When it comes to measuring wealth in America, there are two primary ways to look at it: average vs median net worth.
While these may seem interchangeable, they actually provide very different insights into the financial state of households across the country.
Understanding the differences between the two can help you get a clearer picture of where you stand in comparison to others.
The average net worth in America is a staggering $746,820, according to the Federal Reserve’s 2019 Survey of Consumer Finances.
However, this number is heavily skewed by the wealthiest households, which can drag the average up significantly.
On the other hand, the median net worth is a more accurate representation of the “typical” American household, coming in at $121,411.
This means that half of households have a net worth above this amount, and half have a net worth below it.
What Is Net Worth?
Your net worth is the amount of money you would have left if you sold everything you own and paid off all your debts.
It’s a measure of your financial health and how much money you have available to you. Net worth is calculated by subtracting your liabilities (debts) from your assets (what you own).
Assets can include your home, car, investments, savings accounts, and any other valuable possessions you own. Liabilities can include your mortgage, car loan, credit card debt, and any other money you owe.
The median net worth for an American household was $121,700, according to a recent survey. However, the average net worth for all American families was $746,820.
This is because the average includes the extremely wealthy, which can skew the data. It’s important to understand the difference between median and average net worth when looking at these statistics.
Your net worth can be a helpful tool in planning for your financial future. By tracking your net worth over time, you can see if you’re making progress toward your financial goals.
It can also help you make decisions about investments, savings, and debt repayment.
Average vs Median Net Worth
When it comes to measuring net worth, there are two main ways to look at it: average and median. While these terms may seem similar, they can yield vastly different results.
In this section, we’ll define what average and median net worth are, and explain how they are calculated.
Definition of Average Net Worth
Average net worth is the total net worth of a group of people divided by the number of people in that group.
This means that if you add up the net worth of everyone in a group and divide it by the total number of people in that group, you get the average net worth.
Definition of Median Net Worth
Median net worth is the net worth of the person in the middle of a group of people.
This means that if you line up everyone in a group from the person with the lowest net worth to the person with the highest net worth, the median net worth is the net worth of the person in the middle.
Calculation of Average Net Worth
To calculate the average net worth of a group of people, you add up the net worth of everyone in that group and then divide that number by the total number of people in the group.
For example, if you have a group of five people with net worths of $100,000, $200,000, $300,000, $400,000, and $500,000, you would add up those net worths ($1,500,000) and then divide by the number of people in the group (5), which would give you an average net worth of $300,000.
Calculation of Median Net Worth
To calculate the median net worth of a group of people, you need to line up everyone in that group from the person with the lowest net worth to the person with the highest net worth.
Once everyone is lined up, you find the person in the middle and that person’s net worth is the median net worth.
For example, if you have a group of five people with net worths of $100,000, $200,000, $300,000, $400,000, and $500,000, you would line them up and find that the person in the middle is the person with a net worth of $300,000, which would be the median net worth.
It’s important to note that while average net worth can be skewed by outliers (people with extremely high or low net worths), median net worth is not affected by outliers.
This means that median net worth can be a more accurate representation of the net worth of the “average” person in a group.
Why is the Distinction Between Average and Median Net Worth Important?
When it comes to measuring net worth, there are two main ways to approach the calculation: average and median. While these may seem interchangeable, they can yield vastly different results.
Understanding the differences between average and median net worth is crucial for anyone seeking to understand their financial situation.
Impact of Extreme Values on Average Net Worth
The average net worth is calculated by adding up the net worth of all households and dividing that number by the total number of households.
However, this method can be skewed by extreme values, such as the net worth of billionaires.
For example, if a billionaire moves into a neighborhood, the average net worth of that neighborhood will skyrocket. This can give a false impression of the financial situation of the residents in that neighborhood.
Impact of Distribution on Median Net Worth
The median net worth, on the other hand, is the value that falls in the middle of all households’ net worth.
This means that half of households have a net worth above the median, and half have a net worth below it. The median is less affected by extreme values than the average.
For example, if a billionaire moves into a neighborhood, the median net worth of that neighborhood will not change, as the billionaire’s net worth is just one value among many.
This makes the median a more accurate representation of the financial situation of the majority of households in a given area.
Implications For Financial Planning
Understanding the distinction between average and median net worth is essential for financial planning.
If you rely solely on the average net worth to assess your financial situation, you may get a false impression of your financial health.
For example, if you live in a neighborhood with a high average net worth, you may feel pressure to keep up with your neighbors’ spending habits.
However, if your net worth is closer to the median, you may be better off focusing on building your savings and investments rather than trying to keep up with the Joneses.
In conclusion, understanding the difference between average and median net worth is crucial for anyone seeking to understand their financial situation.
While the average can be skewed by extreme values, the median provides a more accurate representation of the majority of households’ financial situation.
This can have implications for financial planning, as relying solely on the average net worth can be misleading.
Factors Affecting Average and Median Net Worth
When it comes to calculating net worth, there are many factors that can influence the outcome. Here are some of the key factors that can affect both average and median net worth:
Income Level
Your income level is one of the most important factors that can affect your net worth. Generally speaking, the more money you make, the higher your net worth will be.
This is because you have more money to save and invest. However, it’s important to note that income level is not the only factor that determines net worth.
Age
Age is another important factor that can affect net worth. Generally speaking, older people tend to have higher net worths than younger people.
This is because they have had more time to save and invest their money. However, this is not always the case, as there are many young people who have high net worths due to their entrepreneurial endeavors.
Geographic Location
Where you live can also have an impact on your net worth. Generally speaking, people who live in urban areas tend to have higher net worths than those who live in rural areas.
This is because urban areas tend to have more job opportunities and higher salaries. However, the cost of living in urban areas can also be higher, which can offset some of the financial benefits.
Educational Attainment
Your level of education can also have an impact on your net worth. Generally speaking, people with higher levels of education tend to have higher net worths than those with lower levels of education.
This is because higher education can lead to higher-paying jobs and more opportunities for career advancement.
Occupation
Your occupation can also have an impact on your net worth. Generally speaking, people who work in high-paying fields such as medicine, law, and finance tend to have higher net worths than those who work in lower-paying fields such as retail or food service.
However, there are exceptions to this rule, as there are many people who have high net worths due to their entrepreneurial endeavors.
Overall, there are many factors that can influence both average and median net worth. By understanding these factors, you can better understand how your own net worth compares to others and what steps you can take to increase it.
Key Points
When it comes to measuring net worth, there are two main ways to look at it: average and median. While both provide valuable insights, they can yield vastly different results. Here are some key points to keep in mind:
- Average net worth is heavily influenced by the wealthy: When calculating the average net worth of a population, the extremely high net worth of the wealthy can skew the results. For example, if a group of five people have a net worth of $1, $2, $3, $4, and $100 million, their average net worth is $20 million. This can give a misleading impression of the overall financial health of the group.
- Median net worth provides a more accurate picture of the typical person: The median net worth is the middle point of a population’s net worth distribution. This means that half of the population has a net worth above the median, and half has a net worth below it. Unlike the average, the median isn’t influenced by outliers, making it a more accurate representation of the typical person’s financial situation.
- The average net worth in America is high, but the median is much lower: According to recent data, the average net worth of American households is $692,100. However, the median net worth is only $97,300. This means that while some households have a very high net worth, the majority of American households have a much lower net worth.
- Your net worth is influenced by many factors: Your net worth is determined by subtracting your liabilities (debts) from your assets. Factors that can influence your net worth include your income, expenses, savings, investments, and debt. It’s important to focus on building your net worth over time by increasing your assets and reducing your liabilities.
Overall, understanding the difference between average and median net worth can help you gain a better understanding of your own financial situation and the financial health of the population as a whole.
Remember that while the average net worth may be high, the median provides a more accurate picture of the typical person’s financial situation.
