The average net worth of homeowners is much greater than that of renters.
Homeownership has long been held up as the pinnacle of the American ideal. There are several reasons why individuals choose not to buy a house, yet there is no doubting that homeownership may have a significant favorable influence on one’s net worth advanced from IPass Loans.
According to the Federal Reserve’s Survey of Consumer Finances, issued in September 2020, the median household net worth in the United States is $121,700. However, the disparity in net worth between homeowners and renters is startling.
In 2019, landowners in the United States had a median net worth of $255,000, while renters possessed an average net worth of $6,300. That is a 40-fold difference between the two groups.
Numerous factors contribute to homeowners having a more considerable net worth. You might argue that owning a home is like having a compulsory savings account since part of your monthly mortgage payment goes towards the equity. Whereas renting is a sunk expenditure with no return on investment.
Homes often grow in value, contributing to a homeowner’s total net worth. Additionally, homeowners may take advantage of significant tax deductions that renters cannot.
However, just becoming a homeowner does not guarantee that one will become wealthy. According to Betterment’s CFP and head of financial planning, Nick Holeman, homeownership is a long-term investment. “Homes are expensive to buy, own, and sell. If you do not intend to remain in your house for at least four years, you are unlikely to break even,” he adds.
The method through which net worth is computed
Net worth is defined as the entire value of your assets, less any obligations or debts.
Net worth is the sum of one’s assets and liabilities.
The Federal Reserve mentions various assets that should be considered when determining net worth, including the following:
- Cash held in checking, savings, and money market accounts
- Debit cards pre-paid
- Certificates of deposit and savings bonds
- Government securities
- Individual health savings accounts
- Individual investment accounts, such as 529 college savings programs and taxable personal investment accounts
- Individual retirement accounts, such as IRAs, 401(k)s, and 403(b)s
- Cash-value life insurance plans
- Equity-based annuities
- Automobiles, recreational vehicles, motorbikes, boats, and helicopters
Real estate, which includes rental properties as well as primary/residential residences
Liabilities are removed from the value of assets when determining net worth. The following debts are included in the Fed’s survey:
- Home equity loans or home equity lines of credit
- Balances on credit cards
- Personal loans, vehicle loans, and student loans are all installment loans.
How to keep tabs on your net worth
When managing your finances, it’s critical to examine your net worth. This figure provides insight into your financial situation and if you’re on track for retirement.
Numerous budgeting applications are available to assist you in monitoring your net worth.
- Mint is the best free app in general.
- You Need a Budget is the best app for severe budgeters (YNAB)
- PocketGuard is the best software for compulsive spenders.
- Personal Capital is the best app for investors.
- Honeydue is the best app for couples.
Additionally, you may create a basic spreadsheet in Google Sheets in which you can enter all of your assets and obligations and then subtract the second from the first. While it is not necessary to be accurate to the dollar or cent, having a rough concept of your position is critical.
Why is net worth critical?
Net worth will provide you with an overview of your financial situation as you prepare for retirement. While it may be challenging to imagine retirement, which may be years or even decades away, the last thing you want is to reach retirement age and discover you have insufficient savings.
However, even if you are a renter with little money in the bank, there are immediate measures you can take to begin developing your wealth. You may start by automating your savings, investing in your company’s 401(k), or setting short- and long-term goals.