Compare, but don’t despair.
Six years ago, I was sworn into the New Mexico State Bar. While law school is typically 3 years, the eight weeks or so of studying for the bar exam is much more challenging than those three years combined. In those eight weeks, I was immersed in every legal topic on the exam and regularly doubted whether I was going to pass and what it would mean if I didn’t.
To study for the bar exam, I used a “bar prep” tutoring program. It had modules comprised of recorded lectures, practice problems, accompanying workbooks and everything that should help you feel prepared for the dreaded two-day exam. One of the features of this prep course is that it would show you the progress of your peers in their studying. For example, it would present you a detailed bar graph saying “75% of your peers have completed 50% of the modules”. The intent was to give you a little boost if you were, say, only 40% of the way through the modules. And, it worked! If you were a bit behind and you saw your peers were ahead, you would likely (or, at least I did) put in extra hours to get to where they were.
This strategy that my bar prep program used, nudging my behavior through social influence, is known as identity-based cognition. Knowing how others are behaving, and wanting to behave similarly, can influence us to change our behavior or engage in a particular behavior. This is a well-studied phenomenon. One experiment in Minnesota showed that informing taxpayers that 90% of their fellow Minnesotans had complied with tax laws was more effective than informing the taxpayers that their taxes would be used for various good things, that they would punished for non-compliance, or that they could get help with their taxes if needed.
However, certain social influence in our financial lives can have negative effects. We see other people who we perceive as similarly situated to us and we might compare how we fare. Oftentimes this comparison isn’t very accurate. What might look like wealth may be only that – an appearance. And unfortunately, these comparisons can leave us feeling a bit, well, down on ourselves.
There are better ways to get a clearer sense of our financial wellbeing than our perception of what others may have.
A better way to assess your financial wellbeing is net worth. Net worth is defined as what you own (your assets) minus what you owe (your liabilities). Assets are things that have a monetary value and that if you sold today, you could recover as cash value. Assets are typically homes, cars, cash, and investments. Liabilities are commonly mortgages, car loans, student loans, credit card debt and any other type of consumer debt. We can increase our net worth by eliminating debts and increasing assets. We can save/invest more and pay down, or off, debts.
Net worth is useful to measure what you have, in terms of dollars. If you sold everything and paid off your debts, it represents how much money would you have (or not have). Knowing our net worth is one tool we can use to get a pulse on how we’re doing financially. It does not represent the whole picture, so use it as only one, of many, tools in your toolbox. Someone can have a high net worth and still not enjoy their lifestyle, feel secure in their finances, or be able to weather a storm. Similarly, someone might have a high income but have a low net worth. While it’s not a perfect tool, knowing our net worth can help us understand our financial picture.
Every three years, the Federal Reserve Board issues the Survey of Consumer Finances. Most recent figures on Americans’ net worth come from 2019 and are summarized as follows*:
Under 35 years old: Median net worth - $13,900; Average net worth - $76,300
35-44 years old: Median net worth - $91,300; Average net worth - $436,200
45-54 years old: Median net worth - $168,600; Average net worth - $833,200
55-64 years old: Median net worth - $212,500; Average net worth - $1,175,900
65-74 years old: Median net worth - $266,400; Average net worth - $1,217,700
75+ years old: Median net worth - $254,800; Average net worth - $977,600
*data gathered from nerdwallet.com/article/finance/average-net-worth-by-age
My mom is known to say, “compare and despair.” She says this in the context of us complaining about someone having something we wish we had or feeling insecure because of the way we perceive someone else. She’s right – we can create a lot of negative feelings when we compare ourselves to others. And, still, there is a place for comparing, as demonstrated by the research on identity-based cognition. Sometimes, used in the right context and with the right tools, comparing can help us see how we stand in certain situations and can serve as a motivation to help us get to where we want to be. When we know how our peers are behaving in an important situation, the comparison can serve as a tool for us to monitor our behavior in the same situation. It can serve as a nudge in the right direction for our behavior.
So, how does your net worth stack up against others? You can use this simple net worth calculator from Nerd Wallet to calculate your own net worth.
Perhaps your net worth is above the median or average for your age range and that means you can breathe a little easier. If it’s not, don’t fret. There are simple ways to improve it. One of the best ways is to eliminate debt because you have control over your debt. Create a plan to pay off debt (debt has impacts that extend beyond net worth calculations – hello, stress!). Think about how to increase your assets. And importantly, assess how you feel in your financial situation. Aim to get to a place where you feel comfortable and in control, a place that is not based on anyone else’s perceived lifestyle, but how you feel.
Let me know – How do you feel knowing your number?