To outside observers, wealth can be perceived in a number of ways. The size of your house, the neighborhood you live in, and the kind of car you drive can insinuate a great deal about how much money you make or have. However homes can be rented (even in ritzy neighborhoods) and cars can be leased, making these flashy assets little more than a diversion from the only true measurement of wealth: your net worth.
What is a net worth?
Simply put, your net worth is a comparison of what you own compared to what you owe. To calculate this figure you can add up all of your assets and then subtract your liabilities. For example the value of your home, the price you’d get for your car, and any cash you have in accounts would be considered assets while the amount left on your mortgage along with any other loans or debts would be liabilities.
In some cases it is, unfortunately, possible to have a negative net worth, known as a deficit net worth. A common scenario that could cause this is an expected dip in the housing market — like the one seen in 2008 — that makes your home worth less than what you owe on it. While having a deficit net worth might seem like a financial death sentence, it’s important to remember that, in some cases, the value of your asset could rebound, flipping your net worth around along with it.
What is the average net worth?
As you’d probably expect, a person’s net worth typically grows along with their age. In fact, according to a 2011 study by the Census Bureau (and reported on by Holly Johnson for Investment Zen), the vast majority of those under the age of 35 have a net worth of less than $35,000. Meanwhile those over 65 with a net worth of around $170,000 are in the 50th percentile for their age group.
That might sound impressive but, when you consider that the majority of those 65 and over are retired and not bringing in much income, $170,000 is far from enough. Even those over 65 years old in the 70th percentile with net worths of around $350,000 could be headed for serious financial trouble. For that reason it’s important to consider your net worth early on and ensure you aren’t overburdening yourself for the future.
How can I improve my net worth?
The first step in raising your net worth is to pay down your debts. To accomplish this you may consider debt consolidation, while also tightening your budget and making lifestyle changes. With your debts gone, you can then begin setting aside extra money for savings or investments.
Since $170,000 isn’t going to get the job done when it comes to retirement, taking advantage of tax-sheltered retirement accounts and putting as much money as you can into them should be a priority. First, if your employer offers 401(k) matching, be sure to max out that offer by contributing up to whatever amount they’ll match. You might also want to consider a Roth IRA, which will allow you to pay the taxes on your contribution up front so you won’t have to worry about them when you start withdrawing funds upon retirement. These actions will not only help boost your net worth but will also make for a far more financially comfortable retirement.
While society has taught us to judge a person’s financial worth based on things like cars, clothes, and homes, the truth is that net worth is really the best way to assess one’s wealth. However net worth isn’t just about status — it’s about ensuring a prosperous future for yourself and your family. With that in mind you should strive to find ways of increasing your own net worth instead of wasting money on impressive toys just to keep up with Joneses.