The Lifetime Wealth Ratio
08 Mar 2025home > blogs
Financial Competency
Financial Competency - the knowledge, skills, attitude, and behavior an individual demonstrates when making decisions about their personal finances
I kinda get the idea, but not very clear. I have a job that pays a good salary and I have a good amount of savings. Why do I need to bother about financial competency?
That was me a few years ago.
We all do budgets every month - to pay our bills, spend on the necessities, allocate funds for savings and investments, etc. Some of us also measure our net worth at frequent intervals (quarterly, half-yearly, or annual), which gives us a snapshot of what we have. But net worth doesn’t tell us how efficient we are with our money.
Let’s take an example
- Person A starts from the bottom, works their way up and accumulates a net worth of $1 million.
- Person B is born into wealth, inherits $50 million, and eventually sees their net worth drop to $10 million.
Just by looking at the net worth, we can say that person B is doing well financially. But does that mean they’re financially more competent? If you know that person B started off with $50 million, your perception changes immediately. I was wondering if there is a simple way to calculate how efficient a person is with their personal finances.
That’s when I came across a concept called the Lifetime Wealth Ratio (LWR) from a blog Budgets Are Sexy.
What Is the Lifetime Wealth Ratio?
Lifetime Wealth Ratio = Net Worth / Total Lifetime Income
The Lifetime Wealth Ratio is calculated by dividing your net worth by the total income you’ve earned over your lifetime.
Networth - yeah, I can calculate.
How do I find my total income over my lifetime?.
If you file taxes every year, this should be straightforward by checking all the tax returns of the previous years. If you have not filed taxes, it may be difficult. Please check if you have any records of income documented somewhere. We are not going to share this with anyone. It’s for us to understand how efficient we are with our money. So, it’s better if we get as close to the accurate lifetime income as possible.
What about the unexpected financial situations?.
- Unexpected windfall like winning a lottery or inheritance from an unknown dead aunt. That’s an increase in your income. Include it.
- Getting divorced and 50% of your net worth evaporates overnight. You could’ve done better. That’s a decrease in your net worth. Include it.
- Unexpected medical expenses, wiping out all your savings. That’s life. That’s a decrease in your net worth. Include it.
Example 1
Micheal is a software engineer, who started with a $50K salary, and gradually moved up to six-figure salary over the years.
- Over 15 years, he earned $1.5 million in income.
- His current worth is $900K
- Lifetime Wealth Ratio = $900K / $1.5M = 0.6 (60 %)
Micheal has managed to turn 60% of his income into his wealth.
Example 2
Ryan works in a Fortune 500 Company, starts with a whopping $500K salary, and quickly moves up to a seven-figure salary over the years.
- Over 15 years, he earned $10 million in income.
- His current worth is $1 million
- Lifetime Wealth Ratio = $1M / $10M = 0.1 (10 %)
Ryan has managed to turn 10% of his income into his wealth.
Who do you think is better at managing their finances? (i.e.) financially competent?
What Is Your Lifetime Wealth Ratio?
Below is a completely made-up scale, to make you feel miserable, force you to learn personal finance and be competent. This is in no way an accurate reflection of your financial competency. Just for fun :)
| Lifetime Wealth Ratio | Your Competency | Your Attitude |
|---|---|---|
| 1 - 20 | Spender Mindset | I make money, but where does it all go? |
| 21 - 40 | Break-Even Thinker | I have some savings, but I could do better |
| 41 - 70 | Smart Wealth Builder | My money works for me, and I make smart financial choices |
| 71 - 100 | Strategic Wealth Master | I turn income into lasting wealth and financial freedom |
| 100+ | Legacy Builder | My wealth grows even when I don’t work |
Would you calculate your Lifetime Wealth Ratio?
Final Thoughts
The net worth is just a snapshot, but the Lifetime Wealth Ratio (LWR) shows how well you’ve handled your money over time, and whether you’re really making the most of what you’ve earned.
All the best !!!
home > blogs