Yesterday I put together a rundown of average and median net worth values based on the results of the Federal Reserve’s 2004 Survey of Consumer Finances. While I’ve always felt that net worth numbers are most valuable for internal tracking (e.g., how am I doing now relative to 1, 3, or 5 years ago?), making broad comparisons within these sorts of data sets can provide a number of insights, so… Today I thought I’d pick through the numbers a bit and see what we can learn from them.
The caveats
Before we jump in, there are some important caveats to keep in mind…
For starters, it’s important to keep in mind that correlation doesn’t necessarily imply causation. In other words, just because higher net worth correlates with a particular life choice doesn’t mean that it was caused by that choice. Rather, a higher net worth might (and likely does) enable people to make different life choices (e.g., college vs. not, owning vs. renting, etc.).
Also, many of these numbers are probably tainted by covariation with age. For example, younger people are more likely to be renters, so some of the difference between home owners and renters can probably be attributed to age. Unfortunately, I haven’t found a more detailed breakdown of the numbers, so we’ll have to work with what we have.
Digging into the numbers
First and foremost, the numbers in that survey indicate that the distribution of wealth in the United States is tremendously right-skewed. Indeed, the mean net worth value was far above the median value, meaning that some fraction of the upper half of Americans are way, way, way above the median.
Second, net worth appears to peak in the 55-64 age range and then tail off somewhat thereafter. It’s unclear to me whether this is an artifact of generational differences or if people are spending down their wealth as they get older.
Third, and not surprisingly, higher education is correlated with higher net worth. Interesting, the median doesn’t change much when you go from a high school diploma to “some college, ” but it jumps up substantially when you finish college (or high school, for that matter). It’s unclear how much of this difference is due to college producing a higher net worth vs. people with a wealthier background being more likely to attend/complete college.
Interestingly, self-employment appears to be the path to a much higher net worth, with the median net worth of self-employed individuals being roughly 5x higher than for those working for someone else. This isn’t particularly surprising, as the importance of owning your own business is one of the central tenets of The Millionaire Next Door.
And finally, we have the difference between homeowners and renters… As one might expect, homowners have dramatically higher net worth than renters. Truth be told, this is probably due to a combination of the advantages of home ownership, the hot (until recently) real estate market, and an age bias (older people tend to have higher net worth, and are also more likely to own a home). Real estate values also likely plays a major part in the comparatively high net worth value in the northeast.
I can draw on my own experience. After college I lived with my parents for two years. At that time I was making almost as much as my dad. My mum was also working. Of course we were far from a “millionaire household” but the household net worth was certainly more than twice my dads net worth. Yet I’ve seen articles on CNN or USA screaming that the number of millionaires in the US has risen to 6 million, only to read in the article body that they meant “millionaire households” which is quite different. One has only to read elsewhere today of the plight of the actor Mel Gibson, supposedly a billionaire. His impending divorce will make him a “semi-billionaire” if things go as expected. Just try to find reliable figures on what percentage of the US population has a net worth of “X dollars” at any particular date. The emphasis is always on an undefined “household” and therefore useless to a person attempting to determine their rank. I feel that many people overestimate their net worth when they confuse household income or worth with that of the individuals therein. In households comprised of three generations the difference could be very large.
ASTROBOY: I might buy your argument as far as the adults in the household go, but it’s not valid to automatically factor in the kids. What you really need to do is look at how the assets/accounts are titled. That tells you who actually owns the assets.
I’ve never seen this brought up in any article on net worth; a millionaire household is NOT the same a a millionaire! If a millionaire household consists of a married couple and two teenagers who have jobs, we have 4 “quarter-millionaires”. Considering how difficult it is to find actual figures detailing how many individuals have a certain amount of net worth, I think it likely that even our govt. does not really know how wealth is distributed. Frankly, I think the number of individuals who have liquid assets of a million dollars or more is quite small and certainly less than the 3 to 6 million person figure one often sees in news stories.
Any new information found in the 2007 data set?
“I find it interesting that all of the stories that deal with net worth state or imply that the key to amassing great wealth is hard work and education. While these factors certainly contribute to individual success, it is disingenuous to ignore the contribution of inherited wealth as the foundation for many of those currently carried as “high net worth individualsâ€. From my circle of friends (almost all of whom have a net worth in excess of $1.5 million) virtually every one of them has inherited 1/3 to 2/3 or more of their total net worth. For those friends whose net worth exceeds $5 million, all of them inherited more than $1 million. Please spare us the “Self Made Millionaire†Story written by Henry Ford II…that old saw is getting tired.”
Yup. I always wonder how many of the “I’m __ years old and have a seven-figure portfolio” posters on the financial forums I read are, 1. BS’ing, 2. benefactors of inherited wealth, 3. being truthful, or 4. making good money + having 2. No way to know on the internet where anyone can say anything.
Does “homeowner” mean someone that actually OWNS a house, or does it mean home debtor — someone who is paying a mortgage to a bank that owns the house they live in (but oddly, they tend to claim they are a home owner). I guess they own a percentage of the house they live in?
The good news is we could see about $8 trillion in fraudulent “house gains” wiped out over the next few years. This will open up buying opportunities to the smart renters.
I find it interesting that all of the stories that deal with net worth state or imply that the key to amassing great wealth is hard work and education. While these factors certainly contribute to individual success, it is disingenuous to ignore the contribution of inherited wealth as the foundation for many of those currently carried as “high net worth individuals”. From my circle of friends (almost all of whom have a net worth in excess of $1.5 million) virtually every one of them has inherited 1/3 to 2/3 or more of their total net worth. For those friends whose net worth exceeds $5 million, all of them inherited more than $1 million. Please spare us the “Self Made Millionaire” Story written by Henry Ford II…that old saw is getting tired.
My wife and I are in the 35-44 group and have been investing in stocks and stock funds since the late ’80s. As a result, we have some $500,000 in assets and about $300,000 in home equity. Living in the northeast, though, makes for some expensive living. The best advice I ever read was save and invest in the stock market over time and not to worry about it. Except for some nice trips to Paris and Italy, our only occasional luxuries are a nice Swiss mechanical watch or two and some nice meals.
Excellent post! Thanks for sharing it. I plan to include your article in my weekly carnival review this Friday.
Best Wishes,
D4L
I don’t think there is much (if any) wage premium in the job market for “some college” over a high school diploma.
@Zachary: I also think the numbers should be broken down more. The age ranges are wide; college graduates should be broken down further by Bachelors vs Masters, maybe even by profession. Would a large difference between median and mean among college graduates, for example, reflect the difference between BA in, for example, acting and a doctor or an MBA? BTW, I came out ahead of both median and mean in all categories (48, college grad, home owner), but I have an MS in CS, so I’d imagine if one broke down college graduates further, I’d be more in between. Besides, 40% of my net worth is my home, and I live in an expensive area and was lucky enough to buy in mid-90s (and to make enough money on this bubble to pay off my mortgage).
Breaking down by area would also be nice. In California and Southern NY, the housing is very expensive. Virtually everyone who was lucky enough to buy in mid-90s would have a large net worth simply because of high increase in the home value. Since homes went up by higher absolute amount in expensive areas than in cheap, a person who bought a home in mid-90s in California or near NYC will have considerably higher net worth than someone who owns a property in Iowa. This would partially explain the difference between median and mean among home owners – difference between areas as well as timing. Those who bought on top of the bubble may be heavily in debt; those who bought at the bottom may have a huge equity.
So these numbers are pretty meaningless.
The self-employment data are also problematic. Most businesses go bust after a short period of time. Those people who started businesses and failed are no longer in the self-employment category. So you could also interpret the data as showing that people who run successful businesses are wealthier than those who ran failed businesses. That’s an exaggeration, of course, but so is the idea that self-employment appears to be the path to wealth.
I am biased: I am risk averse. Also I have watched my dad run several businesses that weren’t quite successful long-term and now one that is overall successful (I guess?) but is so extremely cyclical that wealth is not happening.
The home ownership vs. net worth thing always seems to come up, but I wonder if people are looking at it backwards. The NAR would have you believe that home ownership is the key to wealth. I’d suggest that wealthier people are buying homes. I’m sure if you looked at the numbers, the average net worth of Ferrari owners is probably pretty high too…doesn’t mean that buying a Ferrari is the key to getting rich 🙂
That’s an excellent point, Matt.
I would suggest that the larger net worths for college graduates exist not only because of the value of the education, or the self-selection bias (e.g. wealthier people being more likely to attend and graduate). In my experience, graduating college is often a marker for the ability to defer short-term gratification in favor of a longer-term goal. That ability is also a key to success in building net worth.
There are plenty of exceptions, of course. I’ve worked for some very successful college dropouts. And there are plenty of college grads who do things that are destructive to their net worth. But it does seem to me that both graduating and building net worth rely pretty strongly on this one skill.
@no debt plan – I would imagine home values would affect the region numbers more than anything else, since not every area is equally impacted. Perhaps the own/rent numbers could change some too. Even in a “down market” my area simply hasn’t had falling home prices. Probably the result of living further away from the city.
I wonder if the net worth amounts have changed considerably due to the house bubble popping?
It’s (of course) very interesting to see how those numbers break down, and it will be even more interesting to see how they break down in 2007.
I wish it would give a better breakdown… I’m a “defect” in the numbers, as I’m under 35(19), own my own home(As of last March), have a high school diploma, no college, work for someone else, and live in the Midwest. I grabbed what the stats say my mean and my median net worths should be. According to them, my median should be $68,700 and my mean should be $89,900.
My actual net worth comes in just above the mean for the under 35 age bracket, which is somewhat reassuring. I’m young still, and I think that if you weighted out all of the factors, age would have the strongest impact on net worth. Especially considering how wide the
I really think net worth has more to do with mindset than it does with any particular statistic. The numbers in the study do show interesting trends, but I think that those statistics are a result of goals, motivations, or habits that the individuals possess. (as you stated about causation)
According to the study, I should have a really high net worth. However, my stupidity and irresponsibility have driven my net worth into the ground. We’ll see how things turn out a couple years from now though. Because with a changed mindset I should be able to pull out of it.