Edward Wolff, a professor of economics at NYU put together a really shocking median net worth chart over time in 2013 dollars I wanted to share with everybody. The main takeaways are:
1) The median net worth of middle class households has dropped by a whopping 44% since 2007 and has not recovered after the worst was over in 2010.
2) The median household today is 6% poorer than their parents were in 1969.
3) There have been periods of income declines before from 1990-1995, with large rebounds over the next 10 years.
MEDIAN NET WORTH ANALYSIS
Why No Rebound?
The main culprit for the median household not being able to recover since 2007 has to do with taking on too much household debt. I have a couple friends who simply walked away from their mortgages in California back in 2010 because they were so underwater on homes that were so far out of the city center. I can’t really blame them since California is one of the 12 non-recourse states that lets you default on your mortgage without the banks getting to go after your other assets.
If everybody was able to hold on to their property, I’m pretty sure the 2013 bar chart above would look much higher since so many asset classes have rebounded since the 2009-2010 lows. But those people who sold at the bottom probably didn’t get back in quick enough due to liquidity issues or tremendous cynicism towards real estate and stocks. Lesson learned: don’t buy property you can’t afford based on realistic dire scenarios e.g. two years without a job.
I’m personally on a mission to pay off my rental property mortgage I first assumed in 2003. I thought I’d be done with this bad boy in 10 years, but I was wrong. I refinanced the property multiple times and I’m getting sick of the interest payments at 3.375%. In comparison, the 10-year bond yield is under 2.3%, while the best 5-7 year CD I can find is no greater than 2.4%. As a result, I’m fine with using proceeds to pay off the mortgage.
Were Our Parents Really Better Off?
It’s hard to say. My parents were in their mid-20s in 1969. The Vietnam War was full blown, so 1969 was definitely not a time of peace and prosperity. I know they were able to go to college and get good jobs working in the foreign service after the war ended in 1975. They were squarely middle class citizens.
When I was in my mid-20s, I was thinking about giving finance up to go back to Hawaii and plant mango trees. I had saved up several hundred thousand bucks through a lucky stock pick and aggressive savings. And I was burnt out and wanted a career change. But a move to San Francisco elongated my time in finance another 10 years until I left in 2012 at the age of 34. My parents and I were both able to afford a car, an apartment, and go to graduate school on our own dime, so I think our comparison is a wash.
Although net worth numbers are stagnant according to the chart, there’s at least been a lot of socioeconomic improvement over the past 45 years for women, gays, and minorities. There’s more freedom for anybody to be or do anything now than in the past. Furthermore, the ability to get very wealthy, very quickly is also greater thanks to technology.
I’m curious to know whether you are wealthier than your parents were at the same age.
The Economy Is Cyclical
If history is any guide, the median household net worth should tick back up beyond 2013. However, the fact remains that income growth has performed poorly compared to the cost growth of many important items such as tuition, food, and housing. Furthermore, you’ll probably never see tuition and housing return to the costs seen in 1969 like net worth has. At least we can gorge ourselves on cheap electronic goods!
The good thing about our economy so far is that the long term trajectory is always up and to the right. If we hold onto our S&P 500 index funds and homes for a long enough period of time, chances are extremely high we will come out ahead. It’s when we panic sell during downturns that we get in trouble.
My fear is that those who just started investing since 2009-2010 are overly allocated in stocks and property. They’ve never seen a downturn, and therefore don’t really know what their risk tolerance is. Having an appropriate net worth allocation is important to grow your wealth during good times, and keep your sanity during bad times.
EVERYBODY IS FALLING BEHIND THE RICH
One of my wealthy friends is spending $5 million remodeling his enormous 8,000+, Victorian home he purchased in 2004 for $5.25 million. I told him he was nuts spending that much money during our tennis match and he said “he’ll be alright.”
I remember thinking to myself years ago, maybe one day I could potentially afford a $5.25 million home if I made it big as an entrepreneur. I’ll obviously never be able to afford that price as an average banker. But very recently, his 4,800 square foot neighbor sold for a whopping $11 million, making my friend’s house worth probably $16 – 18 million dollars!
My relatively piddly earnings and investments will NEVER catch up to that type of asset growth. It’s not like I need an eight bedroom mansion in Pacific Heights. I’m just illustrating a point that where I once had hope, I’m now priced out, probably forever. My only hope is that Golden Gate Heights gets “discovered” and becomes the next Pacific Heights in 15 years.
Everything is relative when it comes to personal finance. For those of you who have much greater net worths, you should be grateful and cognizant there are plenty of households who are not getting ahead. For those of you who mirror the data in the chart or come up short, you must make sacrifices in order to get ahead. If you’re doing what everybody else is doing, you’re going to end up like everybody else.
Wealth Building Recommendation
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Updated for 2017 and beyond.
About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.