Whats Your Net Worth?

Do you have $1? If so congratulations! You are doing better than at least 10% of all US households. If you look at the chart in this report you can see that the cross over into positive net worth is somewhere just north of the 10th percentile.

So what does this actually mean? So as discussed before net worth is literally a household balance sheet, add up your assets (bank accounts, home value, 401K, investments etc.) and subtract your liabilities (mortgage, credit card debt, student loans). The result should hopefully be positive.

In many ways tracking your net worth is much like running a business you need to keep track of your outgoings and ingoings. Your assets and liabilities. In fact the spreadsheet I keep track of all our families accounts on is very similar to the net income statement I used to use when I was in charge of a business.

We use net worth as a key calculation in determining whether you have enough to retire on as typically this is the number you will be drawing down on. So if you plan to live on $100,000 each year in retirement and draw down 4% (or 1/25) of your net worth each year then you would need $2.5M dollars. This should be enough to fund a 30 year retirement. If you want to retire early then we typically talk about drawing down at 2.5% – 3%. So in the situation above you would need $4M to retire on $100K a year.

Four million dollars is clearly a lot of money and less than 3% of all households in the US have that kind of net worth. So getting there takes a lot of work, dedication and a bit of luck too.

Even retiring with a pot of $1.1M puts a household in the top 10% of all households. Though of course this will probably be skewed to older households as younger households will clearly have a smaller net worth.

Half of the households have less that $100,000 in net worth. This is a problem as clearly they are going to find it very hard to ever retire (although I should point out that the above chart doesn’t include revenue streams such as Social Security and Pensions) and they may be only one accident away from bankruptcy due to medical costs or needing a new car.

Clearly unless you are actually retired then increasing your net worth should be a major financial driver in a household. So how does one go about doing that?

  • The most obvious thing is to spend less than you bring in. If you can save a little each month then your net worth goes up.
  • Increase the value of your house. This is obviously harder to do, but if your house is in an area where prices are going up, well so is your net worth. If you invest $20,000 in remodeling a kitchen and you add $30,000 to your house value then you’ve just added $10,000 to your net worth. On average home equity is over 60% of peoples total net worth.
  • Invest sensibly. Clearly your net worth doesn’t go up if your money is in a mattress or a bank, but if invested wisely in stocks and bonds then your net worth goes up.
  • Make more money. I know this sounds specious but by far the best way to increase your net worth is to invest in yourself. Increase your skills, take on more responsibility and hopefully get promotions. That way you have more money coming in and as long as you don’t spend more your net worth will go up.

For those of us in the FIRE community, net worth is almost an obsession. Not in a nosy way or even in a “i”m worth more than you” way. But simply it is the key indicator we can use to see if we need to course correct our habits. By knowing what we plan to spend each year based on our net worth we can budget effectively. Obviously the rise and fall of our net worth is intrinsically related to the market indicators someone is using. If most of your investment is in the S&P 500 and that market is up 10%, then if you are drawing down 4% you would expect your net worth to go up by 6% in the year.

While talking about how much money you make or have is taboo in society it’s important to have a handle on how you are doing and comparing against benchmarks, otherwise you might be in for a nasty surprise late in life.

 

 

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GYM
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You’re right about NW being an obsession in the FIRE/PF Blogger community šŸ™‚ I love reading about them! It’s not a negative thing I agree. I find it interesting to see where the growth is, what people have invested in etc. and even how they calculate their net worth.

Those are some sobering statistics… thanks for sharing!