“How much money should I have?”
A random survey of Americans posed the following questions:
- Do you know that you should pay-off all of your consumer debt?
- Did you that know you should participate fully in your 401K or IRA?
- Did you know that you should spend less money than you make?
- Do you agree that you should have a financial plan to provide for retirement?
With the respondents answering “Yes” to those four questions, the next question was: “Are you doing these things?” For the majority of those surveyed, the answer was “No.” There are two primary reasons for this negative response: 1) People did not know how to get started; and 2) people were afraid they might do the wrong thing(s). Just imagine the magnitude of that inactivity?
The path to financial success starts by laying a good foundation of “wants, needs, and wishes”. The purpose is to outline what you will need to achieve your own personal brand of financial success. Usually this is done in a meeting with a Financial Planner or mentor. The purpose of the meeting is to prepare an overview of your current financial situation, create a net worth statement, and define your financial goals. But just having a net worth statement is not meaningful unless it can be evaluated against some measure of adequacy, such as, “How much is enough and does it meet my goals?”.
I am often asked the question… “How Much Money Should I Have?” Financial planning professionals can answer that question by preparing a Financial Plan tailored to an individual’s or family’s specific situation. Financial plans can use “what if” scenarios to illustrate the lifetime impact of financial choices. The Prosperity Index™ is a tool for people, who want to begin planning or want to measure the success of their existing plan. It is a guide to help answer the question of “How am I doing?”
This simple measuring tool helps you to easily convert your financial information into an action plan to help achieve financial freedom. It is not intended to replace a comprehensive Financial Plan but it does serve as a good first step to setting, achieving and monitoring your financial goals. For the greatest benefit you should update your index at least semi annually.
Congratulations, by working through this information you are taking a step forward in evaluating and possibly improving your financial health. The next logical step is to meet with your financial planner to create a more formal plan and establish benchmarks.
The Prosperity Index™ is calculated by dividing your financial assets by your family income.
(Home equity and 1st mortgage balances are excluded, as these are not future income assets)
Cash, Savings, Money Markets
Retirement Accounts, IRAs
Mutual Funds, Investment Accts
Life Ins Cash Value, Annuities
Other Financial Assets (exc homes, autos, personal use assets)
Gross Financial Assets
Less Auto Loans
Less School Loans
Less Credit Cards
Less Second Mortgages (unless used for home purchase/improvement)
Less other Non-Residential Loans
NET FINANCIAL ASSETS
With this number calculated, it is time to see how this family is doing compared to the table.
Prosperity Index™ Table
As you can see, for a 36-year-old, the number is sufficient. For a forty-year-old the number is behind the curve. In any scenario, knowing your index relative to your age gives you information you can act on. The Prosperity Index™ indicates that an individual with typical income growth, getting the typical return on an investment, and putting away at least 10% of their income towards retirement can be reasonably assured a comfortable retirement income at the age of 65.
Once you know your Prosperity Index™, you can calculate your Prosperity Ratio™. The ratio quickly tells you how you are doing in relation to the index. For example, we will assume that the primary breadwinner of our family has a Prosperity Index™ of 1.35, and is 40 years old.
Their recommended score is 2.0, they score 1.35. By dividing 1.35 by 2.0 we find they have a Prosperity Ratio™ of 67.5%.
If your Prosperity Ratio™ is less than 100% ...
You need to take corrective action. First you need to identify the contributing factors that may distort your score.
- Just out of school
- Major expenses resulting from a change in lifestyle
- Dramatic increase in family income
If these are your issues, consider developing a plan that will put you on track for the next benchmark (i.e. age 45, 50, 55).
If you have been ineffective at building financial assets, consider these steps.
- Pay-Off consumer debt
- Reduce your personal expenditures
- Increase personal savings
- Reduce the interest rate you pay on all of your debt
- Maximize your 401k, TSA, IRA
- Look for higher but sensible investment returns
- Work together with your mate to get in financial control
- Consider professional guidance (consumer credit, financial planning, therapy)
If Your Prosperity Ratio™ is at or near 100% ...
Take a moment and breath easy. You are among a rare minority of Americans. By continuing to save at a moderate rate, you should be able to retire comfortably at age 65. (This assumes that you will continue to stay at 100% Prosperity Ratio™, but this is not guaranteed).
However, if you desire to retire at age 60, simply add 5 years to your age to see what your Prosperity Index™ and Prosperity Ratio™ would prescribe.
There are a few distortions that are cause for concern. You may wish to dilute your score if any of the following apply to you:
Areas You May Wish to Discount
- If a majority of your assets (15% or more of liquid assets) are employer stock (25% discount)
- If much of your retirement accounts are unvested (10% discount)
- If your primary asset is stock of a closely held company (30% discount)
- If you’ve recently come into a lot of money (15% discount)
- A short term drop in family income (discount equal to income % drop )
If Your Prosperity Ratio is well over 100%
Congratulations! you really are something. Sure you may be lucky, but typically you are just very skilled at converting earned income into financial assets. Now, look again at the discounts listed above and consider any distortions. If applicable, apply any discounts. If your ratio is still above 100%, good for you.
In the book ‘Your Money or Your Life’ the question is posed… “If someone stuck a gun in your gut today and said, ‘your money or your life, decide now,’ what would you do?”. The answer comes easily for most of us. Yet, each time we stay late at the office or miss a child; or grandchild’s ballgame or recital… we give up a little of our life for more money. When our career asks too much of us and we cannot say no, we need to understand that we make that choice out of ego and/or greed, not financial fear. Financial fear is reduced when our Prosperity Ratio™ is well over 100%. With a ratio over 100% it is time to enjoy a life well spent.
Having A Life Well Spent
- Take some time off, travel
- Indulge in some luxuries
- Be generous with loved ones (time and resources)
- Give (you can’t out give God)
- Become an expert in something you never needed to know
Being prosperous is within all of our reaches.
There is something better than more… "ENOUGH"
Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.