In the USA, if you earn a six-figure income ($100,000 and above), you are considered to be rich and wealthy. Your social circle tends to include other six-figure earners, you tend to afford the finer things in life, and enjoy experiences others could only dream of. But what about everybody else? According to the US Census Bureau, in 2017, the median household income in the USA was $61,372. The US Census Bureau also reported that in 2017, only 29.2% of households earned $100,000 and above. That means, over two-thirds of Americans earn below this six-figure mark.
The good news is, wealth is not determined by how much you earn (income), but by how much you own (net worth). Net worth is also called equity. For those who have a home, equity is a term that you may hear a lot. So how do you calculate your net worth? It’s simple!
Total of all you own – Total of all you owe = Net Worth
Things that you own could include: savings accounts, checking accounts, retirement accounts, houses, boats, vehicles, collector’s items, and any other item of value.
Things that you owe could include: remaining balance on mortgage, car note/lease, credit cards, student loan debt, personal loans, and any other debt that is not listed here.
If after your calculation, your net worth is a negative number, meaning that you owe more than you own, then that means that you do not have any wealth as yet. Your goal will be to continue to work to reduce your debts, so that the value of the things you own can exceed the value of your debts.
If your net worth is a positive number, meaning that you own more than you owe, then that number represents how much wealth you have. Your goal is to continue to increase your net worth, by increasing the value of the things you own.
To illustrate, John makes $120,000 per year (income). The total value of all that John owns is $55,000 ($20,000 in savings account, $15,000 in retirement account, and $20,000 in home equity). The total value of all John’s debts is $200,000 ($150,000 remaining on mortgage, $20,000 remaining on car note, $20,000 remaining on student loan, $5,000 remaining on credit cards, and $5,000 on a personal loan). Here, John’s net worth is -$145,000, since the value of his debts which is $200,000 exceeds the value of what he owns which is $55,000. John will begin to build wealth, once his net worth is a positive number.
Another example, Jane makes $60,000 per year (income). The total value of all that Jane owns is $30,000 ($10,000 in savings account, and $20,000 in retirement account). The total value of all Jane’s debts is $25,000 ($15,000 remaining on student loan, $5,000 remaining on car note, and $5,000 on a personal loan). Here, Jane’s net worth is +$5,000, since the value of the things she owns which is $30,000 exceeds the value of her debts which is $25,000. Jane should continue to pay off her debts, so that her net worth can be greater than $5,000.
The above were just illustrations, and may not reflect your personal situation. But this shows that a person who make make more money than you do, may not necessarily be wealthier than you are. Wherever you are on your financial journey, just continue to take steps to grow your net worth.
If you have any questions or comments, please write them in the comment section below!