Although some say comparison is the thief of joy, it’s natural to wonder how you measure against your peers financially. And a great way to measure your financial situation is using your net worth.
Net worth = total assets minus total liabilities
Your net worth is a measure of everything you own, minus everything you owe. In financial terms, it is your assets minus your liabilities. And while your net worth will vary over time, it can be critical to understand key milestones and benchmarks to ensure you’re on the right path to financial freedom.
Common assets include your home, investment accounts, cash, and vehicles when determining your net worth. Common liabilities include your home mortgage, credit card debt, and student loans.
Median or Average?
When measuring net worth, it’s critical to account for income disparity between the rich and the poor. For example, using data from the latest Survey of Consumer Finance report from the Federal Reserve, the average net worth of a US household is $748,800. However, those numbers are skewed upwards since the top 10% of households hold 70% of the wealth, and the top 50% hold roughly 98% of the total wealth.
Using the median net worth better represents actual household net worth, as outliers do not skew it as easily. The median is the middle number of a list of numbers when they are sorted either high to low or low to high. The median net worth in the US is $121,700, a better representation and stark contrast to the average.
So how does your net worth stack up against your peers? Let’s find out:
* The data shown below comes from the US Census Bureau’s Survey of Consumer Finance.
As one might expect, net worth tends to increase with age—that is, until you reach retirement and begin drawing down on your assets. That’s because of the power of compound interest over time, where you earn interest on your interest, a snowball effect that can result in massive investment growth over long periods.
As education increases, so does net worth. Using the median net worth, those with a college degree have a net worth that’s four times higher than those with a high school diploma and almost fifteen times higher than those with no high school diploma. Though situations will vary, a larger driver of the net worth disparity between education levels is a result of the earning potential of each category. Generally, those with a college education earn more than those without, resulting in more money to save and build their net worth.
Your location will affect your net worth because of the income you have access to and the expense you are subject to. Typically, incomes are higher in urban areas as more high-tech and professional career paths are available. However, the cost of living is generally higher in urban areas, balancing out much of the income disparity. The result is that people living in urban areas have a 40% higher median net worth than people living in rural areas.
Unfortunately, there is a large racial wealth gap in America, with the average median white family net worth almost eight times that of the average Black family. Here’s how net worth breaks down by race in the US.
The data shows that homeownership has a significant impact on the average household’s net worth. That’s no surprise, as many financial analysts estimate the average American homeowner has close to 70% of their net worth tied up in their home. And despite many having to offset their home value by their home mortgage, the results show that homeownership is still a winning proposition for overall net worth.
So how important is your net worth? While it can be interesting to see how your net worth compares to your peers, it is not the end-all. Net worth is a key indicator of your financial health, but it does not equate to self-worth. Remember that each person will face a different set of opportunities and obstacles in their life, and each experience will add or subtract from their net worth.
If you’re interested in building your net worth, consider a few keys. How to build your net worth.
Automate your savings. The guaranteed path to financial freedom and increasing your net worth is to automate your savings. This ensures that your net worth is continuously building in the background by always hitting your savings goals using automatic deposits. If your employer offers retirement plan contributions through payroll, consider a set-it-and-forget-it approach to increase your net worth.
Play the long game. Your investment growth is largely a function of your investment returns and your timeline. The longer you let your money grow, and the higher percentage it grows each year, the higher your net worth. Unfortunately, investment returns are hard to control, as market forces often dictate total return.
However, your timeline is entirely in your control. The longer you can let your money grow and compound, the higher your net worth will be. For young people: get started early and let it grow. For everyone else, stay disciplined, avoid cashing out early, and let compounding do the heavy lifting.
Track your net worth. Lastly, tracking your net worth can be key to understanding and hitting various benchmarks. By tracking your net worth over time you can understand where you are now, where you want to go, and track the progress you’ve made so far.
Range is here to help.
With Range, you can connect all your finances into a single dashboard to track, monitor and plan the best version of your life. Say goodbye to middlemen and spreadsheets and hello to the new financial you.