The Federal Reserve’s survey of family finances in 2010, released recently, provides a picture of how devastating the recession has been to families’ financial conditions. Family income and net worth both declined from 2007 to 2010 across all slices of demographics, but the decline in net worth was much sharper. The Federal Reserve’s report on the survey contains a lot of interesting information, so I may return to it again, but I found the changes in net worth interesting.
If your net worth has increased from 2007 to 2010, congratulations. A family that shows an overall increase over the time period has bucked the trends and fought against the averages. With a wider economy pulling families in one direction, those who have managed to increase their net worth have shown uncommon success.
Don’t be too quick to accept responsibility for the relative success with net worth. The declines shown in the charts can be primarily due to changes in real estate valuation. As primary homes are not investments but still count in a net worth calculation, families don’t attempt to time the market with residences. To move a family when house values are at their peak would be disruptive, and unless the plan is to downsize or to rent, when you sell at the theoretical top to move, you’ll also need to buy your new place at the theoretical top. That eliminates any advantage to timing the market.
It’s possible to succeed with this strategy by selling at the top in one location while buying in a different location where prospects are good for future appreciation or by selling at the top and buying a house under-priced due to the work necessary to improve the property, but either situation can be majorly disruptive to a family. As most families do not attempt this, or they attempt and fail to make good decisions related to market timing, the result is a significant decline in net worth following a system-wide real estate market crash.
These numbers paint a dark picture over all of the nation’s wealth, but they also highlight some important distinctions. Continue reading to see the net worth chart from the study and some thoughts.
The chart illustrates a few interesting aspects of net worth in the United States.
There is a major net worth gap between the top ten percent and everyone else. The groups used in this chart aren’t designed for perfect comparisons. The four bottom categories represent the four lowest quintiles of Americans based on income, while the top quintile is split into two groups. It does help differentiate the major differences within the top 20 percent of income earners. The shape of a graph based on these data would be a steeply rising curve.
The top ten percent of income earners have an median net worth of $1.194 million — half of all families in this category earn more and half earn less. The mean is significantly higher than the median, at almost $3 million. With the mean so much higher than the median, net worth is majorly skewed in favor of the very top earners. The gap between the top 10 percent and the second 10 percent has increased since the beginning of the recession, further separating the elite from the less-elite.
A college degree is undeniably worthwhile. Education is one of the most-discussed topics on Consumerism Commentary, mostly due to the fact I consider education one of the most important aspects of any life. Yes, more important than money. Recently, I wrote about whether students should ever be discouraged from attending college and a recent study has shown that young adults deprived of a college education feel their life would be better with a degree.
Since 2007, the mean wealth of families whose head of the household has only a high school diploma decreased 17 percent. Households led by college graduates experienced a 15 percent decline. In addition to the smaller decline on wealth through the recession, the wealth of college graduates on a whole, whether looking at the median or mean, is significantly higher than those with just high school diplomas. As far as I know, these numbers are not normalized for other variables, so if home ownership rates are higher among college graduates, that could contribute to the higher level of wealth.
Self-employment relates to high net worth more than managerial positions. Numbers like these put the corporate rat race into perspective. So much time, when working for a corporation, is spent trying to get the next promotion, jockeying for a raise, and playing nice with management in order to gain favor, but the overall economic benefit of moving slowly up the ladder is limited.
Self-employment is a better way to build wealth for your family. One million dollars isn’t what used to be, but it is still more wealth than most families have. The Millionaire Next Door, the classic financial book with down-home advice about building wealth, explains how owning a business is much more effective for economic mobility than chasing the carrot in a job working for someone else. It’s riskier, but the benefits outweigh the drawbacks for the right person.
Have you bucked the trend and grown your net worth over the past few years including the recession?