PERSONAL FINANCES: HOW DO YOU STACK UP?

concept of mortgage and savings

For many, the start of a new year brings reflection of the past year, and the setting of goals for the upcoming year. Setting personal finance goals are among the most common. However, in order to set appropriate financial goals, it helps to assess your current financial situation. When it comes to personal finances, have you ever wondered how you stack up to everyone else?

For most people, their personal finances are a private matter, which makes an assessment difficult. Often we make assessments based on what we see. We compare the houses we live in, the cars we drive, the jobs we have, the “bling” we wear, and even the vacations we take. But the reality is, everyone’s financial situation is unique.

This article will hopefully shed some light on how you are really doing in comparison to others around you. In order to do this, we will look at statistics that give us a picture of what the true state of wealth is in Canada, and more specifically, the city of Calgary.

There are two ways to measure wealth. The first is your income – how much money you earn, and the second is your net worth – the amount of money you would have if you sold all your assets and paid all your debts. Together, these measurements will give you a reliable picture of how you are doing financially. When it comes right down to it, your net worth is the value of what you have at a particular point in time, and your income is your earning power – the influence you have on your net worth over time.

Let’s look at earnings first. To give you an accurate picture of how your income compares to the rest of Canadians, the following table breaks down incomes for both unattached individuals and families of two or more, into five equal groups, each representing 20% of the Canadian population:

Unattached Individuals Families of two or more
Bottom 20% $0 to $19,000 $0 to $39,000
Lower-middle 20% $19,001 to $23,000 $39,001 to $62,000
Middle 20% $23,001 to $37,000 $62,001 to $88,000
Upper-middle 20% $37,001 to $55,000 $88,001 to $125,000
Top 20% $55,001 and up $125,001 and up

Source: MoneySense estimates for 2013 based on Statistics Canada 2011 data

How you stack up to the average Canadian is a helpful measure, as information on a national level is more widely available, and more commonly discussed. However, what we really want to know is how we compare to the people around us. Where you live influences how much you earn. Incomes in Calgary are among the highest in Canada. $66,000 might be the national household average for Canada, but it is $17,000 below the average household income in Calgary. Here is how your household income stacks up to other households in Calgary:

Poorest 20% $22,000
Lower-middle 20% $52,000
Middle 20% $83,000
Upper-middle 20% $129,000
Richest 20% $364,000

Source: Environics Analytics as of December 2013

Think of your income in relation to others as an affordability index. The more you have, the more you can afford, and the more comfortable your lifestyle can be. However, just because you can afford more, doesn’t mean you are richer.

This brings us to the other measure of wealth – your financial net worth. It takes into account everything you own such as your house and other property, cars, savings, and investments, and subtracts everything you owe such as your mortgages, car loans, investment loans, and credit card balances. The net difference is how much you are worth.

Your financial net worth is an important measure of your financial health. It reveals your ability to accomplish major financial goals such as owning a home, reaching retirement, and withstanding unexpected expenses or loss of income. Consider this. An executive who makes $300,000 a year, owns a home and other assets worth $1,200,000, and has debts totaling $600,000. Compare this to a salesman who earns $150,000 a year, owns a home and other assets worth $800,000, and has no debt. Who has more wealth? Although the salesman earns half what the executive earns, the salesman’s net worth is higher by $200,000, and thus has more wealth. Clearly the executive can afford to live a more comfortable lifestyle, but the salesman is actually worth more, and is in a better position than the executive should they both  lose their job because the salesman is debt free.

Now that you understand the concept of financial net worth as a measure of wealth, let’s take a look at how your financial net worth compares to other Canadians. The first table breaks down the financial net worth for Canadians overall for both unattached individuals and families of two or more, while the second table breaks down average household net worth in Calgary:

 

Unattached Individuals Families of two or more
Bottom 20% Negative to $2,500 Negative to $68,000
Lower-middle 20% $2,501 to $19,000 $68,001 to $264,000
Middle 20% $19,001 to $128,000 $264,001 to $590,000
Upper-middle 20% $128,001 to $465,000 $590,001 to $1,139,000
Top 20% $456,001 and over $1,139,001 and over

Source: MoneySense estimates for 2013 based on Statistics Canada 2011 data

 

Poorest 20% $144,000
Lower-middle 20% $281,000
Middle 20% $438,000
Upper-middle 20% $690,000
Richest 20% $1,850,000

Source: Environics Analytics as of December 2013

Determining how your personal finances stack up to those around you isn’t about measuring your financial success. It is about discovering opportunities for improving your financial situation. The more areas for improvement you can identify, the more potential you have to build wealth and accomplish your financial and personal goals.

For more information on how your personal finances stack up to the rest of Canada, check out “The All-Canadian Wealth Test 2015 charts” at MoneySense.ca:

http://www.moneysense.ca/planning/the-all-canadian-wealth-test-2015-charts