This article was published in the New Haven Register on January 19, 2019.
You know your annual household income. You probably know how much money is in your checking account and your savings account. But do you know your household net worth? Do you need to?
Net worth is simply the difference between your assets and your liabilities: What you own minus what you owe. The amount of money that is left over after you subtract all of your debts from the total value of your assets is your net worth.
It’s a good figure to track for several reasons. First, it helps you keep everything in perspective. Say you are a professional earning an annual income above $250,000. You may think contributing the maximum amount to your retirement plan will put you in a good place later in life, allowing you to spend freely otherwise. However, that $850,000 home mortgage and that sailboat you bought last year will chip away at your net worth for years to come.
Second, it will keep you aware of what’s coming in and what’s going out, and that will help you understand what you can afford to acquire and when you need to put on the brakes.
Third, it fosters peace of mind. Knowing your actual net worth gives you a much clearer picture of your overall financial picture than simply enjoying those big paychecks every month.
To calculate your net worth, simply add up all of your assets, add up all of your liabilities, and then subtract the second figure from the first. The bigger the number, the better off you are. Assets include your income, savings, investment accounts, home equity and any other substantial sources of funds (note that many of these items will change year to year, so you have to update your calculations). Liabilities are debts, including mortgages, auto loans, credit card debt and student loans.
If you come up with a negative figure, or you’re 60 years old and the figure stands at a measly few hundred thousand dollars, you need to take immediate action to bolster your net worth.
To put things in perspective, here are some figures from the Federal Reserve’s Survey of Consumer Finances (Federal Reserve Bulletin, September 2017, Vol. 103, No. 3). These figures are as of 2016 and refer to household net worth where the head of household is within the age parameters. The mean (average) figures are boosted by small numbers of super-wealthy families, and the median figures represent the value where half are above and half are below the figure:
— For those under age 35, mean net worth was $76,200 and the median was $11,100.
— For those 35-44, mean net worth was $288,700 and the median was $59,800.
— For those 45-54, mean net worth was $727,500 and the median was $124,200.
— For those 55-64, mean net worth was $1.17 million and the median was $187,300.
— For those 65-74, mean net worth was $1.07 million and the median was $224,100.
To increase your net worth, create a financial plan, cut expenses, pay off debt, and invest more money.
Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at (203) 877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors Inc., A Registered Investment Advisor. Cambridge Investment Research Inc., and Connecticut Capital Management Group LLC are not affiliated.