There is good financial news as of late. Job growth is slow but steady. The stock market is rebounding. And, slowly but surely, American households are regaining some of the net worth they lost during the Great Recession.
Household net worth is defined in much the same way that a business defines net worth. It is a simple matter of comparing the total value of assets to the total value of all outstanding liabilities. Positive net worth is achieved when total assets exceed total liabilities. Negative net worth occurs when liabilities exceed assets. Valuing some assets can take time, but other than that, the equation is simple and it is exactly the same formula that a business uses on its corporate balance sheet.
Net worth for the majority of Americans fell significantly after the onset of the Great Recession. It isn’t difficult to understand why. With the Dow Jones and other indices losing about half of their value and consumers using debt to stay afloat, the accounting equation had nowhere else to go. Some families watched helplessly as their net worth went from positive to negative and wondered when they would be back in the black once again.
Today, things seem to be turning around. According to an official report issued by the Federal Reserve, Americans’ wealth increased to a grand total of $58.5 trillion in the fourth quarter of 2011. The main reason behind the increase is the improved stock market. Since a sizable percentage of households have money in the stock market, either through direct ownership of stock or through mutual funds, it makes sense that improvements in wealth would follow the stock market.
Increased asset values have helped to push net worth higher, but the liability side of the equation also matters and here, Americans saw declines in mortgage debt, but actually experienced a small debt increase overall in the fourth quarter of 2011. The reason is likely due to increased credit card usage, which is common during the fourth quarter of the year, due to holiday shopping.
What is Your Household Net Worth?:
So, how do you compare to the national trends? Is your net worth improving? Holding steady? On the decline? If you have never made a net worth calculation before, it is a good idea to start doing so at least once per year, but once per quarter is better. Begin by adding up the value of your assets. Find the total value of your checking, savings, brokerage, IRA, 401K, kids’ education savings accounts, and other accounts that have a specific dollar value. You can go online to get most of this information or place a call. Then, consider the value of your fixed assets such as your home and vehicles. Calculate your home value based on the sales value of other homes in your area or, if you cannot make a good estimate, use the original purchase price as the value. For vehicles, go to Kelly Blue Book online to get the values. You may also want to include the value of expensive jewelry and collectibles that have a definite investment worth. Exclude household contents like furniture and clothing. Items like these are usually difficult to value and are usually worth far less than you think.
Next, add up your debts. Contact each creditor and ask what your outstanding balance is, or go online to get the amount. The nice thing about liability calculation is that there is no estimating necessary. You can find the exact amount owed, to the penny, on all of your debts.
Now, take your total assets and compare to your total liabilities. Subtract the total liabilities from the total assets. The resulting figure is your household net worth. If your household net worth is above approximately $93,000, then you rank in the top 50% of Americans for net worth. If it is less than $93,000, you rank in the bottom half, according to official sources. Keep in mind that net worth figures are all over the map and vary widely by age group, so you shouldn’t worry too much if you are below the $93,000 overall median. For example, if you are only 30 years old and your household net worth is $50,000, you are below the overall median, yes, but you are actually well ahead of the median net worth for your age group.
Once your net worth has been calculated, keep records of this each quarter and compare your figures. If your net worth is on the decline, it could merit a personal financial self- checkup. Perhaps you are not saving enough. Maybe you are making nothing more than minimum payments on debts and still using your credit cards. The cause will become clearer once you see the numbers on paper and you can then take appropriate action.
In Summary:
Net worth is a true measure of ones’ wealth and it should not be taken lightly. It provides a good indication of your ability to handle prolonged unemployment, survive a financial setback, or otherwise manage your long- term financial security. Net worth is on the increase for most American families and it will continue to increase as the economy improves. The only way to know how your household measures up is to calculate your own net worth and monitor it over time. It doesn’t take much effort and it provides a strong indication of your family’s financial condition.
Copyright 2012, Bryan Carey
