It’s natural to want to compare yourself to others, but the best way to figure out how you’re doing is to track your own progress.
Question: How do I know whether I am on track financially? It’s hard to make comparisons because of all the different variables – age, marital status, whether or not you have children. I’m just not sure how to gauge whether or not I’m making good progress toward financial security. —Nicole, Houston, Texas
Answer: When the irrepressible Ed Koch was mayor of New York back in the late 1970s and 1980s, he would walk the streets of the city greeting virtually everyone he met with this question: “How am I doing?”
It was a good way to get quick feedback on his performance and, in so doing, gain insights into what sort of policies might improve the city’s economic health and quality of life in the future.
Well, Ed Koch’s signature greeting also applies to our personal finances. Whether you ask How am I doing? or Am I on track?, what you really want is a status report that can give you a sense of how you’re faring financially and perhaps help you improve your future prospects.
Keeping up with the Joneses
There are two ways to go about this. One is to compare yourself to how others are doing. So, for example, if you go to our Net Worth: How Do You Stack Up tool, you’ll get a median net worth estimate for someone of your age as well as an estimate for the median net worth of someone with your income.
You can also get estimates of income broken down by such characteristics as household type, race and age by checking out the Census Bureau’s Current Population Report Consumer Income report, not to mention wage estimates for different occupations and parts of the country from the Bureau of Labor statistics.
And if you really want to get granular, you can go to NetworthIQ, a site where real people post their assets, liabilities and net worth, which you can then sort by age, occupation, education, state and country.
Granted, the comparisons you make using this sort of data won’t be perfect. The more narrowly you define your “peer” group (for example, married 25-year-old couples in the Southwest who work in finance and retailing respectively and who have two children under age 18, etc.) the harder it is to find comprehensive and reliable information. And since it can take considerable time for government agencies and other groups to collect and massage this information, the numbers can get a bit dated. (All the more reason to jump on the Federal Reserve Survey of Consumer Finances when it comes out, which should be later this year or early next.)
Still, you should be able to get a fairly decent sense of where you stand versus people who are similar to you in some, even if not all, characteristics.
Take your own measurements
But I think the second way of gauging whether you’re on track is even more important. And that’s to ask yourself whether you are doing the things one must do to achieve financial security, and then see whether you are faring better today than you were before.
In short, the barometer here isn’t where you stand relative to others, but whether you’re making progress compared where you were before.
So what sort of questions should you be asking yourself? Well, the biggie is Am I saving regularly? If you’re not doing that, you may have a perfectly nice lifestyle – in fact, you can live larger if you don’t save – but true financial security will be elusive. If your income is interrupted, you’ll have no cushion to fall back on.
At a minimum you should have an emergency fund that can tide you over should you lose your job.
You also want to be regularly putting aside money in tax-advantaged retirement accounts like 401(k)s and IRAs so you won’t have to rely solely on Social Security after you retire. And depending on where you are in life, you may need to set up separate programs for goals like buying a house or funding a child’s education.
You’ll also want to assess how you invest. Do you have an actual strategy? Have you built a portfolio that consists of both stocks and bonds that reflects your age and how much risk you’re willing to take? Or are you just winging it, buying what’s doing well at the moment or what your instincts tell you will do well in the near future?
Your strategy doesn’t have to be complicated; indeed, I think simpler is better. As Money’s June cover story shows, you can build a fully diversified portfolio with just seven investments.
And if you want to streamline your approach even more, I think you can get by with just two or three: a total stock market index fund, a total bond market index fund and, if you want to add some international exposure, a broad international index fund, all of which you can find on our Money 70 list of recommended funds.
If you are saving regularly and investing sensibly, then your net worth – the value of all you own minus what you owe – should rise. That doesn’t mean it will grow in a straight upward line year after year. But it should grow over time. To see if that’s the case, calculate your net worth using our Net worth calculator, print out the results and repeat the process annually to monitor your progress.
Finally, while your retirement savings will be reflected in your net worth, it’s also a good idea to track your retirement prospects separately, since retirement is such an important goal.
You can do that by going to our retirement-planning calculator. If you do this every year or so, you’ll be able to tell whether you’re making progress toward a secure retirement.
Bottom line: it may be fun to see how you compare to other people financially, but what ultimately matters is whether you’re making the best of the financial resources you have.
Of course, saving diligently and investing in a disciplined way can’t guarantee you’ll achieve financial security. But by doing both those things and periodically tracking your progress, you’ll know that you’re doing all you reasonably can.