Homeownership has long been touted as the ultimate American dream. There are many reasons why people may not want to owning a home, but there’s no denying that owning a home can have a big impact on your equity, in a good way.

The Survey of Consumer Finances, released in September 2020 by the Federal Reserve, found the median U.S. household net worth to be $ 121,700. However, the difference between owner and renter equity is staggering.

In 2019, homeowners in the United States had a median net worth of $ 255,000, while renters had a net worth of just $ 6,300. That’s a 40x difference between the two groups.

There are many reasons why homeowners have higher equity. You could argue that owning a home is a bit like having a forced savings account, where each month a portion of your mortgage payment goes into the equity in the home. Whereas leasing is a sunk cost with no return on investment.

Homes often rise in value, which can help increase a homeowner’s overall equity. Plus, homeowners can also take advantage of valuable tax deductions that are not available to tenants.

However, just because someone owns it does not automatically mean that they will get richer. Nick Holeman, CFP and head of financial planning at Betterment, recommends that owning a home is a long-term investment. “Houses are expensive to buy, maintain and sell. If you don’t plan to own your home for at least four years, you’re not likely to break even with your purchase, ”he says.

Equity refers to the total value of the assets you own minus any liabilities or debt.

Net worth = assets – liabilities

The Federal Reserve lists several assets to consider when calculating net worth, such as:

• Cash in bank accounts, such as checking, savings, and money market accounts
• Prepaid debit cards
• CDs and savings bonds
• Government bonds
• Health savings accounts
• Investment accounts including 529 education savings plans and taxable individual investment accounts
• Retirement accounts including IRAs, 401 (k) s and 403 (b) s
• Cash value life insurance contracts
• Annuities with equity
• Vehicles, including cars, RVs, motorcycles, boats, and helicopters
• Real estate, including rental homes and main / residential homes

In calculating net worth, liabilities are subtracted from the value of assets. In the Fed’s survey, the debts considered are:

Net worth is an important number to consider when managing your personal finances. This number gives an overview of your financial situation and if you are on the right track for retirement.

There are several budgeting apps you can consider to help you start tracking your net worth.

You can also consider making a simple spreadsheet in Google Sheets where you can write down all of your assets and liabilities and then subtract the second from the first. While it is not important to be exactly on the dollar or the cents, it is important to have a general idea of ​​where you are.

Net worth will give you insight into your financial situation as you prepare for retirement. While it can be difficult to contemplate retirement, which can take years or even decades, the last thing you want to do is approach retirement age only to find that you haven’t saved enough. .

But even if you’re a tenant and don’t have much in the bank, there are steps you can take right away to start growing your wealth. Getting things started can be as simple as automating your savings, investing in your business’s 401 (k), or figuring out your short and long term goals and then making a plan to achieve them.