A few weeks ago, the Federal Reserve (FED) released the Survey of Consumer Finances. This survey is published every three years and traditionally contains huge amounts of data on household’s personal finances – income, expenses, mortgages, retirement accounts, demographics, etc.
The latest data shows that the net worth of all households has increased by 23% and is now over 1 million dollars. Our first though, of course, concludes that the statistics are swayed and not entirely accurate because of the richest households’ net worth. And maybe that’s true to an extent, but let’s review the data more carefully.
The household with the lowest income, the poorest 20% of households saw an increase in the net worth of 24%.
The families in the poorest 20-40% of households saw an increase of 39% and the ones in the 40-60% income bracket – an increase of 48%.
What is the level of education of all these people you ask?
The increase in net worth for people with only a high school diploma is 24% and their average net worth in 2022 is 413.3 thousand dollars.
The ones with a college degree enjoy an increase in net worth of 30% for the same period and their average net worth is over 2 million dollars.
All that said the reasonable question is how many million do those people make a year? According to the Survey it isn’t millions. The average income has increased only 11% from 126 000 to 141 000 thousand (for the period 2016-2022).
It is not surprising that many of these households own their primary residence, and its value plays a role in this calculation. The mean net housing value[i] for those household has increased by 27%.
It is interesting to point out here that the net worth of people who do not own their primary residence has increased by 40%.
And so, we keep asking how are those people richer without ever making millions of dollars? The answer is glaring from the next chart. The answer is obvious, and no one is surprised: investments in financial assets. Even the people with lowers income have investments in stock in some form – retirement account, personal investment account. Over 40% of the poorest 50% of households have investments in retirement accounts. Over 80% of households with higher income (50-89.9%) have such investments.
So what is the shocking news that surprises no one? It doesn’t matter if we make little or a lot, whether we are educated or not or we live in our own residence or we rent – if we want to have high and rising net worth it is absolutely imperative that we invest in financial assets. Or with the words of the FED: “For many families, the assets held in IRAs and DC plans (typically associated with either a current or past job) are among the most important components of their balance sheets and are a key determinant of their future retirement security”.
[i] “Home’s value minus any debts secured by the home (that is, outstanding mortgages, home equity loans, and home equity lines of credit)” Changes in U.S. Family Finances from 2019 to 2022. Evidence from the Survey of Consumer Finances. October 2023, Board of Governors of the Federal Reserve System