Is median or average net worth a better way to measure financial success? The answer matters more than you might think.
While the average net worth offers a quick glance at a population’s collective wealth, it often gets skewed by ultra-wealthy individuals.
On the other hand, median net worth reflects the financial position of a typical person more accurately. Understanding the difference between the two can change how you evaluate your progress, set financial goals, and compare your status realistically.
Let’s explore the difference between median and average net worth and what they mean for you.
Median and Average Net Worth
Average net worth is calculated by dividing the total wealth of a group by the number of people in that group. It gives a big-picture view but can be misleading when a few individuals hold extremely high wealth.
For example, top 1% net worths like Elon Musk significantly impact the average by pulling the number higher than what most people actually have.
In contrast, median net worth finds the middle point in a ranked list of values. That means half the population has more, and half has less. It’s not affected by outliers, making it a better indicator of what a typical person owns.
When median net worth is used to represent the typical financial status of a group, it creates a more balanced and relatable benchmark. Meanwhile, average net worth tends to be inflated by extreme wealth, distorting the reality for most people.
Which One Gives a More Accurate Picture of Your Financial Status?
If you’re wondering which of these two is more useful for you personally, the answer depends on what you want to measure. The average might be helpful when you’re looking at national or collective trends.
But if you’re trying to understand how you stack up against your peers, the median is more precise.
Financial advisors prefer to use the median in planning because it reflects typical wealth. For instance, net worth is calculated by subtracting total liabilities from total assets.
Assets can include your home, savings, investments, and even personal property, while liabilities cover everything from mortgages to student loans.
If you’re under 35, your financial picture may look very different depending on which measure you use. The average for this group is around $76,300, but the median is just $13,900. That’s a clear example of how the average can exaggerate your financial standing due to a few high earners in the data.
How Your Age Affects These Financial Benchmarks
As you age, your net worth typically increases due to career progression, investments, and asset accumulation. According to data from the Survey of Consumer Finances, net worth rises steadily with age.
However, the gap between the average and the median also widens.
For example, among individuals aged 65 to 74, the average net worth is $1,217,700, while the median is only $266,400. This difference shows that a small number of very wealthy individuals raise the average far above the level most people in that group experience.
The Survey of Consumer Finances is conducted by the Federal Reserve in collaboration with the University of Chicago every three years. This survey helps to measure the changing financial landscape of American households and highlights how uneven wealth distribution can be.
How to Calculate These Financial Indicators for Yourself
To calculate your own net worth, begin by listing all of your assets—such as savings, real estate, retirement accounts, and investments. Then subtract your total liabilities, including mortgages, personal loans, and credit card debt. The result gives you a snapshot of your financial health at that moment.
For example, if your assets include a $250,000 home, $10,000 in savings, and a $40,000 retirement account, and your liabilities include a $200,000 mortgage and $50,000 in student loans, your net worth would be $50,000. This simple equation helps you track your financial growth and compare it to broader benchmarks.
Personal assets often include investments and real estate, while liabilities typically consist of loans or credit card balances. Comparing your number to both median and average benchmarks within your age group offers better context for financial decision-making.
How Financial Advisors Use These Metrics to Guide You
Financial advisors use both median and average metrics, but when it comes to individual planning, they lean toward the median. This is because it more accurately reflects what most people are working with and avoids skewed comparisons.
Advisors often craft a financial plan based on your goals and actual numbers. They help clients evaluate where they stand financially and develop strategies to grow their wealth realistically. A key element they also consider is asset location, not just allocation.
Assets that generate high taxes, like frequent stock trades or interest-earning accounts, are usually placed in tax-deferred accounts such as 401(k)s or traditional IRAs.
These types of accounts are designed to shelter those earnings from immediate taxation, allowing them to grow faster over time. On the other hand, more tax-efficient assets might be kept in taxable brokerage accounts for strategic flexibility.
Why Outliers Like Elon Musk Skew Financial Averages
Elon Musk is a perfect example of how outliers distort the average net worth. His multi-billion-dollar fortune heavily skews the average upward, even though it has no relevance to most people’s finances.
This distortion happens because the average is sensitive to extreme wealth.
So, while the average net worth of a demographic might appear high, it doesn’t truly reflect the experiences or realities of most individuals within it.
The median, in contrast, holds firm in the face of such outliers and remains a more dependable metric for personal benchmarking. It’s no wonder financial professionals prefer to rely on median data when offering realistic financial advice.
What the Survey of Consumer Finances Reveals About Wealth Gaps
The Survey of Consumer Finances, managed by the Federal Reserve and the University of Chicago, offers one of the most reliable sources of information on American household wealth. It gathers detailed data on assets, debts, income, and demographics.
The findings show that wealth is unevenly distributed, with a small percentage of the population holding a significant portion of total wealth. Average values reflect this inequality, while median values expose just how much most Americans are lagging behind the top earners.
This data underscores the importance of using the right benchmarks when evaluating your own progress. By choosing the median, you’re aligning your expectations with a more representative sample of people.
How Tax Strategies and Account Types Influence These Metrics
Where your assets are stored can influence how your wealth grows and how it’s measured. Advisors recommend placing high-tax assets in tax-deferred accounts like 401(k)s and traditional IRAs.
These accounts allow your investments to grow without being taxed until withdrawal.
Tax-efficient assets, like index funds or long-term holdings, can be kept in taxable brokerage accounts. This approach can help reduce your annual tax burden while keeping your overall financial strategy intact.
By being intentional with account types, you not only optimize tax benefits but also protect your net worth from being eroded over time. These decisions can significantly affect both your median and average financial outcomes, depending on how your wealth is structured.
Conclusion
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