Bloomberg.com notes that according to the Federal Reserve the household and non-profit worth in the US rose almost $3 trillion to grow to over $80 trillion. Such an increase seems to be pointing to a strong economic recovery and wealth spilling into the coffers of average citizens. However, such numbers can be deceptive. And while we’re doing slightly better than during the recession, we’re not falling into the trap of complacency that can be created by reports of rapidly growing household wealth.
Home values have recovered in many areas since the collapse of the housing market, which can increase the feeling of wealth that some people experience. However, not every state has seen jumps in home prices as certain areas of California, Arizona or Florida have. Even in our area of Chicago, while prices are up, we have to tread carefully when it comes to estimating our home’s value.
While I can look at online estimates, they are only that…estimates. But our home is only worth what someone will pay for it; therefore, I don’t value online estimates as much as I do area comp sales. Therefore, I tend to use sites like Zillow, Trulia, Realtor.com and more to get ideas of what homes similar to ours are selling for, which provides me a better idea of home value. Then I account for things like real estate agent commission upon the sale of our home, repairs and updates necessary to sell, and closing costs in order to get a more realistic accounting of what we will really receive for our home when it sells. Such costs can make a substantial difference in the amount of equity we’d pull from our home after a sale and decrease our estimated overall household wealth.
Assets like vehicles, stocks, stock funds, homes, and more can create a sense of wealth without necessarily ever having realized that wealth. People saw some such wealth evaporate in a cloud of smoke during the financial crisis and housing market collapse. One day they had hundreds of thousands of dollars of stock and housing market wealth only to see it sucked away, sometimes in a matter of months or even weeks. Therefore, while these items can indeed be measures of wealth, it can take time to realize this wealth, and we’re careful regarding just how heavily we weigh its importance in our overall net worth.
Avoiding the lure of increased spending and debt
An increased household measure of wealth might make you feel good, but it could also be dangerous. The feeling of increased wealth could lead to psychological dangers, thinking there is more money available than there actually is. This could lead to greater spending, an increase in debt secured by this supposed increased “wealth”, and greater risk when it comes to investing due to the confidence and psychological security that this non-liquid wealth provides. This is why we tend to avoid the temptation of increased spending and debt based solely upon reports of greater household wealth.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.