One of the questions I am most frequently asked is: What is net worth? In this post, I will discuss the concept of net worth and try to put it in perspective for you. Overall, it is one of foundational concepts of personal finance.
What is Net Worth and How is it Calculated?
For most everyone, net worth is simply the total value of the tangible assets you own minus any liabilities or debts you have. It is the primarily the result of how successful you are in generating cash (through work and investment) and converting it into assets versus spending it. When cash is spent, you usually get nothing in return except for consumption (e.g., food, entertainment, gas costs, travel expenses).
Overall, tangible assets include:
Cash within bank accounts, such as checking and savings accounts
Cash value life insurance
Certificates of deposit and US government savings bonds
Health savings accounts
Investment accounts, including 529 college savings plans and individual taxable investment accounts
Non-qualified annuities
Retirement accounts, including IRAs, 401(k)s and 403(b)s
Vehicles including cars, trucks, motorcycles, boats and helicopters
Real estate, including rental homes and primary/residential homes
In calculating net worth, liabilities or debts get subtracted from the value of assets amount. Debts typically include:
Mortgages
Home equity lines of credit or home equity loans
Credit card balances
Installment loans, including buy not pay later, personal loans, vehicle loans and student loans.
A simple example would be the Miller family that has $225,000 in bank accounts and a mortgage of $125,000 which calculates to be a net worth of $100,000.
How Does Your Net Worth Compare?
Luckily every three years, the Federal Reserve Board (Fed) issues the Survey of Consumer Finances to share information about family net worth and income in the U.S.
The most recent report released in September 2020 (using data collected in 2019) shows the median U.S. household net worth is $121,700. So here is the key question: How do you compare to others your age? You can find this out by looking at the Fed’s survey. As you can see from the survey, net worth tends to peak for most American during the decade after age 65.
Household Net Worth by Age
What it All Means
As you compare your net worth to others your age, it is an indication of how comfortable your Fulfilling Stage or retirement will likely be. We have discussed this in prior posts and as you have seen you should have an ever-increasing amount saved as you get closer to retirement. One source you can look to for a rule-of-thumb on the amount you need to have saved to create a comfortable retirement is one of the retirement providers. For example, Fidelity Investments, says that people should have the equivalent of 10 times their income put aside by age 67 to have comfortable retirement.
Summary
Net worth is a fundamental personal finance measurement. It is an indicator of how successful you are being in accumulating a surplus from all your work and money generating endeavors. The larger your net worth and the faster you are increasing the amount are indicators of how well you are managing your financial affairs.
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