Understanding Net Worth and Why It Hasn’t Changed

We all know that the recession and recent financial turbulence of the last few years have hit the average American household pretty hard. Even worse, it seems for many, that even as wages increase or the government extends unemployment benefits the distance those dollars go does not seem to bridge the gulf that keeps many families in poverty’s grasp. Now, the Federal Reserve is has released statements that shed light on why the dollar does not seem to stretch as much as we all hope and need it to.

In a statement on Monday, the Federal Reserve said,

“the recent financial crisis left the median American family in 2010 with no more wealth than they had in the early 1990s, erasing almost two decades of accumulated prosperity.”

Binyamin Appelbaum with the New York Times reported that the Federal Reserve also stated, “The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007.” What this all means for the Americans of today is that the economic crisis that lead to the recession lingers. It isn’t a clear recession type of situation, but problematic nonetheless. Much of the loss in value is related to the housing market and prices along with the amount of income in the median family.

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These families are not making enough to pay off debts and meet daily needs. This means that most are either tapping into long-term savings that eats into resources they had put away for retirement or taking on new debt to meet immediate needs. This isn’t necessarily a bad thing. That is the new debt aspects, tapping into savings is not something any financial analyst or professional would recommend, but opening necessary lines of credit shows that a borrower has the resources to succeed. This is a function that can be viewed as a way to rebuild credit using credit cards.

Sadly the data shows that families saving fell to 52 percent in 2010 from 56.4 percent in 2007. In the New York Times article Era of Cheap Money, Consumers Are Shut Out the fact that many household are not only saving little, but making little to no progress in reducing the amount owed to lenders.

Family net worth has roughly stayed the same because of these two main factors. Much of it is related to the way the banks and lenders support the economy. For the situation to improve, the median families have to be able to either make more income, reduce the debt burden they are currently experiencing, or the value of a dollar has to change. The net worth is determined by a simple calculation of: (assets + cash) – debts = Net Value or Worth. This is often explained as your assets versus your liabilities. Wondering what your net worth is? CNN offers a great tool for doing just that! Check out CNN’s Net Worth Tool and see how you compare.