Net Worth Worries: Why You Shouldn't Sweat It

from daveramsey.com on 10 Aug 2012
 

Content provided by mytotalmoneymakeover.com.

Don’t sweat the net (worth).

A new report by the Federal Reserve said that the recent financial crisis left the 2010 median American family (richer than half the country and poorer than the other half) with no more wealth than they had in the early 1990s. The report is based on data collected in 2010.

In 2007, the net worth of the median family was $126,400. In 2010, it decreased to $77,300. As you can imagine, three-quarters of that loss was due to the housing crash.

But, as previously stated, don’t sweat it. Why, you may ask?

Two reasons. The first is that money ebbs and flows. The market slide in 2008 lowered the value of nearly every stock market investment, but since then, the S&P 500 has basically doubled from its low point. Investors with a long-term view have seen their investments increase in value as well. That’s the way the stock market has always worked. Some years it’s up and some years it’s down. But the long-term trend shows that good, profitable American companies are going to do well.

Second, while net worth is important, it doesn’t have to be going up all the time. It’s like when you own a house. If you want to make money, the house needs to be more valuable only when you sell it. The value can go up and down like a yo-yo for 14 straight years. As long as it’s up in year 15 when you put in on the market, you come out ahead.

And there’s actually one more point to hit on: Consumer spending has increased dramatically from 20 years ago. In 1992, the average credit card debt was $2,991. By 2010, it was almost $6,500. If the typical household hasn’t seen a net worth increase, it’s most likely because they’ve been spending money they don’t have on things that go down in value.

In any economy, it’s inevitable that there with be occasional rough market conditions that cause investments or house values to drop, taking net worths with them. When people don’t curb their spending, debt either stays the same or increases, and you end up with a report like this one.

When you stay away from debt and invest consistently, your net worth doesn’t have as much volatility. It may sway with the market, but you won’t look at your net worth from 20 years ago versus now and wonder where all the money went. Sound good?

A budget is the key to nailing down areas where you can save money, invest and get out of debt. We can walk you through that step-by-step with a 7-day Free Trial to My Total Money Makeover. Sign up today!

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