You can be aware of exactly how much money you have in your savings account. And you may know that you currently owe $1,000 on your credit cards.
So when was the last time you stopped to calculate your net worth? If your answer is “never”, you may be a good friend.
Many people don’t stop to think about their net worth, but they should. Your net worth is a snapshot of your total financial picture.
Net worth is calculated by adding up your assets and subtracting your liabilities or debts. Let’s say you have the following assets:
- $20,000 savings
- $30,000 in your IRA
- A $400,000 house
This works out to $450,000 in total assets. But let’s also assume that you owe:
- $260,000 on your mortgage
- $30,000 in education debt
- $10,000 in credit card balance
This means a total debt of $300,000. So you’re left with a net worth of $150,000.
End Data from the Federal Reserve It turns out that the net worth of the average American family is $1,063,700. And if you’re thinking, “Damn, my family’s net worth isn’t even close to that,” you’re actually not alone. But before we highlight this point, let’s take a deeper look at this data.
It’s time for a quick statistics lesson. Some people use the terms “mean” and “median” interchangeably, but they are very different.
In a given data set, an average is calculated by taking all the numbers in that set and dividing by the number of inputs. The median is determined by taking the middle value of a particular set of data.
Let’s say you have the following dataset:
To calculate the average, you take those 11 numbers, add them together, and divide their sum by 11 to get roughly 31. However, the median (or middle) number in this dataset is 20.
Here’s why this matters. We just learned that the average American family has a net worth of $1,063,700. But you should know median American families have a net worth of $192,000. Given this discrepancy, we can conclude that $192,000 is a better representation of Americans’ net worth than $1,063,700.
Similar to our dataset above. Most of the numbers in this cluster are closer to the median of 20 than to the median of 31. The reason the average is 31 is because we had two larger numbers (88 and 90) to reveal it.
That’s what happens with net worth. Federal Reserve seeks to seize assets and liabilities All Americans. The rich are likely to have more assets, leading to a higher net worth.
But it is likely that a small percentage of wealthy people will move the average significantly higher. The typical American household doesn’t walk around with $1 million on hand and the change in assets after their debts are paid off.
What do you think about your net worth?
It’s not a bad idea to calculate your net worth and see where that leaves you. But something you shouldn’t What you need to do is look at the average net worth and think that you are terribly behind. If your net worth is more in line with the median, this may indicate that you are doing well.
Of course, if you feel like there are certain areas of your finances that need work, this is definitely something that needs to be addressed. Maybe you would have a greater net worth if you didn’t have a $24,000 credit card balance. If so, it is worth looking for ways to reduce this debt. You might consider moving your credit card debt to a card with a 0% APR introductory offer so it’s cheaper to pay off your debt. And if you’re struggling to pay your mortgage, you should consider downsizing to a less expensive home to reduce financial stress and ensure you don’t face foreclosure.
But don’t worry if your net worth is not close to $1 million. Over time, you can work to increase your net worth by doing things like paying off debt and investing in stocks and other assets that have the potential to gain value over time. Buying a home can also help increase your net worth, but it’s not an ideal option for everyone.
Instead of stressing about how much your net worth compares to other people, you may want to focus on seeing your net worth increase over time. If you can improve your personal wealth every year, it means you’re doing a lot of things right.
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