Are you saving enough? What is the state of your financial health? The best way to tell is through your net worth. Your total assets minus total liabilities. More simply: what you have minus what you owe. Despite the simplicity of this calculation, most of the net worth calculators and comparisons I have found online don’t present the data in a way that provides a proper comparison.
Net worth comparisons typically focus on your age or your education level, but I have yet to find one that combines these factors. Generally those individuals that are older or have more education have a higher net worth. Older individuals have had more time to save and those with more education (on average) have higher incomes, which is correlated with higher savings and net worth. This is why most net worth calculators are a problem. By only looking at age or education you are missing the other factor, which leads to improper comparisons. Therefore, a young educated person may they think they are richer than they are (as they would compare themselves to young uneducated people) and an older less educated person may think they are poorer than they are (because they are comparing themselves to older educated people). Once you control for both factors, a more proper comparison comes into view.
With that being said, let’s take a look at some real net worth comparisons using the data from the Federal Reserve Board’s Survey of Consumer Finances. The current data goes through 2013 and is released every three years. The 2016 data should be out later this year. I have only shown 2 education levels (“High School Diploma/GED” and “College Degree”) and have excluded the age groups over 65. Please find your education level below and look at your age group on the x-axis to compare your net worth as of 2013. The uppermost line in each chart represent the median (50th percentile) net worth for that age-group and education level.
The median net worth trends from ~$10,000 for those under age 35 to close to $80,000 for those nearing retirement. You can look at the underlying data (which includes the 75th percentile as well) through an interactive chart here.
And for those with a college degree:
The median net worth trends from ~$25,000 for those under age 35 to close to $440,000 thousand for those nearing retirement. You can look at the underlying data (which includes the 75th percentile as well) through an interactive chart here.
These charts illustrate the age and educational impact on net worth quite well. While you can see that net worth increases with age, there is also a clear distinction in financial outcomes between those with less education and those with more education.
Now that you have done a more proper comparison of your net worth, I want to note one thing. I did some more digging into the data and determined that you should not compare yourself across age groups. I know the charts pictured above are line graphs, implying a relationship across the age groups, but this may not hold in the future. Let me explain with a quick example.
Let’s say you are under 35 with a college degree. You look at the chart above and it shows a median (50th percentile) net worth of ~$20,000. Let’s pretend that is your current net worth. You then look at the median net worth in the older age groups and come to a conclusion like the following: “When I am 60 I should have $1.5 million in net worth.” This logic is not necessarily sound. Why? Those in the “55 – 64” age group in 2013 got their degree roughly 40 years ago (in the 1970s), when college degrees where rarer and the premium on having one was larger than today. The relationship between a college degree and future wealth is not the same as it was in the 1970s. The problem is that we do see declines or no increases in median net worth for all ages and all levels of education from 1989 to 2013:
This is true for those with a college degree as well:
Over time the median net worth is not increasing regardless of age group or education level. This does not imply that this trend will continue (hopefully not!), but I do think it implies that you cannot compare a snapshot (2013) across age groups because the underlying relationship between education, age, and net worth is changing.
You may be thinking: “Wait a second? Isn’t the US richer overall than in 1989? How can your data show declines in wealth? It must be wrong!” I initially wondered that myself, so I dug a little deeper in the data. But you already know how this story ends, don’t you? The only net worth charts that show an increasing trend over time are for the 90th percentile (or higher) for older college educated individuals. I did look at the other education levels for the 90th percentile but they did not show this trend. It looks like it was the wealthiest households getting richer:
This should not be news to anyone as wealth inequality has been covered in much greater detail elsewhere. However, this was a good sanity check of the data.
How to Increase Your Net Worth
Despite the big gains at the top, this doesn’t mean you have to be excluded from gaining wealth and financial freedom. The statistics above are aggregated and do not reflect one’s financial literacy and willingness to grind it out. With that being said, the best ways to increase your net worth are to:
- Expand your marketable skills through more education (learn programming or Learn Data Analysis, trust me!!)
- Increase your ownership of income producing assets (i.e. businesses/stocks, rental properties, bonds, etc.)
- Lower your spending on big ticket items. I don’t think “cutting lattes” moves the dial enough to make a substantial difference, just be wary of larger purchases.
- Track your net worth. If you don’t know where you are how can you get moving in the right direction? I suggest you use Personal Capital. See my Investment Tools page for more info.
Thank you for reading!
This is post 03. Any and all code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.