April 19, 2015

A Look at Household Net Worth and Household Income By Age Group from the 2010 Survey of Consumer Finances

Interesting fact: Do you want a financial “A” in life?  To achieve it, and rank in the top 5% of households (making you richer than 95 out of 100 families), you and your spouse need a combined pre-tax income of $205,300 and a net worth of $1,864,100.  

That is according to the triennial Survey of Consumer Finance, which was released by the Federal Reserve a couple of days ago.  It’s one of the best sources of information available from any source on the health of the average United States household.  Flipping through the data and looking at the net worth, income, and demographic statistics is interesting.  Here are a few of the highlights.

Remember: Median is the figure that matters because it is the point at which half of people are above you and half of people are below you.  Mean, on the other hand, is pointless because it doesn’t tell you anything of value.  If you and Warren Buffett were in a room together, the mean net worth might be $22 billion but that doesn’t do any good in understanding how the money is distributed.  Ignore mean.  Focus on median.

Household Income Breakdowns

2010 Survey of Consumer Finances Federal Reserve Income Chart

Before Tax Family Income, Percentage of Families that Saved Money, and Other Information 2010 Survey of Consumer Finances Federal Reserve Income Chart

The median family in the top 10% of household income in the United States in 2010 earned $205,300.  At that point, half of the people in the bracket earned more, half earned less.  That is $17,100+ per month in pre-tax income.  Obviously, simple math tells you that is the cut-off point for the top 5%, as well.

The median American household earned $45,800 pre-tax.  So if your family generates more than $3,817 per month in pre-tax income (before payroll taxes, retirement savings, and other reductions), you are in the top half of society.  You are in the richest 1 out of 2 Americans.

Household Net Worth Breakdowns

What is fascinating to me is the fact that for the 35-and-under household group, median net worth is only $9,300.  That is all it takes to have a higher net worth than half of people in the same demographic.  It’s insane.  Short of catastrophic health problems or unexpected tragedy, the only reason someone should have a net worth that low by 35, a full 17 years after they entered the work force, is because they spend too much money.  This is a cultural problem.  Thriftiness, self-sufficiency, and independence are not valued and taught as they once were.   

Household Net Worth Survey of Consumer Finances Federal Reserve 2010

Household Net Worth Survey of Consumer Finances Federal Reserve 2010


Source of Household Income By Demographic

Now, let’s look at the source of income based on distribution of net worth percentile.  No surprises here.  Back in 2007, nearly 47¢ out of every dollar in the top 10% of income comes from either interest, dividends, business income, farm income, self-employment income, and capital gains.  In the bottom 25% of income, that is only 2¢ out of every dollar.  Fast forward to 2010 and the figure had fallen to 35¢ out of every dollar, mostly the result of lower capital gains on financial assets, such as stocks, which were hit in value.

Looking at it another way, back in 2007, the bottom 25% generate nearly 80¢ out of every dollar by selling their time.  In the top 10%, only 46.2¢ of every dollar is generated this way.  In 2010, the figures were 76¢ and 56¢, respectively.

Source of Household Income By Percentile of Net Worth

Source of Household Income By Percentile of Net Worth

Here is another interesting find … as per every piece of research on the rich, median net worth for those who are self-employed is vastly higher than for those who work for someone else.  In fact, the median self-employed person typically had $5 in net worth for every $1 in net worth belonging to those who worked for someone else.  That is a massive difference.  If you have the talent to run a business – and many people do not – the rewards can be enormous.  If you don’t, you will probably lose everything and end up broke.

Also, the median net worth to rank in the top 10% of households is $1,864,100.  Common sense and basic math tells you that if this is the figure it takes to have more than half the people in the top 10%, that is the cut-off entry point for the top 5% of net worth.  In other words, if you have $1,864,100 or more, you are richer than 95 out of every 100 households, but we already discussed that figure.

People Who Work For Themselves Can Make More Money

People Who Work For Themselves Can Make More Money

Then, you see the insane part of it all … at least, if you understand compounding.  Roughly 9 out of 10 young people 35 and younger don’t have a stock investment account.  At the very moment in life when time is at its statistical greatest, when stocks and long-term investments have their most value, they are completely neglected.

9 out of 10 Young People Don't Invest in Stocks

9 out of 10 Young People Don't Invest in Stocks

 In any event, the report is full of great information.  I am going to be studying it sometime in the next few days.  The composition and balances of debts are particularly interesting.

  • Kyle Koller

    Fantastic chart. Although it is kind of depressing. The medium houshold net income is only $77,300? That seems absurdly low. Even the “mean” of $498,800 seems pretty low considering that home equity is factored into the equation. Fascinating chart.

  • Jack

    Just to pick nits (but it is a nit that really bothers me), there is no MEAN for such distributions, since a MEAN implies a distribution that is approximately Gaussian. Obviously, the distribution of income and net worth within a quintile CANNOT be Gaussian, such a distribution CANNOT have a MEAN.

  • nothing

    Re: Jack

    Any distribution can have a mean, it does not have to be guassian. Pick any set of numbers and compute the mean.

    If a distribution is guassian, the median and the mean will be the same, as can be seen from this data, they are not.

  • Strategic1

    Very good overview, but I think the net worth of the under 35s may less reflect a lack of virtue, and more reflect the enormous costs of education.
    I know that I was 25 before my net worth moved from negative to positive, because of the large amount of college loans I needed to repay. Shortly thereafter, though, my total assets soared.
    I am pleased that even though I am still in the 35-44 category (I am 38), my net worth is well above the median of all age categories, and resembles the mean of someone considerably older than myself.
    In my case, this has been achieved by a combination of thrift over years coupled with some good investment decisions (including refusing to buy real estate in the 2004-2007 period, when I had the capital and could not justify the prices, and selling equities in the spring of 2007, when it became clear that there were major dislocations in the financial markets – but before Bear Stearns’ hedge funds blew up).

  • fishmonster

    These are interesting statistics and cause one to think what we need to do in America to increase everyone’s net worth. I agree the high cost of education may be a causal factor for individuals less than thirty-five. Another factor may be our society’s impetus for instant gratification. I would think relying upon credit cards is another factor. Growing up my parents taught me or told me I could not purchase something until I had the money. It was good advice and it has been a good thing for me.

  • Terry Pratt

    This part of the post surprised me: “Short of catastrophic health problems or unexpected tragedy, the only reason someone should have a net worth that low by 35, a full 17 years
    after they entered the work force, is because they spend too much money.”

    How about if someone earns minimum wage or very close to minimum…and lives in a higher-cost area paying market rents? (i.e. not living with parents and getting cheap or free room and board) Oh, and I spent seven years working my way through an undergraduate degree part-time, so I didn’t have any money to save and invest for those seven years because the earnings were paying for school expenses.

    My highest lifetime wage is $8.50 per hour, and the most I have earned in a year is $17,000 – and that was after 35, so I doubt I’ve spent too much money.

    • http://www.joshuakennon.com/ Joshua Kennon

      Yes, even in those conditions, $9,300 should have been exceeded. A mathematical example might help.

      To reach a $9,300 net worth by 35, a full 17 years after entering the work force, would have required doing nothing more than saving $1.08 per day and sticking it in savings bonds, CD’s, or money market accounts earning 4% (right now, rates aren’t that high, but they were much higher in the past at the beginning of the period so it would have averaged out in the long-run). If the money had been, instead, placed in a low-cost or free dividend reinvestment program for a blue chip stock, such as Exxon Mobil or Johnson & Johnson, it would have taken only 63¢ per day over that period to reach that point.

      The figures are actually even lower than that because at many companies, such as Wal-Mart, offer incentives to buy an ownership stake. The last time I checked was two years ago, but at the time, an employee of the retail giant could buy shares through payroll deductions, and up to a certain limit, get an extra 15% of whatever they bought added to their investment account for free (e.g., you buy 100 shares, Wal-Mart kicks in 15 as a bonus). I’m not sure if that particular plan is still in place, but many large companies do it if you read through the HR disclosures. In cases like that, you would have had to save less than 50¢ per day.

      The bigger issue, the one underlying your question, is a valid one. When I read it, here is how my mind immediately recast the issue, to give you an idea of how I think in terms of cash generators:

      “How about if someone spends 17 years in the workforce after becoming an adult, generates cash by selling his time for only $7.25 per hour, and chooses to live in a higher cost area with above average rents?”

      In such a situation, the person continually chooses to live in an area they cannot afford. It doesn’t matter if your family is there, it doesn’t matter if you are familiar with it, if you can’t afford it, you can’t afford it. Period. You cannot sacrifice your entire life being a slave to money simply because you want to live beyond your means (and that is what remaining in such an area is for a person in that situation).

      But beyond that, to the really important thing: If you are still trying to generate cash by selling a unit of your time (one hour) for $7.25 pre-tax, and you have’t been able to increase that rate by acquiring skills that are highly in demand (e.g., someone graduating from a regular state school with a degree in Petroleum engineering is going to earn an average of $54.30 per unit of time (one hour) after being in the workforce for awhile), there is something very, very wrong. Seventeen years. Seventeen years. If after seventeen years, you haven’t increased the price you can charge for selling your time beyond what a teenager can earn getting a summer job, it’s time to find something else to sell besides time. I’ve said it before, but it is worth repeating: Ray Kroc sold hamburgers. Bill Gates sold software. Warren Buffett sold investment management services.

      What is going to change if you keep doing what you’ve always done? If your time isn’t worth enough to other people (which is what “the market” is – it’s just people bidding on services and products they need or desire) to give you the lifestyle you want, change the product. Stop selling time. Or, if you insist of selling time, change the skill set so you can charge more per hour.

      It is a coldly, rational, non-emotional calculation. It is that simple. Feelings shouldn’t be involved at all. For two decades, you’ve been selling a product that can’t meet your needs or wants. Time to change the product, or update the product so you can charge more for it. The fact that your product needs replacing or upgrading doesn’t make you a failure. It doesn’t mean you aren’t valuable as a human. It’s purely an economic exchange based on willing parties. Give people what they want and do it at a price that leaves surplus for yourself. That’s the entire game … and it is a game. It’s amazing how much easier generating cash is when you treat the entire thing like a challenge or a real-world competitive sport.

  • http://www.facebook.com/people/Jerry-Bennett/100002060309188 Jerry Bennett

    When combined, the largest expense and burden for most people I wpuld have to say are:
    sales taxes, car taxes, property taxes, SS taxes, medicare taxes and payroll taxes and capital gains taxes.

    • jb1907

      There is no sales tax on real food, not every has a car tax unless you mean gasoline taxes and property taxes are controllable by the type of house you buy. Payroll taxes/SS are the same for everyone at a fixed rate.

  • msb29

    Although Table 6 shows just 10% of families under 35 do not have ordinary (presumably taxable) stock accounts, 41% are invested in retirement accounts, the vast majority of which are heavily weighted in equities.