Net Worth Nonsense
Average numbers go up while the reality remains low.
What is the net worth of U.S. households? You can cut the statistics any number of ways, but the right answer is: low. A recent report would have us believe the number is rosy. It isn’t.
The dubious report, from the American Enterprise Institute think tank, claims that the net worth of the average American household is now $700,000 – up from $406,000 just 10 years ago.
Average? Of $700,000? I don’t think so.
A family’s net worth is the difference between the value of what the family owns – the house, retirement funds, investment accounts, the checking account balance, etc. – minus such liabilities as the mortgage, credit card debt and so forth.
You are calculating yours right now, aren’t you? What number did you come up with? See what I mean? The average household is worth $700,000? No way.
Here’s the logic behind this number. The Federal Reserve just reported that American households have a record high net worth of $80.6 trillion. If you divide $80.6 trillion by the 115 million U.S. households, you do get $700,000. And yes, home values and stock prices have been soaring. The Standard & Poor’s 500 stock index raced up 32.4% (with dividends included) in 2013, while according to the National Association of Realtors, existing home values rose 11.5%.
But here’s the flaw in that $700,000 number: There are only 84 million working households in the U.S. The rest are made up of retirees, the unemployed and others who are not in the workforce. What’s more, 45% of those working households don’t have an individual retirement account or other pre-tax retirement savings accounts. I suspect those households have very low net worth.
Plus, there is a thumb on the scale in the form of America’s super-wealthy. After all, “American households” lump you and me alongside that nice Gates couple, the Zuckerberg kid and loveable old Warren Buffett. I did some math to figure out how much a few uber-wealthy households could skew the average.
Take the Forbes 400 list of the richest people in America. As a group, they are worth approximately $2 trillion. If you grouped about 3 million people with a net worth of zero with the 400 wealthiest people in America, that group would have an average household net worth of about $700,000.
So, don’t feel inadequate if your net worth isn’t quite $700,000, but do keep an eye on that figure. Your net worth is a measure of how well you’re doing with building assets and reducing debt. In other words, it tracks your progress on the road to financial freedom.
Speaking of where you stand, here’s a clever online tool that will give you an idea of how you stack up financially against your peers.
You can see the original article on Morningstar