Money Management

Have you stopped to calculate your net worth? Read on to see how the typical American family is doing and learn how to boost your net worth over time. 

You may be well aware of exactly how much money you have in your savings account. And you might know that you currently owe $1,000, give or take, on your credit cards.

But when’s the last time you stopped to calculate your net worth? If the answer is “never,” you may be in good company.

A lot of people don’t really stop to think about their net worth, but they should. Your net worth is a snapshot of your total financial picture.

Net worth is calculated by taking the total of your assets and subtracting your liabilities, or debts. So let’s say you have the following assets:

$20,000 in savings$30,000 in your IRAA $400,000 home

That’s a total of $450,000 in assets. But let’s also say you owe:

$260,000 on your mortgage loan$30,000 in educational debt$10,000 on a credit card balance

That’s a total of $300,000 in liabilities. So all told, you’re left with a net worth of $150,000.

Recent data from the Federal Reserve found that the average American family has a net worth of $1,063,700. And if you’re thinking “Well shucks, my family’s net worth is nowhere close to that,” you’re actually not alone. But before you stress out about that point, let’s do a deeper dive into that data.

Median net worth is much lower

It’s time for a quick statistics lesson. Some people use the terms “average” and “median” interchangeably, but they’re very different.

In a given data set, an average is calculated by taking all of the numbers in that set and dividing it by the number of inputs. A median is determined by taking the middle value of a given data set.

So let’s say you have the following data set:

10

12

14

16

18

20

22

24

26

88

90

To calculate the average, you’d take these 11 numbers, add them up, and divide their total by 11, arriving at roughly 31. But the median (or middle) number in this data set is 20.

Here’s why this is important. We just learned that the average American family has a net worth of $1,063,700. But you should know that the median net worth among American families is $192,000. Given this discrepancy, we can infer that $192,000 is a better representation of Americans’ net worth than $1,063,700.

It’s similar to our data set above. Most of the numbers in that set are closer to 20, the median, than 31, the average. The reason the average is 31 is because we had two larger numbers — 88 and 90 — to bring it up.

That’s what’s happening with net worth. The Federal Reserve is trying to capture assets and liabilities across all Americans. The wealthy are likely to have more assets, leading to a higher net worth.

But what’s likely happening is that a small percentage of wealthy folks are driving the average up substantially. It’s not as if the typical American household is walking around with $1 million and change in assets after their debts have been accounted for.

How do you feel about your net worth?

It’s not a bad idea to calculate your net worth and see where it leaves you. But one thing you shouldn’t do is take a look at the average net worth and think you’re horrendously behind. If your net worth is more in line with the median, it could indicate that you’re doing just fine.

Of course, if you feel there are certain areas of your finances that need work, that’s something to certainly address. Maybe you’d have a larger net worth if it weren’t for your $24,000 credit card balance. If so, it pays to look at ways to whittle that debt down. You might consider moving credit card debts to a card with a 0% APR intro offer, so it’ll be cheaper to pay it off. And if you’re struggling to pay your mortgage, you should consider downsizing to a less expensive home to alleviate some financial stress and ensure you don’t end up in foreclosure.

But don’t sweat it if your net worth is nowhere close to $1 million. Over time, you can work on growing your net worth by doing things like paying down debt and investing in stocks and other assets that have the potential to gain value over time. Buying a home could also help you grow your net worth, though that’s not an ideal option for everyone.

Rather than stress about what your net worth is compared to other people’s, you may want to instead focus on seeing your net worth rise over time. If you can build on your own personal wealth year after year, it means you’re doing a lot of things right.

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Building a retirement nest egg gets easier when you use the right tools. Read on to learn about a savings plan that offers a world of benefits. 

It’s important to save for retirement so you have funds to cover your living expenses once your career comes to an end. And different accounts can help you meet your long-term savings goals.

Some people like traditional IRAs and 401(k)s because these accounts give you a tax break on the money you put in. Roth IRAs, on the other hand, do not offer an immediate tax break. But the benefits they come with make them worth funding.

A recent CNBC survey, however, found that only 18% of Americans contribute to a Roth IRA. So if you’re among the almost 8 in 10 Americans who don’t have a Roth IRA, you should know that you’re missing out big time.

Roth IRAs offer a world of benefits

The money you put into your retirement savings shouldn’t sit in cash. Rather, it should be invested so it grows into a larger sum over time.

With a Roth IRA, investment gains in your account are tax-free. So let’s say you contribute a total of $100,000 to your Roth IRA over many years, but through shrewd investments, your balance grows to $500,000. With a traditional IRA, you’d have to pay taxes on your $400,000 in gains. But with a Roth IRA, that $400,000 is all yours, free and clear of taxes.

Roth IRA withdrawals are also tax-free. That’s important, because money can get tight for a lot of people in retirement. If you don’t have to pay taxes on a large chunk of your retirement income, it gives you that much more flexibility and eliminates stress.

Plus, unlike traditional IRAs, Roth IRAs do not force savers to take required minimum distributions. These distributions effectively force savers to spend down their nest eggs rather than pass that money on to future generations.

Now, if you need the money in your retirement plan to live on, those required distributions aren’t necessarily a problem. But if you want the option to leave some of your retirement savings to your heirs, then it pays to keep your money in a Roth IRA.

A higher income doesn’t have to stop you from contributing

One thing that may be getting in your way of funding a Roth IRA is having a higher income, since there are earnings-related limits for making contributions. You’re barred from making Roth IRA contributions if you have an adjusted gross income of over $153,000 as a single tax-filer or

$218,000 as a married joint tax-filer.

But you should know that you’re allowed to put money into a traditional IRA and then convert it to a Roth IRA afterward (known as a backdoor Roth IRA strategy). You’ll pay taxes on the sum you convert if those funds haven’t been taxed yet, so you’ll need to plan for that. But that way, you can still enjoy all of the benefits Roth IRAs have to offer.

It’s important to save for retirement consistently, and you may be happy with your current savings plan. But if your current plan isn’t a Roth IRA, it pays to at least consider opening one of these accounts.

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ETFs can make investing easier. Read on to see why one writer recommends them to anyone who wants to grow their wealth. 

If you want to grow wealth over time, investing is the way to go. But investing is also something you shouldn’t do without putting thought into the process. If you simply buy stocks at random, you might end up choosing the wrong companies — and regretting your decisions after the fact.

Many of my friends are interested in investing for their retirement, but they also don’t want to do a lot of work in the process. And I get it. They’re busy people who, frankly, aren’t so in tune with the stock market. And they’re also not that interested in it. So just as I’m someone who doesn’t give a hoot about what the latest reality TV star is up to, so too do my friends not really care which tech companies are most poised for growth.

That’s why the best investment advice I’ve given to my friends is to load their brokerage accounts with ETFs. And you may want to do the same.

How ETFs work

An ETF, or exchange-traded fund, is a fund you can buy and trade like regular shares of stock. But instead of buying shares of one specific stock, you’re basically getting a bundle of stocks with a single investment.

There are also different types of ETFs you can buy. Bond ETFs, for example, focus on — you guessed it — bonds. Healthcare stock ETFs are loaded with — wait for it — healthcare stocks. And so forth.

The upside of buying ETFs is that you don’t have to research many different companies. You simply need to look at the performance and setup of the ETF you’re eyeing to see if it’s a good fit for you.

An even better approach to ETFs

Sector-specific ETFs can help you gain exposure in your portfolio to different segments of the market you may not be invested in already. For example, if you don’t own any healthcare stocks but are interested in doing so because healthcare is thought to be a pretty recession-proof industry, then adding shares of a healthcare ETF might be easier than researching different healthcare businesses.

But to make your life even easier, you could also put shares of a broad market ETF, like an S&P 500 ETF, into your portfolio. The S&P 500 index is generally considered to be an indication of how the stock market is doing as a whole. And that makes sense, since the index is made up of the 500 largest publicly traded companies.

Meanwhile, over the past 50 years, the S&P 500’s average annual return has been 10%. So let’s say you put $10,000 into an S&P 500 ETF. If you hold it for 30 years, at that point, your $10,000 might be worth almost $175,000, assuming that same return.

All told, ETFs can make investing a lot easier. And you know what? That’s OK.

You might say that loading up on ETFs is taking an investing shortcut — but it’s an effective shortcut. So if it saves you time and stress while allowing you to meet your financial goals, what’s the problem with that?

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Inflation, taxes, and above-average cost of living erode workers’ income. Here are some of the most expensive cities to avoid. 

Inflation and soaring housing costs have put a damper on American’s budgets over the past few years. That’s left many Americans living paycheck to paycheck, and many more feeling as if their income isn’t keeping pace with the rising cost of living.

And some recent data shows that it may be worse than it seems, at least in some cities. A SmartAsset survey published earlier this year found that in New York City, San Francisco, and Honolulu, a $300,000 income feels more like $100,000. The survey said that taxes were a significant factor in whether a city or state made a person’s salary feel smaller.

Similarly, a recently released LendingTree survey found that just 52% of millennials and 43% of Gen Xers believe they’re better off financially than their parents.

Let’s look at which cities were the worst at making your money stretch the furthest, one state with a low cost of living, and a few tips for getting your finances on track.

The most expensive cities

If you’re trying to make your money stretch as far as possible, these three cities are not the place to live.

1. Honolulu, Hawaii

You’ll need an eye-watering $312,400 in pre-tax earnings to feel like you’re making $100,000 in Honolulu. The cost of living in the city is 86% higher than the national average, and taxes are steep.

2. New York, New York

No surprise here; NYC typically ranks among the most expensive places in the U.S. With the cost of living nearly 84% higher than the national average and a combined tax rate (federal, state, and local) of 41%, you’ll need to earn $312,000 to feel as if you’re making a six-figure income. Ouch.

3. San Francisco, California

Even with the commercial real estate market on the skids in San Francisco, that hasn’t brought down the cost of living in the city — which is nearly 83% higher than the national average. Throw in a tax rate that’s in the nosebleed section, and you’ll have to earn $300,000 to feel as if you’re making $100,000.

If you want to stay away from the country’s most expensive state, you should probably take California off the list. SmartAsset said cities in the state require the highest salaries to make you feel as if you’re earning $100,000, compared to other states.

Your income feels bigger in Texas

With no state income tax and a cost of living that’s generally lower than the national average, you may want to consider moving to Texas if you can find work in the state or work remotely. Workers earning around $100,000 in Texan cities tend to hold onto more of their wages, making their six-figure income actually feel like six figures.

How to put yourself in a better financial position

With the cost of living on the rise, more Americans may need to find ways to improve their financial situation. Here are a few suggestions for getting back on track.

1. Pay off debt

The latest data shows that Americans owe a record $1 trillion in credit card debt. One popular way to pay it off is by using the debt snowball method, focusing on your lowest balances first and then working up to the higher balances. If you’re having trouble making payments, you may want to consider a debt consolidation loan, which combines your debts into one payment and typically has a lower interest rate than credit cards.

2. Budget for expenses

I’m guilty of not always doing this, so I feel your pain if you’d rather do anything else than create a budget. But knowing where your money goes every month is the first step to finding areas you can cut back. It will also help you eliminate expenses you forgot you were paying for, essentially giving you extra cash you can put toward debt. Several great budgeting apps make this process less painful.

3. Find a few ways to boost your income

I know this can be easier said than done, but as somebody who often picks up extra writing jobs on the side, I also know it’s possible to generate extra income by putting a skillset to work. Take some time to think about how the skills you rely on in your current job may be used for a side hustle, and consider signing up for a freelancing platform like Upwork. You may also want to think about learning a new skill, which has been proven to be an effective way to boost your income.

You don’t have to move to Texas to improve your financial situation, but if your current location is becoming unaffordable, it may not be a bad idea to assess your housing situation. And remember, taking some small steps to improve your finances — including paying off debt — has been proven to increase your overall happiness. No six-figure income required.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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