Personal Finance

Lost American ‘Values’: What Is Your Net Worth?

Richard Satran, Editor

What is your net worth — and should you care about it?

If y

Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.
Getty Images

ou borrowed money recently you might know the answer. But if you saw recent headlines you might be confused. “American Dream Shrinks” and “Decades of Prosperity" came in a flood of tweets and newspaper headlines.These all referred to a Fed report on average family net worth falling 40 percent since 2007.

Late last week there was another wave that showed household net worth climbing this year by 12 percent. But that "surge in net worth" was eclipsed by the more depressing news.

Which reflects your reality? The net worth 'wave' you are on depends on your age, experience, and other demographic factors. The reports this week were like data snapshots sent by mail; your net worth is more like Instagrams.

So why is net worth surfacing now? It's news because it's an election year. It might become this presidential cycle's "It's the economy, stupid" or "Are you better off than you were four years ago?"

For the Federal Reserve it was just business as usual. The Fed is a very big enterprise, it often speaks in different voices, even if Ben Bernanke is its familiar face. There have been two studies in recent days, and even within those studies there are differing views and interpretations.

So what is your net worth? Don't be confused by the proliferation of reports or the political spin. You are not stupid if you don't know the answer. If you do know it, you are way ahead of the wave.

First off, the Fed's net worth figures are a broad index, which is helpful to anyone who needs a broad 'picture' of the average person in the American economy. It was often used by businesses that wanted to forecast the future. But it is a rough gauge at best. Some news stories described Fed data as "long-awaited." Maybe it's because the Fed's net worth data is based on data assembled 18 months back and used a sampling of households.

In the real-time world where your net worth can be calculated to the minute and small decimal point, no one is actually waiting for data that old. The economic pieces are assembled by the nanosecond with each consumer purchase and stored in 'the cloud,' where economists and marketers can access the data.

Average consumers access it all the time, often without knowing it. It can help you plan spending and borrowing. Financial advisers do reviews of net worth with new clients and annual financial plan updates. It can be a worthwhile learning experience, and clients usually appreciate the exercise, said Andy Schwartz, chief executive of the wealth advisory firm Bleakley, Schwartz, Cooney & Finney.

"People always want to know what their net worth is," Schwartz said. "Over time, this is the best calculation to use to track your financial progress."

The studies about net worth this week  — one showing a surge in wealth and the other showing a decline — were both true. But net worth is a snapshot in time. Only the tweets and the analyses were new. 

Even in the 'normal' times there are many different calculations used for net worth, and each one looks for a different result. There is no 'true north.'  Financial advisers try to bring it all together for individuals. Rapid shifts in home prices and stocks have made it harder.

Home prices make up a major portion of 'average' people's net worth. Mortgage lenders sometimes optimistically add home furnishings and other assets so they can justify bigger loans — and applicants rarely complain, even if they should. Financial planners use net worth to assess clients' positions and create financial plans for retirement. And there are tens of millions of mass affluent people who own stocks. All of them need financial plans, regardless of which percentile.  

"You need to know where you are before you can determine where you are going," said Schwartz.

Your Financial GPS

Assessing net worth is "like your GPS placing the dot on the map," Schwartz explained.

Those with financial assets in the $500,000-plus range can get a broker to run the numbers for them as part of their initial pitch. Independent advisers will do it as well, often for a flat fee. College Fafsa forms have their own net worth formula that college parents fear as much as their children fret this year's finals. 

Scores of online tools are available for people to calculate their net worth online. Home loan brokers or mortgage companies do it as part of their lending process, and fees are folded into the whole, and should be disclosed in fees.

There is a simple calculator that goes through the basics: cash bank account balances, retirement savings and investments, and cash value of life insurance. Bank lenders add in estimates of equity in homes, one of the most difficult data points to handle in recent times.

The bottom line on your net worth is that it really depends on how you apply it. There are different formulas used for credit cards, student loans, and any applied measure of personal finance. Vertex has one that downloads to an Excel spreadsheet so you can create your own list with all of the loans, accounts and assets you want to use.

That might not have the Fed's authoritative stamp that pundits love to use in their arguments  — but at least your slice into the loaf will be much fresher than the lagging data used in the data reported over the past week.