You’ll hear both AJ and I talk about this a TON! Net worth, or NW as it’s often referred, is a total measure of your financial health. Okay, so it’s not the total picture, but it is a very important one. Net worth, paired with other things like debt to income (DTI) ratio and savings rate, can give you a really good idea of where you stand financially.
Per the Survey of Consumer Finances posted by the Federal Reserve, the median net worth in the U.S. is $121,700. The table below further breaks down the specifics for each age group.
| Age of Family Leader | Average Net Worth* | Median Net Worth |
|---|---|---|
| Less than 35 | $76,300 | $13,900 |
| 35-44 | $436,200 | $91,300 |
| 45-54 | $833,200 | $168,600 |
| 55-64 | $1,175,900 | $212,500 |
| 65-74 | $1,217,700 | $266,400 |
| 75 and up | $977,600 | $254,800 |
**The averages are higher due to super-high net worth individuals
As you can see, we have a spending and savings problem. The average American household clearly doesn’t prioritize wealth accumulation. Well, we’re here to change that!
What is net worth?
In short, net worth is all of your assets (money/stuff) minus liabilities (debt). In the accounting world, assets minus liabilities equals net assets, so realistically we’re not talking about a much different concept in the personal finance realm. This is how I first explained net worth to my spouse: if you take everything you own and sell it, your net worth is the money you would have left. Simple, right?
The specifics of measuring net worth
In order to make this as simple as possible, I’ll break down the different things that are considered assets and how to add them into the equation. I’ll also go over the debt portion so you can get a better understanding of how this impacts the final number.
Assets:
Main Home
Checking and Savings Accounts
Cash
Stocks and Bonds
Annuities
Other Real Estate
Precious Metals
Bitcoin
[insert crypto named after a mythical creature]
NOTE: there are some other obscure items that could be included such as valuable paintings, classic cars, sports cards, etc. While these are often very valuable, their value fluctuates significantly. Make sure you value these accordingly when adding them to your net worth.
There are also some items such as retirement plans and inheritance, which people try to include in their net worth but should not.
Liabilities (debt):
Mortgage
Car Loans
Personal Loans
Gambling Debt owed to your local bookie
Payday Loans (for the love of God, don’t use these)
Title Loans (see payday loans above)
Student Loans
[insert predatory loan not named above]
Running the numbers
Now that I’ve covered some background info, let’s start running some numbers.
Let’s say you have a home with a mortgage. The remaining balance on the mortgage is $300k. Since 2021 has been a crazy year for real estate your house has skyrocketed to a market value of $450k.
Asset: House, $450k
Liability: Mortgage, $300k
NW: $150k
In this example above, you have a quick $150k added to your net worth. Easy, right? Well, let’s look at some less easy examples.
You have a car. Unfortunately, you got hosed by the dealer. It happens to the best of us, that $7 polo shirt, $5 sunglasses, and slicked back hair had you mesmerized.
Asset: 1999 Honda Civic, $2,500
Liability: Auto Loan, $7,500 (remember, you got hosed!)
NW: -$5,000
Not a good look – you are upside down $5k on this car. Best thing to do is pay it off early and count it as a little asset!
Asset: College Degree, $0
Liability: Student Loan, $100k
NW: -$100k
Concerned yet? That’s right, you cannot sell your college degree. Even though you may have a job as a result of it, it holds no cash value. If that was the case, I’d sell my bachelors degree since I no longer need it now that I have an MBA! No such luck, though. The sooner you pay off this debt, the sooner your net worth climbs toward the moon!
Asset: 70” big screen TV, state of the art coffee maker, pallet of avocado toast, 22 streaming subscriptions, 12 box services, and a bunch of random stuff you bought from Amazon after you drank too much wine, $0
Liability: Credit Card Bill, $7,000
NW: -$7,000
Are you surprised this stuff doesn’t hold much cash value? Granted, you could sell the 70” TV for something, but the rest of this does nothing for your net worth. On second thought, by watching 22 streaming services the TV may not hold value, either!
The examples above leave the individual in question with a net worth of $38k. That’s right, they have $150k in equity in their home but a net worth of ONLY $38k. Not good. To be clear, this is not an unfamiliar scenario for a good portion of the country.
What did we learn today?
Was net worth what you thought it was? Understanding the concept in this article was a turning point for my wife and I. By running these numbers, you can truly understand which purchases have left you with actual value and which ones have added nothing but debt to your financial picture.
