Have more than $200 to your name? Congratulations! You’re wealthier than 12% of all Americans. The Federal Reserve has released data from its 2016 consumer finance survey and the results are terrifying.
This data is compiled every three years and is conducted via survey to over 6,500 households in the United States. It shows both mean and median net worth broken down by age, education level, race, and several other criteria. The government uses this data to assess the financial health of households throughout the country and to gauge how the households are growing (or contracting) from an overall wealth standpoint.
Net worth is an important measure into a person or household’s financial health. It is calculated by taking all assets someone owns and subtracting any liabilities that they owe. See here for a more detailed explanation of calculating net worth. All things considered equal, the larger the net worth someone has the more secure financially they are. There are many ways to build wealth over time. For example, a person could invest in real estate, buy stock in companies that they think have growth potential, or just simply save cash in their dresser drawer. Although people assume that their wealth will grow linearly over time that just isn’t the case. It typically takes people years to amass even a small amount of wealth, this is because most of their wealth is in the form of cash savings from their job. Over time, however, they are able to put their money in different investment vehicles so that it can earn money on its own.
Median net worth, adjusted for inflation, reached a peak in 2007 before falling off a cliff due to the great recession. It has recovered some, but remains about 40% below the 2007 levels. Average net worth, however, has just hit a record high this survey, surpassing the former record set in 2007. This is further evidence of the inequality growing wider in the United States.
What is the median net worth? In America, the median net worth of all households is $97,300 (in 2016 dollars). This is an increase of $13,600, or 16% since the last survey was conducted. What are the drivers of the increase in wealth during this time? With booming equity and housing markets, it’s somewhat surprising the increase wasn’t larger. With equity markets rising over 30% from the end of June 2013 to the end of June 2016, and with the housing price index (HPI) rising nearly 18% over the same time period, one would believe the increase would be slightly higher. Although these both are valid reasons for why the mean net worth number has increased substantially, it doesn’t always transfer to the median net worth. The reason for this is because not everyone owns a home, and similarly, not everyone owns stock in the market. In fact, it’s quite possible (although not probable) that half of the participants in the survey don’t own a home. If that’s the case then the rising HPI doesn’t matter one iota for this analysis.
What is the average net worth? In America, the average net worth of all households is $692,000. This represents a $141,000, or 26%, increase since the last survey. As is quickly realized, the average net worth is dramatically higher than the median net worth. Averages are skewed heavily by outliers, which is why for data related to income and wealth, a median number is typically more relevant. Hopefully the Federal Reserve didn’t mail surveys to Jeff Bezos, Mark Zuckerberg, Warren Buffet, or any of the other 537 billionaires living in America during 2016. In fact, if 12,999 households reported a net worth of zero, but the last participant in the survey was Bill Gates, the average net worth for all households would skyrocket to over six million dollars. All while the median net worth remained at $0. Although in many statistical analyses the outliers will be removed, the data will still be skewed anytime an average is taken verse a median value.
Breaking net worth values down by age provides greater clarity of wealth. As expected, net worth is lower for younger families and increases with age. Younger households are typically trying to just make ends meet, let alone building wealth through investments and real estate. Net worth for households tends to peak when people reach their late sixties and early seventies. People are able to accumulate wealth over time while they’re working, typically into their mid-to-late sixties, at which point they begin drawing down their assets, which causes net worth to decline. The average (household) net worth by age is $76,200 for people under 35, $288,700 for ages 35-44, $727,500 for ages 45-54, and then increases considerable after this. A summary, including median net worth values by age, is below.
An interesting topic that will surely emerge from the data is the disparity between the median net worth of a renter versus that of a homeowner. The results show that the median net worth of a homeowner is $231k, while only $5k for that of a renter. This shows that homeowners have a median net worth of roughly 45 times that of a renter! If builders, realtors, and mortgage bankers aren’t using this statistic as part of their advertising campaign yet, they will. There is just one problem with doing so: when looking at the data further, it’s clearly a matter of average wages for homeowners being more than double that of a renter. The median wages for households in which the property is owned is $71,000 while the median wages for a renting household is just under $32,000. Because of this the reasoning that owning a home will make you wealthy isn’t as cut and dry as it would appear at first glance.
It pays to get an education
We all know college degrees are expensive. Sometimes they may not even seem worthwhile when factoring in the debt associated with obtaining a degree. The data, however, shows that people with a college degree have a net worth far above those without a degree. Keep in mind that net worth is a measure of a person’s assets minus their liabilities. This means that any student debt is already factored into the number. As you can see from the table below, a household where the primary earner has at least a college degree has a median net worth of roughly 4.5 times that of just a high school degree, and a whopping 13 times that of a household where the primary earner hasn’t completed high school.
The report from the Fed is extremely useful and, although somewhat long at 40+ pages, provides for great Friday night entertainment. Want to get updates on new blog posts sent directly to your email? Subscribe to the Financial Fixation blog and in three years we’ll update you on the highlights from the latest Fed survey (and maybe some other interesting posts along the way).