Net worth is frequently used as an indicator of financial success. This number adds up your total assets – whether liquid or not – and subtracts any debts to give a picture of how much money you have, regardless of what’s in your bank account.
Working toward a high net worth involves increasing your assets and paying down debts, both of which are obvious goals for a financially independent life. The hard part is knowing what number is a reasonable goal to work toward.
Building wealth takes time and is greatly influenced by factors including education level, race and other demographics. The average net worth in the U.S. also varies greatly by age.
Comparing your own net worth to the average of other Americans in your age group can be one way to benchmark your progress and set financial goals, but it’s important to remember that these numbers encompass a wide range of situations.
What is net worth?
To calculate your net worth, you’ll need to add up all your assets and subtract your liabilities. According to Peter J. Klein, chief investment officer and founder of Aline Wealth, you should include the following assets in your calculation:
- Market values of your portfolio holdings (in taxable investment accounts and retirement accounts). Bank balances.
- Estimated values of your real estate holdings.
- Physical assets (cars, boats, art and other collectibles).
- An estimated valuation of any business interests one may own.
- The present value of a future stream of cash flows to consider – pensions, annuities, etc.
“Add this all up and then subtract the liabilities (mortgages, loans, credit facilities, debts) and the resulting figure is your net worth,” Klein says.
For instance, if you have $25,000 in checking and savings accounts, $20,000 in retirement accounts and own a vehicle worth $10,000, your assets total $55,000. Then, say you owe $6,000 on that car, $17,000 in student loans and $1,500 in credit card debt. Your total net worth would be $30,500.
Salaried income is not usually considered an asset, even though it's money coming into your pocket. That’s because you can have a high income but spend all that money on liabilities; conversely, you can have a relatively moderate take-home pay but a significant amount of your income may go directly into retirement accounts. So, the more important number is what’s regularly in your various savings, retirement and checking accounts.
Your net worth can be positive or negative – depending on whether the present value of your assets outweighs that of your liabilities – but you always want to aim for a positive net worth. Combining the total value of your assets and liabilities reveals whether you’re headed in the right direction financially.
"Once you see this number on paper, you can gauge your financial reality and it can give you a starting point for your financial wellness journey,” says Vanessa Martinez, chief executive officer and founder of Em-Powered Network, a consulting and mentorship firm.
Why knowing your net worth is useful
Your net worth doesn't represent your entire financial picture. Theoretically, you could have a high net worth but a low credit score, which could make it harder for you to take on loans to acquire more assets. Or, you might have a low net worth but a high credit score and a manageable debt load.
Plus, a healthy net worth varies significantly by age and financial circumstances. If you just purchased a home, for instance, your debts might outweigh your assets but that doesn’t mean it wasn’t a big step forward in your financial journey.
Martinez says that as a younger individual you might feel that liabilities are higher than assets. But she says not to worry if you are taking the right steps – that mortgage will come down and you will finish paying off those loans and your assets will continue to grow (if invested). If you are at a midway point in your career/life, the focus might be on the proper allocation of assets to optimize taxes and retirement planning.
According to Klein, knowing your net worth and shifting your expectations as you age can help you set financial goals at different stages in your life and career.
“You should shift expectations as you age by setting net worth targets for different life stages to help you stay on track, and those targets will depend on your own personal career journey and goals. So, by the time you reach retirement you have accumulated enough wealth to reach your goals,” he says.
He adds that net worth goes beyond your own life to the legacy you leave behind and the wealth you can pass down to future generations.
Average net worth of an American family
Both median and average family net worth increased between 2016 and 2019, according to the U.S. Federal Reserve. Average net worth increased by 2% to $748,800 between 2016 and 2019, the bank reported in September 2020, the most recent year it published the data. Median net worth, however, rose 18% over that same time period to $121,760.
You might wonder why the average and median net worth figures are so different. That’s because when you take the average of something, you add together every value in a data set and then divide that figure by the number of individual values.
When calculating a median, you simply look at the middle figure within a data set. That said, an average figure can be significantly higher or lower than a median figure if there are extreme outliers – meaning a group of people with significantly more net worth than the rest of the group can bring the average higher.
Average net worth by age
The average net worth of someone younger than 35 years old is $76,300, as of 2019. From there, average net worth steadily rises within each age bracket. Between 35 to 44, the average net worth is $436,200, while between 45 to 54 that number increases to $833,200. Average net worth cracks the $1 million mark between 55 to 64, reaching $1,175,900.
Average net worth again rises for those ages 65 to 74, to $1,217,700, before falling to $977,600 for someone over age 75.
The median net worth within every single age bracket, however, is lower than the average net worth.
Ways to grow your net worth
Regardless of what the average net worth is, your net worth goal should be based on your financial, personal and professional goals. If you want to retire early and lounge on a beach for your remaining decades, you’ll want to increase your net worth fast. But if you have few goals that require substantial assets to achieve, a financial advisor may suggest aiming for a relatively lower net worth.
Similarly, your priorities for what assets you want to focus on building might shift as you age.
“Maybe between your 20s and 30s, you focus on paying off debt and begin investing, during your 40s and 50s you focus on building that retirement nest egg and increase and optimize asset allocations [and] in your 60s plus you maintain a balanced approach with investing and make sure you are taking accurate distributions focusing on your lifestyle and legacy,” Martinez says.
When it comes to growing net worth, investing is key, says Robert R. Johnson, Ph.D., a chartered financial analyst and professor of finance at Creighton University.
“Individuals need to be taught to invest and not simply save in order to build net worth. The surest way to build true long-term wealth and higher net worth is to invest in the stock market. Starting early is the key to successfully building wealth because of the effect of compound interest,” he says.
Other tips for increasing your net worth:
- Don’t be afraid to take risks, especially if you’re younger: "Counterintuitively, the biggest mistake many people make in investing is not taking enough risk. Unfortunately, many people are overly conservative with their asset allocation, particularly in their retirement accounts," Johnson says. Plus, the younger you are, the more time you have to make up for any losses.
- Prioritize 401(k) contributions and take advantage of your company match, if available: Since 401(k) contributions are pretax, they're a great way to save your money and build wealth over time. If your company offers a match program, it's giving you free money. So, make sure you contribute at least enough to your 401(k) to earn any match, and more if you can afford to.
- Manage spending even as your salary grows: Lifestyle creep is real, and it can be tempting to increase your spending as you make more money. While you should enjoy the fruits of your labor, you should also take income increases as an opportunity to save more and build wealth.
- Limit borrowing and tackle debt payments as soon as possible: “Debt is much easier to acquire than to extinguish,” Johnson says. As much as possible, you should avoid taking out loans or accumulating high-interest debt (like on a credit card) and do your best to live within your means. Interest on repayments is simply lost money.