Money talks, but what does your net worth say about you? In the land of opportunity where wealth can be made or lost, the question of whether you fall into the poor, middle class, or wealthy category is complicated. It's not just about the number in your bank account. It's about the total value of your assets minus your liabilities: your net worth.
Here we explain in more detail about the net worth criteria and what it means.
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US Net Worth Standards
The U.S. Census Bureau and other financial sources provide insight into these metrics. Below is a breakdown of median net worth in different economic classes:
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Poverty (bottom 20%): Median net worth is $6,030. This group typically includes young individuals with large amounts of student loan debt or who work in low-wage jobs.
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Lower-middle class (next 20%): Median net worth is $43,760. This demographic typically includes young families and early career individuals who save and invest moderately.
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Middle Class (Middle 20%): Median net worth is $104,700. This includes individuals in their 40s who have paid off some debt and accumulated home equity.
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Upper middle class (next 20%): Median net worth is $201,800. This group often enjoys more discretionary income and benefits from long-term investments.
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High Net Worth (Top 20%): Median net worth is $608,900. This group often represents older adults who have accumulated significant savings and investments.
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Factors that affect net worth
Understanding the factors that affect your net worth is crucial in assessing your financial health and planning for the future.
Income and Earning Potential
Income has a big impact on net worth. According to Pew Research, the median net worth of high-income households is about 33 times higher than that of low-income households. While a higher income doesn't necessarily mean a higher net worth, it does provide more opportunities to accumulate assets and build wealth over time.
Investment and Asset Ownership
The types of assets you own and your investment choices can have a big impact on your net worth.
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Real estate investments, especially homeownership, increase your net worth over time as your property appreciates in value. In 2019, the median net worth of U.S. homeowners was $255,000, while the median net worth of renters was just $6,300. That's a 40-fold difference between the two groups.
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Retirement accounts like 401(k)s and IRAs allow investments to grow tax-deferred and tax-free, helping you grow your net worth.
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Other investment accounts, such as brokerage accounts that hold stocks, bonds, etc., also contribute to your net worth.
Liabilities and Obligations
High debt levels can offset your assets and reduce or even make your net worth negative. If your total liabilities exceed your total assets, this can undermine your financial stability. Managing your debt is important to increasing your net worth.
Age and life stage
Net worth increases with age because you have more time to accumulate assets and pay off debts. According to data from the Federal Reserve, the average net worth rises from $39,000 for people under age 35 to $335,600 for those over age 75.
Education level
Higher levels of education translate into higher average net worth because of increased earning potential: The average college graduate has a net worth more than 11 times that of the typical American without a high school diploma.
Location and cost of living
Where you live can affect your net worth due to factors like property values and the cost of living: According to Business Insider, the typical American who lives in a city is likely to have a net worth 1.7 times higher than someone who lives in a rural area.
Tips to Increase Your Net Worth
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Maximize your retirement savings: Take advantage of retirement plans like Roth IRAs, traditional IRAs and 401(k)s and take advantage of employer contributions.
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Invest wisely: Consider investing in stocks, bonds and other asset classes outside of your retirement accounts. Seeking advice from a financial advisor can help you tailor your investments to your risk tolerance and goals.
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Pay off high-interest debt: Reducing high-interest debt can free up money for savings and investments.
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Increase your income: Explore opportunities to increase your income through career advancement or a side hustle.
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Budget and save: Track your income and expenses to identify savings opportunities. Consistently saving even small amounts can have a big impact on your net worth over time.
Talking to a financial advisor can be a valuable step toward reaching your financial goals. Whether you're just starting to build your net worth or want to optimize your existing assets, a financial professional can provide the personalized guidance and expertise to help you make informed decisions and stay on track.
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This article, “Are You Rich? Here's How Much Net Worth You Need to Be Poor, Middle Class or Rich,” originally appeared on Benzinga.com.
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