Some people are more in tune with their personal finances than others are. And so if you have no idea what your net worth entails, you’re probably not alone.

Your net worth is the difference between your financial assets and your debts. As a very basic example, if you have a balance of $10,000 in your savings account but owe $4,000 on your credit cards, your net worth is $6,000.

As of 2022, the average American had a net worth of $1,063,700, according to data from the Federal Reserve. And while that might seem like an almost unbelievable number, remember that when we talk about averages, sometimes, a small percentage of very wealthy households can drive a number upward.

For context, median net worth among Americans as of 2022 was $192,900. This tells us that the $1,063,700 figure is not representative of the typical American.

I happen to have a friend who recently calculated his net worth at roughly $1 million. He isn’t rich, though. Quite the contrary — he actually largely lives paycheck to paycheck, and there’s a reason for that.

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Net worth is not always indicative of spendable cash

My friend lives in an area where home values have soared. He purchased his home for about $300,000 almost 15 years ago, and his home is now worth around $1.2 million. Because he’s been paying his mortgage for many years, he has around $1 million of equity in his home. And because he doesn’t have debts other than his mortgage, he’s left with a net worth of about $1 million.

However, my friend’s net worth is tied directly to his home and only his home. He has a negligible amount of retirement savings and pretty much no money in a regular savings account.

Because of this, he mostly lives paycheck to paycheck. If he were to encounter an unplanned expense, he’d probably have to borrow against his home equity to cover the cost. So all told, while his net worth is high on paper, he’s not in a great financial situation.

Focus more on your day-to-day finances

It’s not a bad thing to aim to grow your net worth over time. But an even more important thing to do is make sure you’re in a position to cover your monthly expenses and you have an emergency fund for those times when unplanned bills pop up.

Furthermore, it’s a good idea to arrange your expenses so that they’re not eating up your entire paycheck month after month. If you’re a lower earner, this may not be possible, but try your best. And if you’re a moderate earner, some lifestyle changes might make it so you aren’t living paycheck to paycheck.

For example, you may be able to get a roommate to reduce what you’re spending on rent. Or you may be able to carpool to work with colleagues to reduce your commuting costs.

On my friend’s end, his paycheck-to-paycheck lifestyle isn’t the result of overspending so much as unfortunate circumstances — namely, a divorce that drained his savings. He’s not a particularly high earner, so all told, he’s not in the best financial spot. And while he could sell his home and downsize, he feels stuck where he is while his kids are still in school.

Lately, he’s been picking up side jobs to boost his income, and he’s starting to build his cash reserves back up. But all told, it just goes to show that a high net worth doesn’t automatically mean you’re set financially. So rather than fixate on your own net worth, first make it a priority to build emergency savings and set yourself up with expenses that don’t drain your entire paycheck.

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