What is family wealth?

Sometimes called family wealth, the family 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. Family wealth measures are useful for assessing the stability of a local or national economy, as well as for planning or adjusting an individual family's budget.

When it comes to understanding the economics of a defined geographic location, determining household 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 has established a factory in the area and hired a significant number of residents who were unemployed, then the household or residential equity assessment for the area will provide an idea of ​​the impact the employer has on stability. . company's finances. community.

The household wealth measure is also useful with individual households. 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 mortgage payments throughout the year and also pays off a significant amount of credit card debt, that family's wealth at the start of the New Year will be significantly higher than it was at the same time last year. If the family creates new debts as quickly as the old debts are paid off, there may be little or no increase in wealth during the quoted period.

Declining household wealth may mean that it is necessary to reassess how financial resources are currently used. This may involve changes in consumption habits so that more income can be funneled into some sort of interest-earning venture, such as investments or even a savings account. At the same time, efforts to minimize debt accumulation may also be necessary. When a family is uncomfortable 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.

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