How Nancy Dunnan Changed My Life

TB and I were chatting yesterday and somehow we ended up talking about investing. The crux of the conversation was how so many of our family members view the stock market as a massive Ponzi scheme setup to allow institutions to steal money from small investors. Perhaps this is true, microscopically, yet investing in equities, particularly stock, has been a surefire method of sustained asset growth over the long term. Still, the stock market is viewed by many in our families as something to be feared rather than something to be leveraged.

This fear is real and cannot be summarily dismissed. I wish I could chalk it up to conservatism, yet these same people throw caution to the wind whenever the next get-rich-quick opportunity (aka scheme) comes knocking. Another explanation is complexity. The stock market involves millions of numbers, some with lots of decimal places, others with lots of commas. There are also numerous financial & technical terms resulting in a jargon and shorthand that could scare away just about anyone.

I am sure if you asked the average person to walk you through the process of buying a share of McDonald’s or Starbucks stock, they probably could not tell you. However, they can quickly tell you what comes on a #3 and that they prefer Grande-raspberry-soy-extra-hot-no-whip-mocha lattes. For many people, it is easier to buy from most publicly traded corporations than it is to invest in them.

I could have been one of those people. Statistically, from my upbringing, I probably would have as well if it were not for a book I bought and read one college summer.

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Planning for Retirement: Your Wealth Score

There are as many methods for measuring financial well-being as there are opinions of what it means to be truly stable financially. Some people track their overall net worth, looking at the balances of all their accounts over regular intervals of time. Others go for a simpler barometer consisting of monthly income vs. expenses presumably as an indicator of how much they have left each month to save — whether that excess cash actually makes it into a savings or investment account (and stays there) is a separate topic. Regardless of the method or metrics used, as long as you are tracking something and making adjustments along the way, chances are you will arrive closer to your destination than going with hope and prayer alone.

TB, being the finance person in our household, likes data. Her favorite financial tool is Microsoft Excel. She likes to run models of where we will be financially in the future based on how we adjust various inputs today. She updates a cell here and there and the results of that update propagate across our financial forecast. I am, on the other hand, the organization & execution person in our household. My favorite financial tool is Microsoft Money. I like tracking balance statements and regularly adjusting the system on-the-fly. I think in terms of quarters and adjust our plan accordingly based on past performance and trends. TB’s long-term, future view and my short-term, past view work well together…most times.

What if you don’t have Excel or don’t have the discipline to use Money? Do you lack the patience to track your net worth or monthly income vs. expenses? Are you looking for a relatively simple, straightforward way to determine whether you are on track or to help define what “on track” might mean?

MSN Money Central ran an article some weeks back entitled “Your free financial report card” (PDF) in which Liz Pulliam Weston describes how to use your annual Social Security statements to calculate your household wealth score which “can help you see what you’ve got to show for the money you’ve made over the years.” That wealth score will either be sobering (“Where did all the money go?”) or encouraging (“Sweet!”) but you have to calculate it to know. (“Now we know! And knowing his half the battle. GI Joe!”)

Here are the steps:

  1. Determine your Net Worth (assets minus liabilities) using either Intuit Quicken, Microsoft Money, Microsoft Excel, paper & pencil, or whatever.
  2. Turn to page 3 of your most recent Social Security statement — these statements are usually sent 3 months before your birthday.
  3. Add up all the values from the Medicare column for each year to calculate your Lifetime Earnings.
  4. Calculate: Wealth Score = Net Worth / Lifetime Earnings x 100

Professional financial planners recommend the following wealth score ranges by age group:

Age Range Wealth Score
20-34 0%-25%
35-59 25%-100%
60+ 100%-200%

These are estimates that provide a good basis for establishing general rules-of-thumb for evaluating your work history, savings strategy and retirement plan. If you are just starting out, chances are you have had little income and little savings compared to someone who has been working 20+ years. If you plan to retire early, you need to be at the upper end of the wealth score range for your age group. Wealthy parents who bequeath assets or inheritances can be huge X factors in any retirement plan. The wealth score ignores such factors.

After doing this calculation for our household, TB and I came up with a wealth score of 28%. Sweet.