Personal financial planning is extremely challenging and requires the use of several mathematical concepts. Van Wie Financial attempts to simplify math concepts when explanations are needed. Our example today pertains to the reporting of household Net Worth.
Simply stated, Net Worth is the numerical difference between a family’s total assets and their total liabilities. The number can be positive or negative and generally changes over time. Determining your own Net Worth is an interesting project, and will actually help you become more familiar with your own finances. This is an early step in comprehensive lifetime personal financial planning.
Once Net Worth is computed, many people naturally like to know how they stack up among their peers. Do you compare your findings to the Average Net Worth or the Median Net Worth, and within your own peer group or among Americans in general? Those answers will likely dictate your attitude.
Average refers to the total American Net Worth, divided by the number of households studied. Median simply reflects the number at which an equal number of households have greater Net Worth, and an equal number have lesser Net Worth.
The Average Net Worth of American households is $748,800, while the Median Net Worth of American households is $121,700 (from the Federal Reserve in 2019). The difference merely reflects the method of computation. Average Net Worth weights billionaires according to wealth, rather than as individual households. Confusing the public is as easy as presenting the concept most likely to make the writer’s point. There is a fine line between reporting facts and deceiving readers using math.
Would anyone with a Net Worth of “only” $200,000 feel inadequate when compared to the average of $748,800? Probably, but a simple comparison to the Median Net Worth ($121,700) indicates relative success. A clever author (or politician) will often selectively present numbers to bolster a personal opinion or bias. Don’t be fooled; consider the source.
A truly meaningful comparison of your own Net Worth should be based on the Median Net Worth, but should also be confined within an age-related bracket.
Several recent media presentations are using Average numbers for the purpose of fomenting political unrest. The authors are apparently on the “Equity” bandwagon we hear so much about. Don’t fall for the deception.
Setting reasonable goals requires a practical and knowledgeable approach to financial planning. We can help.
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