Net worth, often referred to as wealth, is the difference between an individual’s or household’s assets and liabilities. The net worth percentile indicates the relative position of a household’s wealth compared to others in a given population. This metric provides valuable insights into economic disparities and trends, allowing policymakers, researchers, and individuals to better understand wealth distribution. The Federal Reserve has been collecting data on household net worth since 1989 through its Survey of Consumer Finances (SCF). The SCF is an ongoing triennial project that allows researchers to understand how households accumulate and distribute wealth and provide insights into thorny issues like income inequality.
Household net worth is calculated as the total value of all household financial assets, including savings accounts, retirement savings, and brokerage accounts, plus the market value of any homes and valuables owned by the household. This is minus the total value of all household liabilities, which includes mortgages and home equity loans, car loans, student loan debt, and other debts.
When it comes to household net worth, most of the value is attributed to homeownership. Owning a home is one of the most common ways to build wealth, but it can also be very expensive and expose families to market fluctuations. The concept of household net worth percentiles is crucial for understanding wealth distribution, economic inequality, and financial well-being. Household net worth data is often collected through surveys, tax records, and financial institution reports. However, data accuracy and availability can pose challenges. For instance, some high-net-worth individuals might intentionally underreport their assets to reduce tax liabilities, leading to an underestimation of wealth inequality.
Hot to Calculate Household Net Worth?
The calculation of household net worth percentiles involves sorting a group of households by their net worth and then dividing them into 100 equal groups or percentiles. Each percentile represents a specific range of net worth values. The 50th percentile, often referred to as the median net worth, divides the households into two equal halves: half of the households have a net worth above the median, while the other half have a net worth below it.
For instance, if we consider a hypothetical group of 1,000 households and arrange them in ascending order of net worth, the household at the 1st percentile would have the lowest net worth, while the household at the 100th percentile would have the highest net worth. The 20th percentile would represent the point below which 20% of households fall, and above which 80% of households are positioned, and so on.