It's challenging to paint a picture of your overall financial health, because there are so many factors involved. How much do you have saved for retirement? How much debt are you carrying? Do you have an emergency fund?
The one figure many people point to, though, is your net worth -- that is, what you own minus what you owe. Your net worth accounts for your property, savings, and debt, so it can give you a decent idea of where you stand financially.
To calculate your net worth, simply add up everything you own (your assets) and subtract everything you owe (liabilities). Assets can include home equity, a car, retirement savings, and more, while liabilities include a mortgage, student loans, and other forms of debt. If your net worth is deep in the negative, it means you owe far more than you own, and you need to work on paying down your debts. On the other hand, you may find that you can give yourself a pat on the back if your assets outweigh your liabilities.
The thing about net worth, however, is that there's no agreed-upon benchmark of success. Your net worth is highly dependent upon your individual circumstances, so it's tough to set your sights on a certain figure. However, one formula that can help you gauge where you stand is outlined in Thomas Stanley and William Danko's book The Millionaire Next Door, which states that your ideal net worth is calculated by multiplying your age by your pre-tax annual income and dividing the result by 10. So if you're 40 years old with an annual salary of $50,000, you should be aiming for a net worth of around $200,000.
Even if you have a net worth goal in mind, it's human nature to measure yourself against others. Although it's important not to focus too much on keeping up with the Joneses, sometimes it's helpful to see how you compare to others in your age bracket.
Your net worth: How it compares to others
According to the Federal Reserve's 2016 Survey of Consumer Finances (the latest one released), the average U.S. household net worth was $692,100.
That number may come as a shock, but it doesn't tell the entire story: It's skewed by super-wealthy households that are worth millions of dollars. The median figure paints a more accurate picture of the typical American family, because it's smack-dab in the middle; half of households are worth more, and half are worth less. The Federal Reserve found that the median U.S. household's net worth was around $97,300.
The survey also broke the results down by age, ranging from those under 35 years old to those over 75 years old:
|Age Range||Median Household Net Worth||Average Household Net Worth|
|35 to 44||$59,800||$288,700|
|45 to 54||$124,200||$727,500|
|55 to 64||$187,300||$1,167,400|
|65 to 74||$224,100||$1,066,000|
If your net worth doesn't quite amount to what others your age are worth, don't get discouraged; it doesn't necessarily mean that you're off track financially. Rather, there are other things to consider to get a better idea of your overall financial health.
Other factors that are more important than net worth
Your net worth doesn't portray your entire financial picture. For example, if you recently bought a house, you may owe hundreds of thousands of dollars on your mortgage -- and you may have a negative net worth. But that doesn't mean you're necessarily worse off than someone who's renting, has no mortgage, and yet struggles to make ends meet.
That's why it's more important to look at the bigger picture. A single number can't tell you everything you need to know about your finances, but by looking at a variety of factors, you can get a better understanding of where you need to improve.
For example, first look at the types of liabilities you have. Things like mortgages, car loans, student loans, and credit card debt are all liabilities because you owe money. However, not all types of debt are created equal. Owing $100,000 on a mortgage, for instance, is very different from owing $100,000 in credit card debt. High-interest credit card debt, in particular, is one of the worst types of liabilities to have, because it can cost you thousands of dollars in interest alone, and once it's paid off, you'll have little to show for it (unlike a mortgage, for example, which allows you to obtain a home and build equity as you pay down the debt). So by reducing the "bad" types of liabilities first, you can improve your overall financial health.
Your debt-to-income ratio is another important figure to consider. It's easy to fall into the trap of thinking that once you earn more money, your net worth will increase as well. That's not always the case, though -- in fact, a quarter of Americans earning $150,000 or more per year say they're living paycheck to paycheck, according to a 2015 Nielsen Global Consumer Insights survey. What's more important than income alone, then, is how your income compares to how much you're spending each month.
To calculate your debt-to-income ratio, add up how much you spend each month repaying your debt -- this includes your mortgage, car loans, personal loans, student loans, credit card debt, etc. Then divide that number by your gross monthly income. For example, if you're paying $1,000 per month toward your mortgage, $200 per month toward your car loan, and $300 per month toward credit card debt, your total monthly debt payments amount to $1,500. If your gross monthly income is $3,500, divide $1,500 by $3,500, and your debt-to-income ratio is around 43%.
In general, you should aim for a ratio of around 20% or less. If you're trying to get a mortgage, most lenders will look for a ratio of less than 36% (though they may go higher if you have a strong credit score). A ratio above 50%, though, is typically a red flag, because it means more than half your income is going toward debt payments each month.
Net worth is an important financial figure to understand, but it's not everything. There's more to your overall financial health than just one number, so it's important to look at the big picture to get a more accurate idea of how you're doing.
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