Family wealth determinations are important when working with budget projects or when considering investments.
Sometimes called household wealth, household wealth is a term used to describe the net worth of a specific household or the average net worth of households within a defined geographic area. Calculating this type of personal wealth value requires identifying the current market value of all assets owned by the family and subtracting the sum of all liabilities from that total value. Measures of household wealth are useful for assessing the stability of a local or national economy, as well as for planning or adjusting an individual household’s budget.
Determining family wealth helps people plan a budget.
When it comes to understanding the economics of a defined geographic location, determining family wealth provides valuable clues about changes in living standards that apply to that area over time. For example, the average wealth of households in a city may increase or decrease over a five-year period. Analysts will use these changes to determine the level of impact that events in the community have had on the local economy. This means that if a company established a factory in the area and hired a significant number of residents who were unemployed, then assessing the area’s household or residential wealth will provide an idea of how much impact that employer has on the financial stability of the community.
Family wealth is calculated based on the current value of assets and may vary as the market changes.
Measuring family wealth is also useful for individual families. Since the formula requires identifying the value of all assets and the present value of all outstanding liabilities, it is an easy task to determine whether the family’s wealth increases or decreases from one year to the next. The result of the calculation can help to evaluate the performance of the family with the available resources. For example, if a family makes regular payments on a mortgage throughout the year and also retires a significant amount of credit card debt, that family’s wealth at the start of the new year will be significantly greater than at the same time of the previous year. If the family creates new debt as quickly as the previous debt is eliminated, there may be little or no increase in wealth during the quoted period.
Spending habits influence family wealth.
Reductions in family wealth may mean that there is a need to reassess how financial resources are currently spent. This may involve changing spending habits so that more income can be funneled into some sort of interest-bearing venture, such as investments or even a savings account. At the same time, efforts to minimize the accumulation of debt may also be appropriate. When a family is uncomfortable with the results of a family wealth analysis, the task is to find out what is contributing to the unfavorable trend and take steps to reverse that trend as quickly as possible.