Cassidy is an author, a scientist, and a personal finance enthusiast.
It's important to understand your finances if you want to be financially comfortable, not living paycheck to paycheck. You need to know how much money you have, how much you earn, and how much you spend. That way you can make sure you are not making purchases you cannot afford and are able to grow your savings to one day eventually retire. One significant metric for tracking your finances is net worth.
What is net worth?
Put simply, net worth is defined as your total assets minus your total liabilities. That means to calculate your net worth, you add up everything you own that holds value and subtract all of your debts. If you were to sell everything you own and use that money to pay off all your debts, the money left over would be your net worth.
What are my assets?
Assets include your cash, investments (stocks, bonds, CDs, etc.), retirement accounts (401(k)s, IRAs), primary residence and other real estate, vehicles, and anything else that has value. Note that assets do not include income, only the money that you have saved.
What are my liabilities?
Liabilities include mortgages, car loans, student loans, credit card debt, and anything else you owe money on. Liabilities do not include monthly bills (such as rent), assuming that you pay them on time and do not accrue debt.
How does my net worth measure up?
Net worth varies mostly based on age and income, as you can see in the following infographic from Cozy Nest Egg.
Net Worth Infographic
According to the 2019 Survey of Consumer Finances by the Federal Reserve, the median net worth is $121,760. That means that half of Americans have a net worth over $121,760, and half have a net worth below that. Here are net worth percentiles to give you a better indication of how your own net worth compares to the net worth of other Americans:
- 10%: -$467
- 25%: $12,430
- 40%: $67,469
- 50%: $121,760
- 60%: $201,311
- 70%: $314,921
- 75%: $403,284
- 80%: $558,190
- 85%: $795,219
- 90%: $1,219,126
- 99%: $11,099,166
How does median net worth vary based on age?
As you might expect, net worth generally increases with age. The more time you have to make money, the more money you have. This is especially true when it comes to your investments due to the power of compound interest. Each time interest compounds, you not only make money off of your initial investment, but also off of the money you have previously gained. Here is the median net worth of different age groups:
- Under 35: $14,000
- 35 to 44: $91,110
- 45 to 54: $168,800
- 55 to 64: $213,150
- 65 to 74: $266,070
- 75 and older: $254,900
How does median net worth vary based on income?
Although income is not included in the net worth calculation, it does have a big effect on median net worth. As you can see in the infographic, the higher your income, the higher your net worth, and the relationship appears to be exponential. This is not surprising since the more money you make, the more you should be able to save. Someone who has a low income will have to spend most of it on expenses, while someone with a high income will have more left over. That said, many people with a high income end up blowing their income on various nonessential things. Many experts recommend following the 50/30/20 budget, which allocates 50% of income for needs, 30% for wants, and 20% for savings.
I should note that you don't need any income to have a high net worth. For most people with a high net worth, income does not contribute much to net worth annually, as most of their net worth growth will come from investments and/or real estate appreciation. Also, when people retire, they will have a large net worth but little income.
How should your net worth change over time?
Your net worth should grow over time. If it is decreasing, you should evaluate why and take steps to fix this problem. If you are saving money every year and managing it wisely, it should increase year after year. When you are young and have a low net worth, it will increase drastically percentagewise in a short time frame. For example, if your net worth is only $10,000 and you manage to save $10,000 in a year, your net worth will have increased 100%. On the other hand, when you are older and have a larger net worth, your net worth will increase slower percentagewise even if you save the same amount. If your net worth is $100,000, saving $10,000 only increases your net worth by 10%. The average change in median net worth has been calculated to be about 3% per year, according to Cozy Nest Egg.
In terms of raw numbers rather than percentages, someone with a larger net worth should see a larger increase in net worth annually due to compound interest. With a 7% annual return in the stock market, someone who invested $1,000 would only get $70 in a year, but someone who invested $100,000 would get $7,000.
How can you increase your net worth?
As we have seen, net worth increases with income and age, so the simplest ways to increase your net worth are to find a better paying job (or look for side gigs) and wait. Make sure that you are saving money regularly and not spending on unnecessary purchases. To keep you on track, it helps to make a budget. Also, make sure you are getting your money to work for you by investing it. Storing your money in a checking or savings account is useful for quick access, but it does not help you grow your money. If you take inflation into account, you're actually losing money. As long as you take the time and effort to keep track of and manage your money, your net worth is sure to grow.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.