harvard student loans, which he plans to get serious about soon and pay off over the next 10 years. Credit card balance is just a bit high at $8,000 right now, what with the holiday season hangover. What is his net worth?

Whoo! Look at that collection of financial spaghetti. Oddly enough, when people write to me with financial problems this is usually how they are described: a big list of confusing and unsorted details. They just heap them on a plate and hope it will straighten itself out some day. When

you’re confused about your own money, it is likely that you are wasting a lot of it.

**Joe’s Net Worth**

**Ownership of the Condo:** $580,000 – $460,000 = $120,000

**Retirement accounts (401(k) + IRA):** $50,000+27,300 = $77,300

**Student loans, car loan, and credit cards:** $-90,000 + $-43,000 + $-8,000 = $-141,000

**Total Net Worth:** $120k + $77.3k – $141k = **$56,300**

If you ask the average Josephine, Joe is a successful rich guy, doing very well for a 33-year-old. Expensive house, flashy car, massive income and even some money in the bank. If he just keeps on the current path and saves a bit more during those “peak earning years” in a couple decades once he makes partner, he’ll have a nice fat retirement fund by age 65.

My diagnosis would be quite different: “**Holy Shit, Joe! What the hell have you been blowing all your money on?**. **You should have had a higher net worth than that many years ago, given your career!!”**

**Very Rough Guideline:** Take the total money you’ve earned after taxes in your lifetime (suppose that for Joe it happens to be $1,243,100). If you don’t have at least 40% of it still around to show for it today, you are spending way too much.

**Bonus:** Suppose his nearly-new BMW can still be sold on Craigslist for $33,000. Although he has already lost $28,300 in depreciation on this horrible money pit, he could end the bleeding immediately by selling the car and taking the $33k plus $10k of his own money to pay off the $43,000 note. This would increase his net worth by $33k and set him on a much more prosperous path for the future.

**Spending**

This was Joe’s problem above. The key is to understand where your money is going, and for most of us that means tracking your spending. I calculate it like this:

**Everything that flows out of your wallet, bank account, credit cards, or automatic payroll deductions for things like insurance.**

Finer Points:

I include property taxes and sales tax, but do **not count income tax or other payroll taxes.**

I include all loan interest and fees, but **do not count the principal portion of loan payments.**

Why? Because I’m very interested in financial independence: that point when your passive non-work income is enough to pay for a hypothetical retired life of your choosing. Right now, Joe might be earning $250k and paying over $60,000 in income taxes. In retirement, he will probably be in a lower tax bracket. Plus income might come from dividends, long-term capital gains, or rent checks from investment properties he owns. He might even live in an area with a different tax rate.

You need to deeply understanding your spending needs and wants in order to know if you can afford to retire. Instead of taking random guesses at the factors above, I prefer to think of everything in terms of after-tax dollars. Take-home income instead of gross income.

So if we sort out what is surely a twisted ball of credit card, EFT and ATM transactions, Joe’s monthly spending might look something like this:

**Joe’s Spending**

**Interest portion of his $2500 mortgage payment:** ($2000)

**Interest on credit card and student loans:** $480

**Car Payment:** $539

**Employee contribution for health insurance:** $150

**Full collision+comprehensive car insurance:** $200

Category: Bank

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