Owning a home has long been celebrated as a cornerstone of the American dream. While there are various reasons why some individuals may prefer renting, the financial benefits of homeownership are undeniable and can significantly bolster your net worth.
According to the Survey of Consumer Finances conducted by the Federal Reserve in September 2020, the median net worth of U.S. households stands at $121,700. However, when comparing the net worth of homeowners to that of renters, the contrast is striking.
In 2019, the median net worth of homeowners in the U.S. was $255,000, whereas renters trailed behind with a mere $6,300 – marking a substantial 40-fold difference between the two groups.
There are several factors contributing to homeowners’ higher net worth. Owning a home can be likened to having a forced savings account, where a portion of each mortgage payment contributes to the equity of the property. In contrast, renting entails monthly expenses without the potential for investment returns.
Moreover, homes often appreciate in value over time, further enhancing a homeowner’s net worth. Additionally, homeowners can benefit from valuable tax deductions that are unavailable to renters.
Understanding Net Worth and How to Calculate It
Net worth is calculated by subtracting liabilities from assets:
Net worth = Assets – Liabilities
Assets include various financial holdings such as cash accounts, investment portfolios, retirement savings, real estate properties, and valuable possessions like vehicles.
Liabilities encompass debts such as mortgages, home equity lines of credit, credit card balances, and other outstanding loans.
The Importance of Net Worth
Your net worth provides a snapshot of your financial health and readiness for retirement. While retirement planning may seem distant, it’s crucial to ensure adequate savings over time. Even if you’re a renter with limited savings, taking proactive steps such as automating savings, contributing to retirement accounts, and setting clear financial goals can pave the way for wealth accumulation and financial security in the future.
