Figuring out a celebrity’s own condition is like American entertainment.
I wonder how much Will Ferrell is worth watching Elf or The TV Presenter, or googling how much money LeBron James is watching the NBA Finals – something fascinating about finding someone’s net worth.
However, for some reason, few of us know what our net worth is and how it compares to the average American.
According to the Federal Reserve and its Consumer Finance Survey, the average American household had a net worth of $ 746,820 in 2019.
This was a shockingly high number for me, but it doesn’t tell the whole story as the average net worth was only $ 121,760.
How can they be so different?
Below is a super-fast example of how to bring it to life.
Let’s say there are five U.S. households in a net worth dataset that looks like this:
- American family 1: 0 dollars
- American Family 2: $ 50,000
- American Family 3: $ 100,000
- American Family 4: $ 100,000
- American Family 5: $ 2,000,000
The average net worth for these American families would be $ 450,000. To get the average net worth, you add up the total net worth and divide by five.
However, the average net worth is only $ 100,000. To get the median NPV, you take a number that is exactly in the middle of the dataset, or American Family # 3.
In this case, the super-rich, or America’s No. 5 family, raise the entire average. The wealth gap in this example is so large that, on average, $ 450,000 is more than 4 times that of most Americans in the dataset!
So when we look at the average net worth by age group below and at the correctness of your height, keep in mind the difference between the average and median net worth.
How do you calculate your net worth?
Net worth is calculated by adding all of your assets and then subtracting your liabilities.
In a simple form of the equation, it looks like this:
Net Worth = Total Assets – Total Liabilities.
An asset is all that you are own it has value. The key is that the asset must be valuable. Here are some common examples:
- Cash
- Savings accounts
- Account verification
- Investment (e.g. 401k, IRA, brokerage account)
- Real estate
- Collectibles
An old T-shirt or a used 200,000-mile car is most likely not an asset that you would include in your NPV calculation.
Responsibility is all that you are be to… This is usually some form of debt. Here are some common examples:
- Student loan debt
- Credit card debt
- Mortgage
- Car loan
So, to calculate your net worth, you subtract what you have from what you have.
Bonus: liquid capital
You may hear someone refer to liquid net worth, which is how much of your net worth you have access to today.
Money in a bank account, in your wallet, or even in investment accounts is considered very liquid. You can quickly access it if needed.
However, your home and any home equity is an illiquid asset. This will count towards your total net worth, but not your liquid net worth.
Why is Net Asset So Important?
I like to think of your net worth as your financial pulse. Your net worth shows how your financial affairs are right now.
To prove its importance, let me ask you one question …
Do you want to retire?
If your answer is yes, you need to know your net worth. If you answered no, well, I think you will have more power.
Your net worth is an important personal finance indicator to help you know if you are ready for retirement. I think this is a better metric than just your investment or retirement account, because it also takes into account any outstanding debts you have and whether you own your home or not.
You cannot rely on equity capital alone. For example, it might not be the right number if half of your fortune is tied to your home, because then you may not have enough liquid savings to fund your retirement. But this is an important piece of the puzzle that you need to piece together to figure out if you are going to retire.
Average net worth by age: are you on the right track?
Before diving into America’s average net worth by age, I want to preface this by saying that comparing yourself to others is not the best way to know if you are on the right track.
What is the old saying that parents like to quote?
It sounds something like this … “If everyone jumped off the bridge, would you?”
The same logic applies here: “If everyone in their 60s had a net worth of $ 5, would you?”
You should focus on the milestones that you need to achieve in order to reach your financial goals. Assessing how others are doing is a useful comparison, but not the ultimate yardstick by which you should judge yourself.
Okay, with that out of the way, let’s dive into the Fed’s numbers for the average net worth of American families by age:
Average net worth at <35
- Average net worth: USD 76,340
- Average net worth: USD 14,000
To be honest, this age range was too big to be useful in my eyes.
I could see many young 20-year-olds with negative net worth due to huge student loan debt. My guess is that people between the ages of 30 and 30 add a grade point average here.
However, the generally accepted recommendation is to accumulate about one year of salary by age 30. This is not a bad goal if you are 20 years old and don’t know where to start.
Average level of condition: 35-44
- Average net worth: USD 437,770
- Average net worth: USD 91,110
Using the median net worth as a benchmark when it jumped from $ 14,000 to $ 91,000 is actually very encouraging. Jumping five times over a 10-year period is great.
Plus, $ 91,000 by itself isn’t such a scary figure to hit $ 40.
Obviously, it depends on your salary, start-up debt, and retirement goals. But assuming the median household income is $ 68,703, that’s about 1.5 times your income.
Plus, to get $ 91,000 in savings, you’ll need to set aside $ 2,220 a year between ages 20 and 40, with a 7% return on your money. This will be about 3.2% of your income, which is not bad.
But what if you pay off debt within the first 10 years and invest over the next 10 years. In this very realistic scenario, you would need to save about $ 6,600 per month over 10 years, which is 9.6% savings.
It’s hard to make a firm judgment based on averages, but I’d like to save 3x your income to 40 as a goal.
Average state level: 45-54
- Average net worth: USD 833,790
- Average net worth: USD 168,800
Your 40-50 years are usually your peak earnings years – you probably have a lot of experience and relevant knowledge in the industry in which you work, and because of this, you are paid well. Hopefully you will also be able to increase your savings during this period of time.
During this time, I would begin to shift your focus from comparing your income to your net worth to comparing your living expenses to your net worth.
Ultimately, you will need about 25 times your living expenses to retire. So if you want to retire at 65, a roughly 8x increase in living expenses by age 50 should set you on the right track.
Average level of condition: 55-64
- Average net worth: USD 1,176,520
- Average net worth: USD 213,150
By the end of the timeline, you should be at or near what you need to retire!
Again, your goal here should be about 25 times your living expenses.
According to the Bureau of Labor Statistics, the median household spending was about $ 63,000. I haven’t been able to find any outlined average costs outlined anywhere, but even when compared to the average net worth, that’s only 18.7 times the annual cost. Not 25.
Over $ 1 million may seem like a high net worth, but it may not be enough for retirement depending on your spending level.
It’s a good thing we have a couple of years, and if you save 18 times a year, you can increase it 25 times by the time you hit 65.
Average status: 65-74
- Average net worth: USD 1,215,920
- Average net worth: USD 266,070
… Well, it looks like by the age of 70 the average American family is still a little behind.
This equates to approximately 19.3 times the annual cost.
Average equity aged 75 and over
- Average net worth: USD 958,450
- Average net worth: USD 254,900
And we have bonus data for those over 75.
Unsurprisingly, the numbers are dropping a little here, as my guess is that as you get older and retire, you stop hoarding money and start digging into your own capital to fund your lifestyle.
How to increase your capital
To recap, to increase your living expenses 25 times by the time you reach age 65, the following is how you will need to calculate your savings in order to achieve this:
- Age 30: 1.13 times the cost of living
- Age 40: 3.66 times the cost of living
- Age 50: Living expenses 8.32 times higher
- Age 60: 17.49 times the cost of living
- Age 65: Living costs 25 times higher!
This assumes that your savings will remain the same throughout your life, which is a simple and unrealistic assumption, so keep that in mind. It’s okay to get a little behind this early on, as you have to catch up as you age and earn more.
Yes, and that also assumes a 7% return on your savings!
Plus, if you’re looking to build your net worth quickly, here are three things you should learn to help build your net worth:
1. Create a budget and save money
First things first, you need the money left over at the end of the month to build your own capital.
If you are struggling to save money, the first thing to start is with a budget to figure out how you can stop spending so much money and perhaps how you can make more money.
2. Pay off bad debt and create an emergency fund.
The next thing you can do from now on is remove any commitments. In particular, bad commitments.
This can include things like credit card debt or any personal loans. Basically, anything that involves high interest rates should be paid off quickly.
3. Start investing
Finally, to retire, you may have to invest in some fashion.
Whether it’s a brokerage account, a tax-exempt account, real estate, or some other form, the cumulative growth you get from your investment creates the shape of a hockey stick in the diagram above. This is how you make your money work for you!
This article originally appeared on Your Money Geek and has been republished with permission.