When will you/should you attain positive net worth?

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guitarguy
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When will you/should you attain positive net worth?

Post by guitarguy » Thu Dec 22, 2011 1:34 pm

This is obviously for the younger members here like myself...

I'm 26, income is ~ $63k, investing in a 401k, maxing a Roth, paying down student loans (accelerated schedule), and a mortgage (minimum payments). No other debt.

Assuming I don't take on any more debt (which I don't plan on doing) and keep or increase my current savings rate, I estimate attaining a positive net worth at age 31. At that point my student loans will be gone and I can start accelerating payments on the mortgage as well.

* I assumed 5% ROR on my investments...so it also assumes the market doesn't tank for the next 5 years. :roll:

I'm sure there are others on here that are further ahead of 'schedule' than me by starting earlier and getting through school without student loans, and if you rent or something then it obviously will apply differently, but just for fun I'm just curious how others my age fair and where others were at when they were at this stage of their financial life.

Random Poster
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Re: When will you/should you attain positive net worth?

Post by Random Poster » Thu Dec 22, 2011 1:42 pm

It was probably somewhere around age 27. Had student loans, but also had cash and investments so I was probably slightly net worth positive at that point, if only by a penny.

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tyrion
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Re: When will you/should you attain positive net worth?

Post by tyrion » Thu Dec 22, 2011 1:49 pm

Are you forgetting the value of your house? That should come close to cancelling out the mortgage unless you bought at the peak with no money down.

Obviously the biggest driver here is student loans. And that will vary a lot based on school and profession.

TN_INVEST
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Re: When will you/should you attain positive net worth?

Post by TN_INVEST » Thu Dec 22, 2011 1:50 pm

I always liked Dr. Stanley's method of keeping score (it's only natural for folks to want to do it, even though it's irrelevant). He "designed" it to give folks somewhat of a gauge to help them determine if they were doing really well.

age times annual income divided by 10

26 x 63,000 = 1,638,000
divided by 10 = $163,800

Something tells me you might be the sort of guy that can and/or will project this out and come up with an age in which you might fall in to the top tier given some of your assumptions.

Just a simple word to the wise. Don't get all caught up in keeping score. Be wise with your money, be kind to others and live a good life.

FWIW, there are plenty of folks that have always had a positive net worth.
Last edited by TN_INVEST on Thu Dec 22, 2011 1:51 pm, edited 1 time in total.

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Re: When will you/should you attain positive net worth?

Post by sscritic » Thu Dec 22, 2011 1:51 pm

Probably around age two months or so. I got a $25 savings bond. I bought houses, but the values were always greater than the loan amounts, and I sold before the recent era of "everyone is upside down" began. I did borrow to buy a car, but I had the money in the bank; I only took the loan so I would have a credit history when I applied for a mortgage. But then I am an old xxxx, and my parents paid for most of my education.

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Re: When will you/should you attain positive net worth?

Post by stan1 » Thu Dec 22, 2011 1:57 pm

I don't think there's ever been a rule, but those of us who are older didn't have to take into account the new realities of student loans (even at public universities) and mortgages with loan balances greater than the value of the property.

Best you can do is live beneath your means (keep expenses low) and look for ways to increase your income.

If you want to get a Master's degree, get it from your local state university while you continue working and try not to take out more loans.
Find a spouse who shares your financial goals (starting with the cost of the wedding).
Work hard at your job and prove to your employer that you are worth as much to them as other employees making twice as much. If they don't notice, you are probably working for the wrong company/boss. If you've made a choice to accept lower pay because you like a particular type of work -- great -- happiness and personal satisfaction are also important but understand its a trade-off you are making.

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Re: When will you/should you attain positive net worth?

Post by bungalow10 » Thu Dec 22, 2011 2:06 pm

I had a positive net worth upon graduating from college. I had $10k in debt (2001) and received a little more than that in bonuses and relo, and put it all on the debt. Paid it off before the first paycheck... I still high-five my 22-year-old self for that.

Using the age * income / 10 I see I'm falling a bit behind. According to the formula we should have about $480k in net worth, but I think we are around $430k. Two little kids and a layoff set us back a bit though. I'm sure we'll catch up :beer

Edit: I'm 32.
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Re: When will you/should you attain positive net worth?

Post by laughlinlvr » Thu Dec 22, 2011 2:06 pm

He "designed" it to give folks somewhat of a gauge to help them determine if they were doing really well.

age times annual income divided by 10
Given this formula can lead to a result where a smaller salary at an older age beats out a larger salary at a younger age; it would seem ill-suited to being used to determine one's "score" in life.

Salary divided by age would not have this problem.
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Re: When will you/should you attain positive net worth?

Post by Harold » Thu Dec 22, 2011 2:11 pm

bungalow10 wrote:Using the age * income / 10 I see I'm falling a bit behind. According to the formula we should have about $480k in net worth, but I think we are around $430k. Two little kids and a layoff set us back a bit though. I'm sure we'll catch up :beer
Just ask your bosses for a pay cut -- that'll bring you right to where you should be financially! :wink:

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Re: When will you/should you attain positive net worth?

Post by bungalow10 » Thu Dec 22, 2011 2:15 pm

Harold wrote:
bungalow10 wrote:Using the age * income / 10 I see I'm falling a bit behind. According to the formula we should have about $480k in net worth, but I think we are around $430k. Two little kids and a layoff set us back a bit though. I'm sure we'll catch up :beer
Just ask your bosses for a pay cut -- that'll bring you right to where you should be financially! :wink:
I would laugh except my DH almost got just that this week. Turns out it was a very, very, very bad joke.

But yeah, sometimes it isn't helpful to compare against generic yardsticks or even other people. What is important is that one is aware of how they are doing and is comfortable with it (or working to get to a place they can be comfortable).
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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Re: When will you/should you attain positive net worth?

Post by Atilla » Thu Dec 22, 2011 2:22 pm

Student loans are an absolute killer these days.

I went to a Big 10 university from 1985 to 1990. During that time a semester's tuition doubled from $750 to $1,500. Books per semester ran from $200 to $250.

I worked part time and my dad flung me $50 per week plus 1/2 of tuition. Graduated with $3,500 in student debt; the loan payments were $50 a month.

These days it seems some/many kids graduate with the equivalent of mortgage debt before they even get started.

My first job out of college was minimum wage plus 25% of gross sales. The second was $18,000 a year plus 5% of gross sales.

As far as positive net worth - many years of spending more than I made I found myself at least a hundred grand or so negative in my mid 30's. A (unwanted) divorce actually cleared things up and a couple years later I found myself net positive to the tune of $200K.
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Re: When will you/should you attain positive net worth?

Post by doug4523 » Thu Dec 22, 2011 2:35 pm

The student loans really killed my wife and I, but we have dramatically increased our savings rate since we started dating and graduated from school. I expect to be in the positive by age 29 (wife would be 34 though), but like the other poster said, only by a penny or so. But we probably won't be debt free for another 10-12 years (student loans + mortgage).

I'm 27 btw.

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Re: When will you/should you attain positive net worth?

Post by TN_INVEST » Thu Dec 22, 2011 2:37 pm

laughlinlvr wrote:
He "designed" it to give folks somewhat of a gauge to help them determine if they were doing really well.

age times annual income divided by 10
Given this formula can lead to a result where a smaller salary at an older age beats out a larger salary at a younger age; it would seem ill-suited to being used to determine one's "score" in life.

Salary divided by age would not have this problem.
The purpose of the calculation is to give folks some sort of age & income based measuring stick to let them know how they are doing given their age and their income.

I think we all know a few older folks that had six figure incomes their entire life, but an't got squat to show for it. And then their are folks like the o.p, guitarguy, that sounds like he's not but a few years away from moving into the upper echelon, even though his net worth might be in the low six figures.

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Re: When will you/should you attain positive net worth?

Post by HomerJ » Thu Dec 22, 2011 2:40 pm

He "designed" it to give folks somewhat of a gauge to help them determine if they were doing really well.

age times annual income divided by 10
Also the problem with the above formula is the day after you get a big raise, suddenly you discover you're not doing very well anymore.

My wife and I are making probably double what we made 5-7 years ago...

Rather unfair to say "Hey should have this much based on your salary" when I wasn't saving off that much salary just 2-3 years ago.

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Re: When will you/should you attain positive net worth?

Post by Harold » Thu Dec 22, 2011 2:41 pm

bungalow10 wrote:
Harold wrote:
bungalow10 wrote:Using the age * income / 10 I see I'm falling a bit behind. According to the formula we should have about $480k in net worth, but I think we are around $430k. Two little kids and a layoff set us back a bit though. I'm sure we'll catch up :beer
Just ask your bosses for a pay cut -- that'll bring you right to where you should be financially! :wink:
I would laugh except my DH almost got just that this week. Turns out it was a very, very, very bad joke.

But yeah, sometimes it isn't helpful to compare against generic yardsticks or even other people. What is important is that one is aware of how they are doing and is comfortable with it (or working to get to a place they can be comfortable).
And it was also an observation about yet another formula unhelpfully using income as a variable. A formula that works if expenses are lowered because of one's relative wealth is a good thing -- a formula that works if income is lowered is not such a good thing.

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Re: When will you/should you attain positive net worth?

Post by thedude » Thu Dec 22, 2011 2:49 pm

I wiped out a total of about $17K in student loan debt by the time I turned 27, if memory serves correctly. I held onto that debt for a while since at that time CDs were paying 5% and my debt was at about 3.5%, with deductible interest payments. I never depleted my emergency savings to pay down debt.

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Re: When will you/should you attain positive net worth?

Post by Grt2bOutdoors » Thu Dec 22, 2011 2:54 pm

About 25, then I bought a car, paid that off 2 years later, so 27 give or take a few months.
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TN_INVEST
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Re: When will you/should you attain positive net worth?

Post by TN_INVEST » Thu Dec 22, 2011 2:59 pm

Certainly you guys are flexible enough to know that Dr. Thomas J. Stanley's formula is simply a tool to help answer a very complex question. Right?

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Watty
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Re: When will you/should you attain positive net worth?

Post by Watty » Thu Dec 22, 2011 3:58 pm

I don't think that it is coincidence that the prevalence of student loans, and negative net worth, is happening at a time when interest rates are near generational lows.

This means that having a large amount of student debt will only cost a few thousand in interest per year and while it might take a long time to pay it off, that taking on a lot of debt to qualify for a job that pay $50K a year might be workable, even if the wisdom of it is questionable. Compared to working your way through college and taking six years to graduate it might even be a reasonable choice for some marketable degrees where getting a job related to your degree was probable.

When I graduated college the interest rates were in double digits so that there is no way someone could have taken on so much dept relative to their potential income even if it was available. This meant that it was not uncommon for people who were short of money to extend their time in college while working to earn the money to pay for it so it was not uncommon for people to joke about being on the six year plan.

My son just finished his degree at a state university that is at more or less the same level as the one that I went to and adjusted for inflation the prices are up but not up as dramatically as some people might think. What has changed a lot is that when I was in college the dorm rooms were all tiny rooms with twin beds that you shared with someone and the bathroom was down the hall, all the meals were at the cafeteria with "budget" food, most of the students did not have cars, books were outrageously expensive since the campus books store had no competition, and there were no expenses like cell phones. As I recall once your tuition, dorm fees, and books were paid for there were really not that many essential expenses that you had to pay for to get by if you were short of money.

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Boglenaut
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Re: When will you/should you attain positive net worth?

Post by Boglenaut » Thu Dec 22, 2011 4:04 pm

guitarguy wrote:
I'm sure there are others on here that are further ahead of 'schedule' than me by starting earlier and getting through school without student loans, and if you rent or something then it obviously will apply differently, but just for fun I'm just curious how others my age fair and where others were at when they were at this stage of their financial life.
I finished college with no debt but had to buy a car with a loan. I didn't know better and got a terrible deal (no Bogleheads to ask what to do back then). So I got that paid off at age 25.

I still remember I was about 26 when I saved my first $10K. I felt so rich!

You'll be surprised... keep saving like you planned and it'll start to grow quickly. At first it barely moves, but all of a sudden will jump.

You are on the right track!!! :sharebeer

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Re: When will you/should you attain positive net worth?

Post by bungalow10 » Thu Dec 22, 2011 4:15 pm

Watty wrote:What has changed a lot is that when I was in college the dorm rooms were all tiny rooms with twin beds that you shared with someone and the bathroom was down the hall, all the meals were at the cafeteria with "budget" food, most of the students did not have cars, books were outrageously expensive since the campus books store had no competition, and there were no expenses like cell phones.
I graduated in 2001 and you described my experience. At that time, things were changing dramatically and most students lived in high-priced on-campus suites (with kitchens, bedrooms, and private baths), or in new off-campus luxury apartments. I was in one of the few remaining true dorms, and it was imploded a couple years after I left.

I did not have a car. I remember when I did get one my senior year (so I could travel to interviews), insurance alone was $78/month. The four year cost of just the insurance was almost $4k, imagine if I had financed that, gas, maintenance, and payments my entire college career? I would have easily doubled my loan balance.
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Re: When will you/should you attain positive net worth?

Post by zaboomafoozarg » Thu Dec 22, 2011 4:25 pm

Age 0, have never been in debt.

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Re: When will you/should you attain positive net worth?

Post by Village Idiot » Thu Dec 22, 2011 5:02 pm

zaboomafoozarg wrote:Age 0, have never been in debt.

Unfortunately you were born owing the US and Chinese Govermnents
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Re: When will you/should you attain positive net worth?

Post by Grt2bOutdoors » Thu Dec 22, 2011 5:15 pm

Village Idiot wrote:
zaboomafoozarg wrote:Age 0, have never been in debt.

Unfortunately you were born owing the US and Chinese Govermnents
Really? :shock: Come and try to collect. :lol
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Re: When will you/should you attain positive net worth?

Post by ryuns » Thu Dec 22, 2011 5:49 pm

bungalow10 wrote:
Watty wrote:What has changed a lot is that when I was in college the dorm rooms were all tiny rooms with twin beds that you shared with someone and the bathroom was down the hall, all the meals were at the cafeteria with "budget" food, most of the students did not have cars, books were outrageously expensive since the campus books store had no competition, and there were no expenses like cell phones.
I graduated in 2001 and you described my experience. At that time, things were changing dramatically and most students lived in high-priced on-campus suites (with kitchens, bedrooms, and private baths), or in new off-campus luxury apartments. I was in one of the few remaining true dorms, and it was imploded a couple years after I left.

I did not have a car. I remember when I did get one my senior year (so I could travel to interviews), insurance alone was $78/month. The four year cost of just the insurance was almost $4k, imagine if I had financed that, gas, maintenance, and payments my entire college career? I would have easily doubled my loan balance.
That's often the case, but don't make the mistake of assuming everyone is living the high life in college. A lot of those nicer dorms are filled with continuing students who get first pick among the dorms. A lot of schools have expanded dramatically, but the tendency for students to want to live near campus hasn't changed, so its pushed the prices up, making university-owned apartment more expensive. I do think students owe it to themselves to have a dirt poor lifestyle through most of college.
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G-Money
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Re: When will you/should you attain positive net worth?

Post by G-Money » Thu Dec 22, 2011 5:57 pm

Your net worth is probably already positive if you consider all of your assets.

If you have a mortgage, you probably also have a house. Your house is an asset. Depending on where you live and how much you put down, [House-Mortgage] is probably a positive number, or at least a wash.

You also could consider your human capital, which you will exchange over the course of your working life for income. Your human capital is the value of your future income, discounted to present value. Hopefully, the education you obtained via your student loans increased your human capital. If you took into account your human capital, your net worth is probably significantly positive.

Bottom line: don't focus too much on your liquid net worth. Just work hard, save as much as you can, keep your costs low (in all aspects of life), diversify when possible, and stay the course.
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Re: When will you/should you attain positive net worth?

Post by scrabbler1 » Fri Dec 23, 2011 9:46 am

When I graduated from college in 1985, I had student loan debt of about $8k. But by the end of 1985, just before the 6-month grace period expired, I paid off about $5k of it using some money I have saved up from 6 months of working and some money I had in an old custodial bank account I had forgotten about. This gave me a NW of around zero but it soon climbed above zero. I was 22.

I bought a car (cash, no loan) a few months later so my NW remained above zero as long as the depreciated value of the car did not fall too much in those first few months while I rebuilt my savings. I was 23.

In 1989, I bought an apartment, putting 20% down although when the RE market crashed in the early 1990s my mortgage might have been underwater for a short time. However, my other savings were growing quickly so my NW was always positive.

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Re: When will you/should you attain positive net worth?

Post by momar » Fri Dec 23, 2011 10:03 am

I hardly think the nicer "suites" that have been built in the past decade and the record low interest rates of the past 3 years are responsible for college costs increasing faster than inflation for the past three decades.

More likely, Universities have operated more and more as businesses as time goes by; as such, they have realized they can capture an increasing share of the college wage premium. Oh, tuition growth will stop. Once people are no better going to University and taking out loans than getting a job as a manager at McD's.
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market timer
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Re: When will you/should you attain positive net worth?

Post by market timer » Fri Dec 23, 2011 1:18 pm

momar wrote:More likely, Universities have operated more and more as businesses as time goes by; as such, they have realized they can capture an increasing share of the college wage premium. Oh, tuition growth will stop. Once people are no better going to University and taking out loans than getting a job as a manager at McD's.
Universities are also becoming more effective price discriminators. Where else does the price you pay depend on your income/assets?

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Re: When will you/should you attain positive net worth?

Post by dbr » Fri Dec 23, 2011 1:37 pm

I'm one of those who never had negative net worth, but we never borrowed to go to college either.

It seems to me one of the most pernicious evils in our current economy is a system that places college graduates deep in debt just to be able to play the game. I have less sympathy with people that borrow to buy a fancy new car, when an affordable used one would do, or who milk income from the asset value of a home rather than paying down the mortgage. On the other hand there is a lot of sympathy for those trapped by job loss and/or medical disasters and disability for which we do not provide the safety net we probably should.

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Re: When will you/should you attain positive net worth?

Post by 555 » Fri Dec 23, 2011 2:38 pm

momar wrote:I hardly think the nicer "suites" that have been built in the past decade and the record low interest rates of the past 3 years are responsible for college costs increasing faster than inflation for the past three decades.

More likely, Universities have operated more and more as businesses as time goes by; as such, they have realized they can capture an increasing share of the college wage premium. Oh, tuition growth will stop. Once people are no better going to University and taking out loans than getting a job as a manager at McD's.
College costs are increasing because government funding is decreasing. Once government funding goes to zero, that source of increase has finished.

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Re: When will you/should you attain positive net worth?

Post by momar » Fri Dec 23, 2011 2:52 pm

555 wrote:
momar wrote:I hardly think the nicer "suites" that have been built in the past decade and the record low interest rates of the past 3 years are responsible for college costs increasing faster than inflation for the past three decades.

More likely, Universities have operated more and more as businesses as time goes by; as such, they have realized they can capture an increasing share of the college wage premium. Oh, tuition growth will stop. Once people are no better going to University and taking out loans than getting a job as a manager at McD's.
College costs are increasing because government funding is decreasing. Once government funding goes to zero, that source of increase has finished.
That's one source, but why are private tuitions increasing as well?
Image

Clearly there is a divergence in the early 00's, which is most likely explained by state disinvestment.
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Re: When will you/should you attain positive net worth?

Post by dandan14 » Fri Dec 23, 2011 2:59 pm

It's tough to answer with a one-size-fits-all. Theoretically, going to school longer should earn you more money later.
So if you study to be a surgeon, you my not finish residency until 30. However, the slope of your net worth over the coming years should be fairly steep.

On the other hand, someone who has never gone to college may be positive from day 1 -- but with a much slower increase.

I don't really like arbitrary formulas like that. It doesn't take living expenses or retirement need into account.

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Re: When will you/should you attain positive net worth?

Post by GregLee » Fri Dec 23, 2011 4:01 pm

I didn't even start to pay off my student loan until I was 30 (in 1972), then from 33, when I had paid it off, my net worth was positive until I bought a house when I was 52, then remained negative until I paid off the mortgage when I was 62. Now, I'm in the black.
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Re: When will you/should you attain positive net worth?

Post by FireProof » Fri Dec 23, 2011 4:29 pm

It's hard to answer this, because it's pretty much entirely a function of student loans - without that, you should never be negative (mortgage is cancelled out by homed value). I chose to go with scholarships, so my net worth is about 75K at 24, but certainly if I had paid 40K per year for college and grad school, I'd be worse off. Now, I tend to think that was a good, conscious choice, but realistically, it's not for everyone.

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Re: When will you/should you attain positive net worth?

Post by tim1999 » Fri Dec 23, 2011 4:32 pm

I am fortunate to never have had a negative net worth. I'm relatively young, but seem to have graduated from college before the recent era of the "mega student loan." My education was paid for partially by scholarships and partially by my parents. I am thankful for that.

I agree with a couple other posters that it's not right to count the debt associated with an asset (car loan, mortgage, etc.) against your net worth without counting the value of the asset towards it. However, student loans would only count against your net worth, since there is no physical asset you could sell to offset the debt.

I also feel that the "Millionaire Next Door" formula is generally useless, especially for anyone under age 35 or so.

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Re: When will you/should you attain positive net worth?

Post by Mudpuppy » Fri Dec 23, 2011 5:54 pm

Those of us who bought homes near the peak, the net worth calculations will be all sorts of "wonky" for the near foreseeable future. For example, I got my job in 2006 and thought in 2007 when prices had come down 15% that it would be okay to buy.... whoa nelly, what a classic example of the folly of market timing that would be. I'm now at 200% LTV on the house, so my net worth is negative even after including the house value in the asset category. But my overall debt-to-asset ratio is 145%, so the primary drain on my net worth is being so massively underwater on the home. If I were to leave the mortgage and home value out of the calculation, I would have a positive net worth.

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Re: When will you/should you attain positive net worth?

Post by MnD » Fri Dec 23, 2011 10:12 pm

Since birth.
Three figures from birth (thanks grandma!), 4-figures age 13-21, 5 figures age 22-25, 6 figures age 26-45, 7 figures age 45-49 (present).
I still have my first financial investment i made at age 12 bankrolled by the $600 my grandmother willed to me.
(Six Carson City Morgan silver dollars auctioned off by the government during the Nixon administration).
I worked at a very dangerous high-paying logging job all through college so between that and parental help and State U costs - no student loan debt.

Always very conservative regarding home prices. We bought a big old home on a big lot that needed _everything_ in our 20's and are still here. That sort of trade is costly in terms of what we've put into it over 20 years but avoids the situation where you buy a great condition home at the top.

I don't see my kids being negative net worth given their deal (4-year college no debt) but who knows...

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Re: When will you/should you attain positive net worth?

Post by 555 » Sat Dec 24, 2011 12:07 am

momar wrote:
555 wrote:
momar wrote:I hardly think the nicer "suites" that have been built in the past decade and the record low interest rates of the past 3 years are responsible for college costs increasing faster than inflation for the past three decades.

More likely, Universities have operated more and more as businesses as time goes by; as such, they have realized they can capture an increasing share of the college wage premium. Oh, tuition growth will stop. Once people are no better going to University and taking out loans than getting a job as a manager at McD's.
College costs are increasing because government funding is decreasing. Once government funding goes to zero, that source of increase has finished.
That's one source, but why are private tuitions increasing as well?
Image

Clearly there is a divergence in the early 00's, which is most likely explained by state disinvestment.
Yes, there are a few sources of the increase of course. I was just pointing out one obvious one that some people neglect.

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Re: When will you/should you attain positive net worth?

Post by ObliviousInvestor » Sat Dec 24, 2011 1:03 am

dbr wrote:I'm one of those who never had negative net worth, but we never borrowed to go to college either.
Ditto.

It seems to me that age of attaining positive net worth isn't a particularly relevant data point unless we control for profession. In my field (accounting), I was able to stop at a bachelor's degree and find work with no difficulty. For other professions, more years of school are necessary, which increases the likelihood of loans and/or the amount of loans.
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Re: When will you/should you attain positive net worth?

Post by Buckeye » Sat Dec 24, 2011 1:15 am

About 33 when net worth turned positive.

Did a ton of partying and traveling throughout my 20's.

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Re: When will you/should you attain positive net worth?

Post by guitarguy » Sat Dec 24, 2011 6:52 am

tyrion wrote:Are you forgetting the value of your house? That should come close to cancelling out the mortgage unless you bought at the peak with no money down.

Obviously the biggest driver here is student loans. And that will vary a lot based on school and profession.
Very good...thank you! My loan balance is a bit more than the house is worth now, but I did indeed forget to include this in my calculations. Thank you for the catch. I'll have to redo my calculations.

I graduated with almost $70k student loan debt in Dec 2007. Down to $43k today with all rates less than 3%. Once I had all the 6.8% loans gone I started maxing a Roth and paying less extra on the loans.

I got a little help with college from an Aunt/Uncle, but that's it unfortunately. I plan on focusing early on giving my kids much more help...making it easier for them than it's been for me!

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Re: When will you/should you attain positive net worth?

Post by OutOfCyan » Sat Dec 24, 2011 9:38 am

guitarguy wrote:I'm 26, income is ~ $63k, investing in a 401k, maxing a Roth, paying down student loans (accelerated schedule), and a mortgage (minimum payments). No other debt.
That sounds familiar. At age 26, I had a $100K mortgage and barely any retirement savings. I received a merit-based scholarship for some of my undergraduate expenses and worked as a TA during graduate school to cover my tuition. My parents paid the remaining balance of my educational expenses, which amount to about $40K. In return, I got a MS degree from garden variety public school.

There is no doubt that this was money well-spent. It didn't take me long to recoup the losses plus enough to cover my time in college. I could've been in the workforce, after all.

I hope to help my parents out by providing some financial assistance in their later years. They're not well-positioned for retirement, despite being very close to retirement age (my father is 56). I tried to get them interested in investing... but it's a tough sell. My mother has a pension that'll still be there when she retires; their plan is that they'll both live off of that money. They feel like they need the money from their income now.

My brother will likely enter college in 3 years, right as my mother hits retirement age. She might have to work for a couple more years to fund his education. There's talk that he might go to school where I live (in a different state), so he might spend a year down here in order to get in-state tuition.

Considering your age and income, it sounds like your loans were well worth it. I don't know what the rates are, but if they're higher than your expected ROR and they're not tax-deductible, paying them off sounds like a great idea.
guitarguy wrote:Assuming I don't take on any more debt (which I don't plan on doing) and keep or increase my current savings rate, I estimate attaining a positive net worth at age 31. At that point my student loans will be gone and I can start accelerating payments on the mortgage as well.
My greatest financial mistake so far was paying off my 4.75% 15-year fixed loan early. I no longer have to deal with a mortgage payment, which is nice... but consider the opportunity cost. I could've deducted the mortgage interest from my taxes for 15 years (my tax rate throughout the mortgage was 25%). If I had known then what I know now about bonds, even without the conceit hindsight I would've put that money in a medium-term bond fund, which would've almost certainly yielded more than enough to make up for the mortgage interest. I would've started investing after the hiccup in late 2007. If you have a low interest rate on your mortgage, it's financially unwise to pay it off early.

All of our friends and relatives thought prepayment was a great idea. In hindsight, at 4.75%, it wasn't. It might seem at first glance that knocking a lot of the principal off the mortgage at the beginning is a great idea. I thought so. However, what I failed to realize is that due to compounding, the initial return on my investment was likely to more than compensate me for the mortgage interest.

My wife and I both have careers. With no mortgage interest to deduct, our taxes are painful. Filing jointly doesn't help us that much.

Our first mortgage payment was June 2008. Regardless of whether I went with stocks, bonds, or a mix, I'd be much better off with the investments and a looming mortgage. We have a house that's worth less than 75% of what we paid for it. We saved about $55K (nominal) on interest payments, but the value of our investments would've been much greater. We should have maxed out our retirement accounts instead.

It's up to you to weigh the peace of mind vs. the opportunity cost in paying your mortgage off early. I wish I had done the following, in this order:
  1. Invested in my 401K up to the company match
  2. Maxed out my Roth IRA
  3. Maxed out my 401K
  4. Opened up a taxable account and invested the money I would've spent prepaying my mortgage

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Re: When will you/should you attain positive net worth?

Post by OutOfCyan » Sat Dec 24, 2011 9:42 am

guitarguy wrote:I graduated with almost $70k student loan debt in Dec 2007. Down to $43k today with all rates less than 3%. Once I had all the 6.8% loans gone I started maxing a Roth and paying less extra on the loans.
Wow, that's a low rate! At 6.8%, I'd probably pay the loans off, but at 3%, that's around the inflation rate. I'd pay the minimum and invest the money instead.

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Re: When will you/should you attain positive net worth?

Post by 555 » Sat Dec 24, 2011 11:03 am

I paid off my mortgage before starting retirement savings. I have no regrets. It was the better choice.

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Re: When will you/should you attain positive net worth?

Post by bobcat2 » Sat Dec 24, 2011 11:58 am

I think a calculation of net worth for a young adult that ignores human capital is a nearly pointless exercise. For most people under 35 the vast majority of their net worth is their human capital.

Such a calculation can also be dangerous to a young adult's financial health. Foregoing additional education because it may make your net worth (absent human capital) negative may be a very bad idea.

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Re: When will you/should you attain positive net worth?

Post by Mudpuppy » Sat Dec 24, 2011 8:04 pm

OutOfCyan wrote:
guitarguy wrote:I graduated with almost $70k student loan debt in Dec 2007. Down to $43k today with all rates less than 3%. Once I had all the 6.8% loans gone I started maxing a Roth and paying less extra on the loans.
Wow, that's a low rate! At 6.8%, I'd probably pay the loans off, but at 3%, that's around the inflation rate. I'd pay the minimum and invest the money instead.
I'm assuming that the low rate loans are variable rate loans (issued before the 2006/07 school year). The variable loans are based on the 91-day T-bill investment rate from the auction in the last week of May of each year plus an offset based on the type of the loan and issue date. Since the auction this May was a mere 0.061% investment rate, variable rate student loans have a very low interest rate (between 2.4% and 3.4% for federal loans).

My question to guitarguy: If these are variable rate loans, have you consolidated them to lock in the rate? It's a great time to consolidate and lock in the current variable rate. It might take a few years before the T-bill rates go back up, but the consolidation applications get swamped when that happens and the T-bill rates don't have that much lower to go.

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Re: When will you/should you attain positive net worth?

Post by edawg » Sun Dec 25, 2011 11:45 am

Responding to TN_INVEST's post about Dr. Stanley's formula "age times annual income divided by 10"... It's deceivingly wise if you're a 10% + saver.

We were slightly 10% ahead of that yardstick net worth in 2007, but doing some end of year goal review / setting for next year, realized we're 10% under 4 years later. That coincides with the stock market drops in our portfolios and some poor choices spending on toys I made in this timeframe. Lessons learned...

Instead of worrying about net worth, stop worrying period! Instead, read "Mastering Your Money" by Ron Blue or Dave Ramsey's books to do the most efficient things you can to increase your monthly marginal savings rate while reducing wasted spending in your life. It's amazing how much true discipline in spending can do without cutting back on the real joys of life. I'm talking the "don't pay $70 a month for cable, but do get the $8 NetFlix subscription, buy nicer 2nd hand car vs. new smaller car, type spending choices). Instead of paying for oil changes, I change it now and put the savings to work in dividend paying investments to reward myself instead. You get the idea... And if you're married, empower your spouse to run the house on a budget you can both agree on. Without teamwork, the money will fly out the window.

In our case, yes we're "behind" 4 years later from where we were, but our cash savings rate is so much better and we made some decisions to sell our depreciating toys and buy a home that was an amazing deal in today's down market that we hope will pay us back when it's time for us to downsize in ~8 years or so... In short, trimming expenses to accelerate debt pay-offs will open up smart opportunities later. Merry Christmas!

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Re: When will you/should you attain positive net worth?

Post by White Coat Investor » Mon Dec 26, 2011 4:20 am

I don't recall ever having a negative net worth. I borrowed $5K for college once, but I probably owned $5K worth of stuff...maybe. I was never underwater on a mortgage, never had a real car loan, never carried a balance on a credit card etc. But I was probably in my 30s before my net worth was anything significant.
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Re: When will you/should you attain positive net worth?

Post by OutOfCyan » Mon Dec 26, 2011 9:06 am

edawg wrote:Responding to TN_INVEST's post about Dr. Stanley's formula "age times annual income divided by 10"... It's deceivingly wise if you're a 10% + saver.
I still don't buy it. Assume a 31 year old with a $100K salary who should have a net worth of $310K. If he's been out of school since age 21 and has saved $10K per year. Given recent market history, he might have close to $100K. If he saved 10% the whole time, he'd have less due to salary increases and disruptions in his career.

If you're 65 and the value of your retirement savings is equal to your expected net worth (I'm gonna call it the target amount), you have 6.5x your annual salary in the account(s). At 4% withdrawal, you can replace 26% of your before-retirement income. Assuming social security replaces about a third, you have about 60% of your former income (a SS calculator tells me I can expect to replace 34% of my current salary if I wait until the maximum benefit age - it'll be less if I receive benefits at 67, and it'll be a lower percentage if I receive additional raises). At this point, I'd feel pretty disappointed about choosing to put my money in a Roth IRA... I paid higher taxes on my wages all those years?

The formula is linear; it can't account for compounding. You might set a goal to meet the target amount by a certain age. After that, despite market fluctuations, if you drew a trend line for your future net worth, it should beat the target amount over the long term.

My wife and I max out our 401K accounts and Roth IRAs. We're 28 and 27 now; if we continue this into the future, assuming 8% growth, we'll meet the target amount in 10/2016 and be PAWs in 9/2029. At 10%, it'd take much longer.
edawg wrote:and buy a home that was an amazing deal in today's down market that we hope will pay us back when it's time for us to downsize in ~8 years or so
Image
Down market is a relative term. If you look at the long-term trend, home prices don't seem so low. For most of history, a bank held the mortgage until it defaulted or was paid off. Leading up to the housing crisis, the rules of the game were completely different. Lenders sold mortgages to investment bankers after a few days. From the bank's point-of-view, there was no longer a strong incentive to check the credit-worthiness of the buyer. Lenders loosened their standards. The investment bankers sliced the mortgages into derivative bonds. The way the loans were sliced, the "first claim" on the payments of interest were given a higher rating than the mortgage itself. To make matters worse, credit default swaps gave people the chance to insure against default on the derivatives.

Many of these loans were insured by the federal government and some were insured by large private insurance companies. When home prices started to fall, people found their home prices were underwater. the defaults came rolling in. Some rather large financial institutions went belly-up.

Prices are still inflated. The long-term real return on residential real estate has been barely above 0%.

Perhaps the prices near you have returned to sane levels. You could very well have gotten an amazing deal on your house. However, this market is only "down" relative to the past few years. The horrible things that happened in 2007-2011 were possible because the past 15 years were amazing. We've had two speculative bubbles, followed by two of the most drastic market corrections of all time. If home prices and gold retain their value, they'll be the exceptions to the rule. I'm not holding my breath.

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