The concept of “net worth” may conjure up images of wealthy investors with multiple homes and a private jet. In reality, however, everyone has a distinctive net worth that reflects their own financial situation.
Economics aficionado Greg Aziz breaks down net worth’s components. He also explains how market conditions and other factors can cause net worth to experience short- and long-term fluctuations. Finally, he offers an integrated set of recommendations for increasing net worth over time.
Net worth is essentially the answer to a simple equation. To determine an individual’s net worth at a given point, they should list their total assets. Next, they should subtract their liabilities from these assets. The resulting number is their net worth.
- Checking Accounts
- Savings Accounts
- Retirement Accounts [including 401(k) and IRA accounts]
- Investment Accounts
- Paid-Off Real Estate
- Credit Card Debt
- Unpaid Student Loans
- Other Unpaid Loans
- Outstanding Mortgage Balance
Greg Aziz explains that net worth and income are two entirely different concepts. When individuals earn income, they rarely keep 100 percent of the money they make. Instead, they purchase goods and services, take out loans, and make investments with their income. For this reason, income is not included in the net worth equation.
To illustrate, a highly paid employee with excessive credit card debt may have a low net worth. In contrast, an individual with a middle-class income may decide to save their money and purchase assets that appreciate over time. This person could gradually achieve a substantial net worth.
The financial industry has developed a classification ladder based on individuals’ overall net worth. These figures begin at a relatively low $100,000 and extend upward into the millions (or billions) of dollars.
- Sub-High-Net-Worth Individual (SHNWI): $100,000+ to less than $1 million
- High-Net-Worth Individual (HNWI): $1 million to $5 million
- Very-High-Net-Worth Individual (VHNWI): $5 million to $30 million
- Ultra-High-Net-Worth Individual (UHNWI): $30+ million
Greg Aziz notes that each individual’s net worth will vary according to their life stage, lifestyle, priorities, and financial obligations. For perspective, in 2019 the United States Federal Reserve estimated that an individual in the United States had an average net worth of$121,700.
If an individual’s total debt exceeds their total assets, they have a “negative net worth.” Stated another way, the person’s mortgage payments, loan payments, car loan, credit card bills, and other debt add up to more than their liquid assets and investments.
For a young professional with student loans, a negative net worth is not an unusual occurrence. Unexpected medical bills or family events can also trigger a descent into the red zone.
Regardless of the reason, maintaining a negative net worth is not a good long-term strategy. To reverse the trend, Greg Aziz recommends that the individual or family focus primarily on reducing all debt. A strict budget, the addition of a proven debt reduction strategy, and perhaps renegotiation of debt should help to turn the situation around.
An individual’s net worth is not cast in stone. Greg Aziz emphasizes that market trends, plus an individual’s personal circumstances, can cause their net worth to fluctuate upward and downward.
Two factors can cause an individual’s net worth to increase. First, the paid-off portion of their home can increase in value. Note that their unpaid mortgage balance is treated as a liability. If the individual owns a second home, that property may also appreciate in value.
In addition, Greg Aziz points out that the individual’s retirement accounts and/or investment accounts may increase in value. These investments may be tied to the stock market, mutual funds, and/or index funds. Regardless of the investment vehicle, an investment account increase translates into higher asset values.
Just as market-linked retirement and investment accounts can see higher values, they can also lose value when the related investments drop in price. For this reason, retirement account and investment account balances are viewed as a snapshot rather than an absolute number.
Personal financial difficulties, such as a job loss, can cause an individual to turn to credit cards to pay for groceries, gas, and other essentials. However, poor financial decisions can also send an individual’s net worth into the red. An ill-planned vehicle loan or a vacation splurge, and little cash on the asset side, can result in negative net worth.
Greg Aziz’s Tactics for Growing Net Worth
Increasing net worth won’t happen by itself. However, Greg Aziz emphasizes that a coordinated strategy and plenty of financial discipline will position an individual to enjoy higher net worth over the long term.
Although income doesn’t figure into an individual’s net worth, extra household cash enables faster debt payoffs and more savings and/or investments. A part-time job, a side hustle, or an online business could generate a substantial amount of extra income.
Many United States employers offer an employee retirement plan featuring tax advantages. Some employers match employees’ contributions, helping account balances to grow twice as fast.
Job-related retirement contributions delay an individual’s taxable income to their lowest-earning years. Concurrently, the contributions increase the person’s assets, helping to boost their net worth.
Individuals mired in debt should concentrate on paying off these financial obligations. A debt consolidation loan frequently offers a relatively low rate. An individual can use the funds to retire high-interest debt before turning their attention to lower-rate bills.
Although paying off debt is important, Greg Aziz recommends that individuals first perform their due diligence. Some lenders could penalize them for paying off certain bills ahead of schedule.
Cutting back overspending on new clothes and regular restaurant meals is an obvious way to cut household costs. However, many people may incur multiple small expenses without realizing it.
Daily lattes, midmorning snacks, and other small purchases add up during the course of a week. By making incremental adjustments, individuals will have more money available for debt payoffs and savings.
Working to generate extra income, pay off debt, and cut expenses is an ongoing proposition. Concurrently, individuals should stay apprised of local, regional, and national economic conditions that could affect their income and/or impact their net worth. Finally, Greg Aziz says individuals should consider working with a qualified financial advisor who understands their goals and is willing to provide guidance to achieve them.