My friend has a net worth of $1 million and is still living paycheck to paycheck. Here’s why

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

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

As of 2022, the average American’s net worth was $1,063,700, according to data from the Federal Reserve. This may seem like an almost unbelievable number, but remember that when we talk about averages, sometimes a small number of very wealthy households can push the numbers higher.

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

I have a friend who recently calculated his net worth to be approximately $1 million. But he is not rich. Quite the opposite. He actually lives paycheck to paycheck, and there’s a reason for that.

Net worth does not always indicate expendable cash.

My friend lives in an area where housing prices have skyrocketed. He bought the house nearly 15 years ago for about $300,000, and today his home is worth about $1.2 million. He has about $1 million worth of equity in his home because he has been paying off the mortgage for many years. And since he has no debt other than his mortgage, that leaves him with a net worth of about $1 million.

However, my friend’s net worth is tied directly to his home, and only to his home. He has minimal retirement savings and very little money in his regular savings account.

Because of this, he mostly lives on salary. If you have unplanned expenses, you’ll probably need to borrow against your home equity to cover them. So, although his net worth is high on paper, his financial situation is not great.

Focus more on your everyday finances

Aiming to increase your net worth over time isn’t a bad thing. But what’s even more important is making sure you’re in a position to cover your monthly expenses and have an emergency fund for when unplanned bills come up.

Additionally, it’s a good idea to adjust your costs to ensure they don’t eat up your money. entire I get paid every month. If you are on a low income, it may not be possible, but try your best. And if you’re a modest earner, lifestyle changes may prevent you from living paycheck to paycheck.

For example, you may want to get a roommate to reduce your rent. Or, you can cut down on commuting costs by carpooling with colleagues.

For my friend, his paycheck-to-pay lifestyle is not the result of excessive spending, but rather the result of an unfortunate circumstance: a divorce that depleted his savings. He’s not a particularly high earner, so as everyone said, he’s not in the best financial position. He may sell the house and downsize, but while the kids are still in school, he feels trapped where he is.

Recently, he has been starting a side job to increase his income and is starting to build back up his cash reserves. But when you put it all together, you can see that having a high net worth doesn’t automatically mean you’re financially stable. So rather than obsessing over your net worth, make it a priority to build an emergency fund first and cover expenses that don’t consume your entire paycheck.

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