It’s interesting to look at Americans’ net worth, as opposed to the amount of money in savings accounts, because it paints a bigger picture. Net worth is a measure of all your assets minus all your liabilities.
Let’s say you own a home worth $400,000 and have $40,000 in savings and a retirement account of $160,000. This means a total asset of $600,000. But let’s say you also owe $300,000 on your mortgage. This reduces your net worth to $300,000.
End Federal Reserve data It turns out that the average American’s net worth is $1,063,700. But if that’s the case, why do so many people feel like they’re barely making ends meet?
Average net worth doesn’t tell the whole story
While the average net worth among Americans is $1,063,700, median net worth only
$192,900. And when you have a median that’s way below the mean, that tells you that more people are closer to the median than the mean.
In other words, in this data it is likely that a small percentage of very wealthy Americans have an average net worth of over $1 million. But this does not represent the typical American.
Many of us do not take full advantage of our assets
Net worth is a measure of your total assets. However, not every asset turns into liquid, spendable cash.
Let’s say your net worth is $200,000, which is roughly like the average net worth today. You may have this net worth because you have no money in savings, a home worth $300,000, and a mortgage balance of $100,000.
Do you feel rich? Probably not. You may be sitting on $200,000 worth of equity in your home. But you need a home to live in, so you can’t fully convert that asset into spendable cash unless you sell it.
something you to be What you can potentially do is borrow against your home equity through a loan or line of credit. But this means having to borrow more money and pay interest. So in the meantime is While there is a way to access liquid cash, it may not be the ideal way.
Now let’s say you have a net worth of $1 million, which is close to the average. You may be sitting on a $1 million IRA balance in your late 40s because you started funding that account in your early 20s and have invested your money well over the years.
In this case, you may be in pretty good financial shape. But that doesn’t mean you have $1 million to spend. If you use your IRA before retirement, you won’t have that money for pension. And if you’re not yet 59 1/2, you’ll still be penalized for withdrawing money early. In fact, it’s more than possible for someone to have $1 million in their retirement plan and still have to spend a few bucks each day to cover their expenses.
Take this data with a grain of salt
After all, Americans have a high average net worth. But that doesn’t mean typical American feels rich. If you were to poll your friends and neighbors today, they would probably tell a very different story.
To be clear, it’s good to have a high net worth, even if most of your assets aren’t things you can easily touch. If you own a home with $300,000 in equity, to be Leverage that capital in an emergency, or downsize to a smaller home and pocket some profits if you need the cash.
But if you want to feel like you’re in a good position to spend money without worry:
Having high net worth is good. But it’s also important to prepare yourself so that you feel like you’re in a position to enjoy your success and spend money comfortably.
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