In some ways, net worth and wealth can be tricky terms to define. To some people, the phrases are synonymous. As others acknowledge, the perception of wealth is influenced by a variety of factors, including where you live, your career, and your age.
Here’s a deep dive into how to calculate individual net worth and some of the factors that may influence our perception of wealth.
Key Points
• Net worth is calculated by subtracting liabilities from the total value of assets, including real estate and investments.
• Assets like cash, life insurance, household items, and jewelry contribute to overall wealth.
• A positive net worth results when assets exceed liabilities, indicating financial health.
• Lifestyle creep can hinder wealth accumulation as higher incomes often lead to increased discretionary spending.
• Middle-income families earn between $56,600 and $169,800 annually, defining economic classes.
How to Calculate Individual Net Worth
An individual’s net worth is the value of all of their combined assets minus any liabilities (that is, outstanding debts). If your assets are worth more than your liabilities, you have a positive net worth. If you owe more than you own, your net worth is negative.
Assets you may use as part of your net worth calculation can include:
• Real estate. Your home, second home, rental property, commercial real estate, or other holdings.
• Cars and other vehicles. Note that automobiles are typically subject to depreciation in value over time.
• Investments. Stocks, bonds, mutual funds, and retirement accounts.
• Cash
• Life insurance. Use the cash value.
• Household items. Furniture, silverware, etc.
• Jewelry. Plus precious gems and metals.
Liabilities are debts such as:
• Balance remaining on your mortgage
• Student loans
• Auto loans
• Credit card debt
Recommended: Does Net Worth Include Home Equity?
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What Is the Difference Between Net Worth and Income?
Net worth and income don’t necessarily go hand in hand. Income is the money that is reported on a tax return, while a high net worth results from owning valuable assets. High net worth could be a result of careful saving, inheriting money, or hanging onto highly appreciated assets.
For example, let’s say someone bought a house in a once-undesirable neighborhood decades ago. Today, that neighborhood is super popular and the house is worth much more. Even if they don’t sell, the homeowner has increased their net worth without a boost in income. (It can be useful to see how net worth changes by age and location.)
On the other hand, a professional with a high salary who carries a lot of debt could have a relatively low net worth, especially if they also maintain a costly lifestyle. That said, various types of income certainly can have a big impact on how much wealth a person is able to accumulate.
Income is also one way that researchers sort individuals into economic classes, though the income ranges that delineate class can vary from year to year and by research methodology.
What Salary Is Considered a Middle-Class Income?
Pew Research Center defines middle-income Americans as those whose annual size-adjusted income is two-thirds to double the median size-adjusted household income. (Size-adjusted household income refers to the number of people within the household.)
A middle-income family of three earned $56,600 to $169,800 in 2022, the most recent information available from Pew Research.
What Salary Is Considered an Upper-Class Income?
Upper-income individuals earn more than double the median size-adjusted household income. This means a family of three may earn more than $169,800.
Wondering how your income compares? It can be helpful to look at the median income for a three-person household in each income tier.
| Income Tier | Median Income in 2022 |
|---|---|
| Upper Income | $256,920 |
| Middle Income | $106,092 |
| Lower Income | $35,318 |
Source: Pew Research Center
Why Wealth Is Relative Person to Person
The definition of “wealthy” differs depending on a person’s background, geography, and age. Consider a law student who earns very little money each year and carries hundreds of thousands in student debt. While their current wealth may be low, their potential future earnings may be quite high, and could catapult them into the wealthiest classes.
Consider, too, that where you live has a big impact on how far your wealth will stretch. A middle-income earner in an expensive city like San Francisco or New York may find it more difficult to make ends meet than someone in a small town in Oklahoma with a lower cost of living.
Ways to Measure Wealth
Wealth and net worth can be considered synonymous in some cases. But there are other factors that play into the perception of wealth and a person’s ability to accumulate it. Examples include demographic differences and potential return on investment, which may not have an immediate impact but can increase future wealth.
Income
As mentioned above, high income does not necessarily lead to high net worth — but it can. High earners may use their income to acquire assets that maintain equity, such as a home. These people may also use their earnings to invest within retirement and brokerage accounts.
Personal Savings
Your personal savings may refer to the cash you have on hand in checking and savings accounts, certificates of deposit, and money market accounts. It may also refer to the savings you have invested in brokerage and retirement accounts.
Ideally, these investments will appreciate over time, increasing net worth and providing a future source of income to maintain your standard of living after you stop working. As you build up your savings, tools like a money tracker app can help you keep tabs on your money.
Investment Rate of Return
An important factor in accumulating wealth is the rate of return (ROR) on your investments. Investment returns are not guaranteed. Stock prices rise and fall according to various trends in the market. Even bonds, which are relatively safe, are subject to default from time to time.
In the past, the stock market tended to rise over the long term. In fact, since 1926, the average annual rate of return for the stock market has been about 10%, surpassing potential returns for other major types of investments, including bonds.
Investors who save more, and hold more of their investment portfolio in stocks, may be better positioned to take advantage of these potential future returns.
Real Estate Assets
One way to think about wealth is as the maintaining of assets. Real estate can be a good place to build equity, and it can appreciate in value. Returns can vary widely depending on what type of real estate you buy — whether a home or commercial property — and where the property is located. Historically, the rate of return on real estate has been close to stock market returns. In the U.S. market, the median return on real estate investment is 8.6% annually, per the S&P 500 Index.
Age and Family Status
Demographic factors can have an impact on how much money you earn and the wealth you can accumulate. For example, median weekly earnings vary by age and gender.
Perhaps unsurprisingly, men and women ages 16 to 24 have the lowest median weekly earnings, with men earning $771 per week and women earning $695 in the second quarter of 2024, according to Bureau of Labor Statistics data.
Men age 35 and over enjoyed the highest median weekly earnings:
• 35 to 44: $1,379
• 45 to 54: $1,470
• 55 to 64: $1,361
Women earned less overall than men:
• 35 to 44: $1,114
• 45 to 54: $1,151
• 55 to 64: $1,048
The number of people in a household has a different impact. More people under one roof may require a larger home and more money spent on things like groceries, clothing, and transportation. As a result, a single individual usually requires less wealth to maintain a certain lifestyle than a family of five.
Good Credit Score
While not exactly a measure of wealth, a good credit score is a measure of financial health. It suggests that you have not taken on more debt than you can handle, and that you are able to make your payments on time.
A good credit score can also help you leverage your wealth to achieve financial goals. For example, lenders will look at your credit score when you apply for a loan to determine your creditworthiness. A good score can help you qualify for loans with lower interest rates. Individuals with bad credit, on the other hand, may be seen as a risk, and lenders may charge higher interest rates to compensate.
As a result, a good credit score can help you qualify for loans, such as a mortgage, at affordable rates that can help you build wealth.
Difference Between Material Wealth vs Spiritual Wealth
Material wealth is dependent on the physical and financial assets that you own and the debts you carry. Spiritual wealth, on the other hand, is not based on tangible items. Rather, it’s based on things like a sense of well-being and happiness.
Are material wealth and spiritual wealth linked? In a 2023 paper, authors Daniel Kahneman, Matthew A. Killingworth, and Barbara Mellers discovered an overall connection between larger incomes and increasing levels of happiness. But they also found that happiness peaks at $100,000 a year and then plateaus in people who are already unhappy.
Appreciating What You Have
One of the reasons that higher income doesn’t always translate into greater wealth is a phenomenon known as “lifestyle creep.” This occurs when increasing income leads to an increase in discretionary spending. A certain amount of lifestyle creep can result from trying to “keep up with the Joneses” — a tendency to accumulate material goods to compete with others in one’s perceived social class.
For example, as a person earns more, they might buy a bigger house, a more expensive car, pricey clothes, and start sending their kids to private school. These costly habits can mean that the individual may not be able to save more than when their salary was lower.
Try to avoid lifestyle creep by putting off grand lifestyle changes, like buying a large home, and putting off big purchases until absolutely necessary. Build and stick to a budget that includes wealth-building line items, such as saving in retirement funds. Track your progress with a budgeting app.
Practice appreciating what you already have, and you may find that some of the upgrades you desire are just wants — not necessities.
Recommended: What Credit Score Is Needed to Buy a Car?
The Takeaway
Net worth and wealth are inextricably linked. Measuring net worth helps people assess how many assets they currently have at their disposal. Accumulating wealth is about acquiring and maintaining assets that hold their value or increase in value. Doing so often requires careful saving and investing, as well as constant monitoring to ensure you stay on track.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
FAQ
What salary is considered middle-class income?
Middle-income Americans have annual incomes that are two-thirds to double the median income, according to Pew Research. For example, a middle-income family of three will earn $56,600 to $169,800.
What salary is considered upper-middle class income?
An upper-middle class income is at the high range of middle class income. According to the U.S. Census Bureau’s “Income in the United States: 2022” report, that’s an average annual income of $94,001 to $153,000.
What salary is considered lower-class income?
Low-income Americans are anyone earning less than two-thirds of the median household income. Per Pew Research Center, that means a family of three would have a household income of less than $56,600.
Photo credit: iStock/fizkes
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