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.
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.