What is Household Net Worth?
Household net worth is the collective total of a household’s total assets minus personal debts. The total assets are usually a mix of the cash and the value of real estate owned by a single individual, or by married couples.
How to Calculate Household Net Worth?
Household Net Worth is calculated by adding up all assets (like cars, real estate, etc.) minus all liabilities (like mortgages, student loans, etc.). The result is a single figure that represents how much wealth a household has accumulated over time.
What goes into Household Net Worth?
While there are many components to calculating your household networth, the total value of everything a household has or owes can be broken down into two categories — assets and liabilities.
Assets are things people own and can be converted into cash. Liabilities are money or obligations that are owed. When a lender gives you credit, they expect to be paid back. This becomes a liability for you and an asset for that person or company who gave it to you.
Assets: The most obvious component of net worth is what you own — or more specifically, what you own that has value. Your assets fall into two basic categories:
Fixed Assets: These are the big ones like your home, car, boat, and other valuable items that you can sell for cash. While some people refer to fixed assets as “investments,” these investments only make good financial sense when you’re buying them with the intention of selling them later at a substantial gain. Otherwise, they’re just the things you need to get through life (or enjoy it). Most people don’t try to maximize their profits on homes and cars — they buy what they need and keep it until they need to replace it.
Liquid Assets: This category includes cash and investments like bank accounts, retirement accounts, and stocks. Liquid assets are important because they represent what’s readily available should you have a sudden financial need.
Liabilities: Liabilities are everything you owe money on — mortgages, car loans, student loans, credit cards, and the like. They can also include things like child support payments (which may not appear on your credit report but still count against your net worth).
Why do you want to know your household net worth?
There are plenty of ways to improve your household net worth, from saving and investing to paying off debt. But they all come down to the same thing: increasing what you own (assets) or decreasing what you owe (liabilities).
Increase your assets
Asset-building strategies include:
Save up an Emergency Fund – This is money you keep on hand in the event of a financial crisis, such as a lost job, illness, or natural disaster. It is always good to keep at least 3 to 6 months’ worth of living expenses in your savings account. Make sure the money is readily accessible, so that includes keeping it in a bank account rather than an investment.
Save for Retirement – The sooner you start contributing to a 401(k) plan or IRA, the more time your money has to grow and the less you have to save over time to reach your goals. But if you’re over 30 and haven’t started saving yet, don’t let that discourage you. Every dollar counts.
Invest for growth – Whether it’s in stocks, real estate, or some other asset class, this is how most people build wealth. It can also be riskier than saving or paying down debt — but it’s also where you have the most potential for reward.
What household net worth is considered wealthy?
The Schwab 2021 Modern Wealth Survey found the magic number is $1.9 million for Americans to consider themselves wealthy. The average household net worth in the U.S., however, is less than half that — just under $700,000.
What is the net worth of a household in the top 1%?
According to the Federal Reserve, net worth of a household in the top 1% was $8.9 million in 2016 and $10,374,030.10 in 2020
Conclusion
The best time to start tracking your net worth is now. Even if it’s not perfect and needs updates every few months, this will give you a solid guideline for measuring progress over time and help keep you focused on your goal.