I recently came across a report that reminded me of the old saying, “Figures never lie, but liars figure.” That suspicious report claims that the net worth of the average American household is now $700,000 – up from $406,000 just ten years ago.
Average? $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 its liabilities – the mortgage, credit card debt, et cetera.
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 $700K? 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 US households, you do get $700,000. And, yes, home values and stock prices have been soaring. The S&P 500 stock index raced up 30 percent in 2013 while home values rose 11 percent.
But here’s the flaw I see in that number: There are only 84 million working households in the US. The rest are made up of retirees, the unemployed, and others who are not in the workforce. What’s more, 45 percent of those working households don’t have an IRA 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” lumps 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 3,000,000 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.
The more meaningful aspect of that group’s profile, of course, is that it would consist of 400 billionaires and 3 million people with a zero net worth.
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.