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In our latest show, “Average Net Worth By Age 2020”, we compared the median net worth to where you should be at. We used the Money Guy-adjusted Millionaire Next Door average accumulator of wealth formula and prodigious accumulator of wealth formula (boy, is that a mouthful) for the “where you should be” numbers. At every age, the actual median net worth is significantly lower than where the median net worth should be, although in the 50s and 60s, the gap closes slightly. Why do most Americans have a low net worth?

To answer that question, we need to dig into the numbers, decade-by-decade. Our average debt and net worth data is from the Federal Reserve, average income is from the BLS, and the average savings rate is from Fidelity.

In the 20s, median net worth is $7,477, average income is $31,960, the savings rate is 7.20%, and average debt is around $33,393. The savings rate could be a little higher, and debt could be an issue. In the 30s, the average income has increased significantly to $45,277, but the average savings rate is still only 7.75%. As we move through the 40s and 50s, the average savings rate stays under 10%. In fact, it doesn’t reach 10% until the 60s.

Low savings rates

It’s pretty clear that the low savings rates across the board is keeping median net worth down. Average debt reaches over $90,000 in the 40s, but most of that is probably from a mortgage, and relatively low-interest debt like a mortgage shouldn’t prevent anyone from saving. The average income doesn’t increase significantly as Americans age, but it does steadily increase. Unfortunately, the average savings rate doesn’t increase at the same rate as average income.

Are there any other factors?

A low savings rate is the main driving force behind the low median net worth, but there are other factors as well. The savings that do accumulate may end up being used for emergencies or other needs; over half of all Americans dip into their retirement savings early.

Spending habits also are keeping Americans from saving more money. The average American spends $18,000 per year on non-essential expenditures. These include eating out, takeout, impulse purchases, alcohol, cable, streaming services, apps, etc. This does not mean that people shouldn’t be spending money on these things, but they are probably spending too much. Cutting back on non-essential purchases could help many people save more money.

Debt is also keeping net worth down. The average credit card interest rate is 17.27%, and the average U.S. household has $6,849 in credit card debt, and pays $1,162 each year in credit card interest. That’s $1,162 every year that could be used to save for retirement.

As we often mention on the show, car loans can also be a significant financial burden. They may not seem like it at first; the interest rates can be extremely low if you have a good credit score, and the monthly payments seem more than manageable. So how do people get in trouble with credit cards? 33% of people who trade in used cars to buy new ones have negative equity on their car, which means they owe more on the car than the car is worth. When they trade their used car for a new one, that negative equity carries over; the average new car is $33,312 but the average new car loan is $39,105 for those who have negative equity. The average interest rate for those with negative equity is 7% and the average term length is 6 years.

Student loans don’t normally have killer interest rates, but can keep graduates from building their net worth. Excessive student loans may prevent people from saving more for retirement, or buying a home.

Mortgages can potentially hurt your net worth, but less so than other types of debt. You are building equity in your home each time you make a payment, increasing your net worth (although payments at the beginning of your mortgage are almost all interest). If the interest rate is low and your home is increasing in value, mortgages won’t kill your net worth.

Learn more about what you can do to avoid some of the traps people who have a low net worth fall into. Watch our most recent show, “Net Worth By Age”, to learn more about where the average person is at, where you should be, and how to get there.