It’s important to check in on your finances so that you can adjust your spending, saving, and investing habits to make sure you’re on track for a more stable future.
One way to better understand your financial health is to learn about your net worth and what you can do now to help it grow.
What is net worth?
In simple words, your net worth is the value of what you own (your assets), minus what you owe (liabilities).
So basically your assets are everything you own including bank accounts, investment accounts, and the fair market value of real estate, cars, and personal property. Your liabilities include mortgages, car loans, student loans, credit card debt and any other personal loans or debts.
So, for example, if you own a $500,000 house and a $30,000 car, but have $300,000 mortgage and $15,000 car loan and $5,000 in credit card debt, it means that your net worth is $210,000.
Understanding your net worth serves a few key purposes:
- Financial planning: Knowing your net worth is essential for creating a financial plan. It helps you understand where you stand financially and set goals for the future.
- Tracking progress: By tracking your net worth over time, you can see how your financial situation is changing. This can be helpful in identifying trends and making adjustments to your financial plan.
- Debt management: Understanding your net worth can help you manage your debt. For example, if your net worth is negative, it may be an indication that you need to focus on paying off debt before you can start building wealth.
- Retirement planning: Knowing your net worth can help you plan for retirement. It can help you determine how much you need to save, how much you can spend in retirement, and when you can retire.
- Creditworthiness: Lenders and financial institutions often use your net worth as a factor when deciding whether to approve a loan or credit application. A high net worth can indicate financial stability and make you a more attractive candidate for loans and credit.
The average American net worth by age
Net worth is often measured in one of two ways: average net worth and median net worth. The average net worth is the average of all Americans. This figure may be a less accurate representation of the average net worth because it can be skewed by extremely high or low outliers.
The median net worth is the middle point between all Americans and it’s the most accurate representation of real net worth in the USA.
The Fed’s findings demonstrate a positive correlation between age and net worth, with most Americans seeing an increase in their net worth as they get older, earn more money, and have more time to save and invest.
Here’s how the average American’s net worth changes throughout their lifetime.
The first group is those that are under 35 years old. Their median net worth is $13,900 and average net worth is $76,300. They have the lowest net worth from all groups and it makes sense as people under 35 are usually just getting started in their jobs after graduating university and they still have large amounts in student debts.
The second group is from 35 to 44 years old. Their median net worth is $91,300 and average net worth is $436,200. As you can see this age group has a large bump in net worth mainly because 35-year olds usually have 10 or more years of experience in the workforce and may demand higher salaries. Also within those years they have already paid out large amount of their student loans.
Another age group is from 45 to 54 years old. Their median net worth is $168,600 and average net worth is $833,200$. This age group usually get the highest salaries, they also have their own house which has already appreciated in value but still have mortgage left to pay. Also, these people have usually paid out their student loans.
Now the ones from 55 to 64 years old have $212,500 median net worth and $1,175,900 average net worth. So people in this age group are millionaires on average.
65 to 74 year olds have their median net worth increase to $266,400 and their average net worth increases to $1,217,700.
Now people older than 75 years old is the first group where we see the decline in net worth. This age group has a lower median net worth of $254,800 and $977,600 of average net worth. That’s mainly because these people are usually retired and are mainly using their net worth to cover everyday expenses.
What’s the best way to get your net worth growing?
There are two ways you can grow your net worth:
1) by increasing your income and how much you save/invest;
2) by reducing your debt. Both factors work hand-in-hand, since you can’t pay off debt without an income, and some might argue that you need certain kinds of debt (student loans, for instance) to earn more money.
By the time you’re in your 30s and 40s, you probably know about how much debt you have in your name. Millennials, on average, have about $78,396 of debt, between credit cards, installment loans and mortgages. Boomers, by comparison, average $135,841.
While debt is common, it’s also important to borrow strategically. When you have more debt than total assets, your net worth can dip into the negative. And even borrowing smaller amounts can delay your ability to accumulate cash and meaningfully invest your money, whether in the stock market or real estate market.
Next, switch from shorter-term planning to longer-term thinking. If you’ve been making minimum payments on your debts, crunch the numbers to see whether you can afford to pay it down faster.
It makes sense to be aggressive with debt repayment when you’ve got a high interest rate (like credit card debt), and/or you’re not earning you any kind of equity or profit in return (like when you have a mortgage on a home that’s appreciating in value).
You might crunch the numbers and realize that, before you can get serious about building wealth, you need to increase your income. If that’s the case, think about negotiating for a raise, starting side hustle or finding ways to bring in passive income through investing or real estate so that you have a little more discretionary income to work with.
You may not build up to your dream net worth overnight, but with some planning you can make incremental progress that, over time, adds up.
