Sometimes referred to as household affluence, 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 figure requires identifying the current market value of all assets owned by the household, and subtracting the sum of all liabilities from that total value. Measurements of household wealth are helpful in assessing the stability of a local or national economy, as well as in planning or adjusting the budget for an individual household.
As it relates to understanding the economy of a defined geographical location, determining household wealth provides valuable clues into the changes in the standard of living that apply in that area over time. For example, the average wealth of households in a town 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 had on that local economy. This means that if a business established a manufacturing plant in the area and hired a significant number of residents who were unemployed, assessing the household or residential wealth for the area will provide an idea of how much impact that employer has on the financial stability of the community.
Measuring household wealth is also helpful with individual households. Since the formula requires identifying the value of all assets and the current amount of all outstanding liabilities, it is an easy task to determine if the household increases or decreases in wealth from one year to the next. The outcome of the calculation can aid in assessing how well the household did with the resources on hand. For example, if a household makes regular payments on a mortgage throughout the year and also retires a significant amount of credit card debt, that household’s wealth at the beginning of the New Year will be significantly more than for the same time the previous year. Should the household create new debt as fast as the older debt is retired, there may be little to no increase in wealth over the period cited.
Decreases in household wealth can mean that there is a need to reassess how financial resources are currently employed. This may involve changes in spending habits so that it is possible to funnel more income into some type 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 in order. When a household is not comfortable with the results of a household 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.