A financial rule to remember — Forget the Joneses

I was recently conducting a portfolio review with a client when they asked, “How are we doing?” Having been asked this question before, I knew they weren’t asking, “How are my investments doing?” but rather, “How do we stack up financially?”

There are a number of ways to address this “keeping up with the Joneses” type question.

The first is to ask, “Compared to whom?” If you want to compare yourself to Bill Gates, chances are your portfolio is a rounding error. But assuming you want to compare yourself to those in a similar bracket, we need to consider what data to use to make an assessment — median or mean data? And, are we comparing you to all ages or just people in your age bracket? Typically, using median data and evaluating it against others in the same age bracket is the best way to get to the comparison most investors are looking to evaluate.

We also have to decide what number we want to compare. Are we looking at just the value of your investments or your entire net worth? Net worth is the value of your investments, savings and home minus any debts, including your mortgage. Unless you are in the minority of Americans and are debt-free, your net worth will be lower than the value of your investments.

Once we’ve set some parameters for the comparison we need to consider where we’re going to get the data to do the comparison.

If you search “median American net worth” online, you will get lots of results and statistics. One of the more detailed reports published every three years is the Federal Reserve’s Survey of Consumer Finances. The most recent data from 2010 has the median American net worth at $77,000. If we take the liberty to increase that number by 20 percent to take into account recent stock market and real estate increases, that number comes in around $94,500. One particularly nice aspect of this report is that age and income are taken into consideration.

If government statistics aren’t your thing, consider using the New York Times best-selling book “The Millionaire Next Door.”

Written by Thomas Stanley and William Danko (a Niskayuna resident and University of Albany professor), the book features interviews with thousands of financially successful people and identifies seven common traits among them. The authors also devised a formula to calculate where they think you should be in terms of net worth based upon age and income. Their simple formula is to multiple your age by your income, and then divide by 10.

While I won’t begrudge any client or any one the opportunity to do a comparison with the Joneses, I always like to point out that where the Joneses are and where they’re headed are irrelevant to your situation.

Unless the Joneses are going to pay off your mortgage or pitch in for a few bills, it’s not worth paying attention to their finances. What’s more important is paying attention to where you stand in terms of your personal income and retirement goals and making sure you’re doing all you can to stay on track to meet those metrics. The only way to improve your situation is to stay focused on what you have and what you can control. With the right focus and planning you might just find yourself in a position to buy the Joneses lunch if they’re down on the their luck.