The_median_and_average_American_net_worth
00:00:00.000 | Hello, everybody. It's Sam from the Financial Samurai podcast. And in this episode, I want to talk about the average American household, because we have done it.
00:00:09.000 | According to the Federal Reserve's Consumer Finance Survey for 2022, it comes out every three years, and the 22 survey came out this year in 2023.
00:00:19.000 | The average American household is now a millionaire. We're talking a net worth of 1.06 million. Pretty good. And that's up from an average household net worth of 868,000 in 2019.
00:00:35.000 | So that's a 23% increase. Even though a bear market wiped away about 20% of public shareholder wealth in 2022, we clawed a lot of our way back in 2023. We're not back to the high.
00:00:47.000 | So okay, if we were to have real time stats on the average American household net worth in 2023, October 27, it would probably be a little bit less, maybe 5 to 10% less, maybe spot on at a million dollars.
00:01:02.000 | I know some of you all are thinking, "Come on now, we're not average. We're above average. So clearly we have an even higher net worth."
00:01:10.000 | Well, then I know some of you all are thinking, "Come on now, the average American household net worth is not reflective of the average American."
00:01:19.000 | So this is an interesting case of using the word average and what it really means, because average is the mean.
00:01:25.000 | And really what we're talking about is the median. The median is more reflective of the average American household. Isn't that funny how words have different meanings?
00:01:35.000 | Well, let's look at the median number. According to the Federal Reserve Consumer Finance Survey, the median American household net worth was only $192,900.
00:01:46.000 | Now, $192,900 is still a great net worth figure. That's 37% higher than it was in 2019. So that is huge progress, folks, over three years.
00:01:59.000 | And I couldn't be prouder of the median American. However, it is 80% lower than the average American household net worth of $1.06 million.
00:02:10.000 | So why? Why is there such a huge difference between the average and the median?
00:02:16.000 | Well, the top 10% wealthiest American households have an average net worth of $6.63 million as of 2022.
00:02:25.000 | Meanwhile, households in the bottom 10% had a mean net worth of $5,300 in 2022. So mean average means the same thing.
00:02:36.000 | So we remove the top 10% and the bottom 10%, we come up with an average household net worth closer to probably around $500,000, which is still pretty good.
00:02:48.000 | And just to recap, average net worth is calculated by adding up the net worth of all American households and then dividing by the number of households,
00:02:57.000 | while the median net worth is calculated by finding the middle net worth of all net worths in the data set.
00:03:04.000 | So what are the three main reasons for why there was a huge boost in the average and the median Americans net worth?
00:03:12.000 | Well, reason number one is the strong housing market. For families that own home, the median net housing value rose from $139,100 in 2019 to $201,000 in 2022.
00:03:28.000 | Meanwhile, the home ownership rate increased slightly to 66.1%. The median net housing value is equal to the value of a home minus home secured debt.
00:03:39.000 | So, folks, I've been talking about this for a long time now. If you see yourself living in one place for five years or longer, I would try to get neutral real estate by owning your primary residence.
00:03:51.000 | If you are neutral real estate, you're rising up and down with the real estate market. And you will also neutralize the negative effect inflation has on you because your mortgage will be fixed.
00:04:04.000 | Or if you pay cash, which is rare for first time homebuyers, you will not be facing ever rising rents and ever rising home prices.
00:04:13.000 | We're currently in a lull in the real estate market given mortgage rates are so high. And this is why I think now is a good time to look for deals, especially during the winter.
00:04:23.000 | The demand is much softer and you can find deals out there if you look. However, you also need to buy responsibly. And I think you should follow my 30/30, 3 to 5 home buying rule.
00:04:36.000 | And I'll link that rule in the show notes. The thing with real estate is that it forces you to save because it forces you to pay your mortgage and a percentage of your mortgage goes to paying down principal.
00:04:48.000 | So if you are an undisciplined saver, you like to YOLO and spend it on whatever it is that doesn't help you build net worth, owning a home will force you to save.
00:04:57.000 | And that adds up over a 10 year period because every single year, the percentage of your mortgage payment that goes to paying down debt goes up and you gain more home equity.
00:05:10.000 | Once you've been able to replenish your funds, I would buy another home or buy a rental property and then live in that new home and rent out your old home.
00:05:20.000 | This is one of the easiest ways people can build a rental property portfolio to support their retirement over a 20, 30, 40 year career.
00:05:28.000 | You can buy one rental property or one property every 3 to 10 years and you could have 3 to 6 properties by the time you're 60 years old.
00:05:37.000 | Inflation and the government are two forces that are too powerful to combat and home ownership. Real estate is one of the biggest reasons why there are more American millionaires.
00:05:49.000 | Another reason for a boost in the average or median American's net worth is increased participation in retirement plans.
00:05:58.000 | You heard in a previous podcast episode that most small business owners don't offer 401k plans. It's too expensive. It takes too much time.
00:06:07.000 | If we can increase the participation rate in retirement plans, we increase the chances of more Americans gaining more wealth because about 70% of the time, the stock market goes up.
00:06:19.000 | Of course, there are bear markets as we saw for a couple months in early 2020 and then also all year in 2022.
00:06:27.000 | But most of the time, 70% of the time, the stock market goes up. So if you're participating in that, more people will participate in higher public equity growth.
00:06:37.000 | So please, if you have a 401k plan, try to max it out. It's $22,500 for employees in 2023. It might go up next year, but usually goes up $500 to $1,000 every couple years.
00:06:50.000 | So try to max that out. If you don't have that, contribute to your IRA or your Roth IRA. Or if you have a small business, contribute to your SEP IRA or your solo 401k plan.
00:07:01.000 | Participating in the max for your tax advantaged accounts is kind of the least you can do here at Financial Samurai.
00:07:09.000 | I want you to max that out and then start aggressively contributing to your taxable investment portfolios.
00:07:15.000 | Because it is your taxable investment portfolios and your rental property portfolios and all other taxable investments that are going to generate enough passive income.
00:07:24.000 | So you can one day break free from a job you might no longer enjoy. You don't have to work until 60 if you can build a large enough taxable investment portfolio.
00:07:33.000 | And then finally, the main reason why the average and median American net worth has gone up is because of increased stock market participation.
00:07:42.000 | So that goes hand in hand with increased participation rate in retirement plans.
00:07:46.000 | Roughly 61% of all Americans own stocks in 2023, according to Gallup.
00:07:53.000 | The higher the income and net worth, the greater the percentage of Americans who own stocks.
00:07:58.000 | As of 2022, the top 10% of Americans owned an average of $969,000 in stocks.
00:08:06.000 | The next 40% owned on average $132,000 in stocks. And for the bottom half of families, it was just under $54,000.
00:08:17.000 | And if you're curious about what percentage of Americans own a home, as of 2022, the latest statistics, 65.8% of Americans own a home.
00:08:28.000 | And for a little bit more detail, about 27% of Americans live in a condo or HOA property, while 58.4% of the housing units were owner occupied.
00:08:41.000 | And also a fun statistic to know is that about 42% of homeowners don't have a mortgage.
00:08:47.000 | So all this talk about higher mortgage rates crushing the housing market when lending standards have been tight since 2012, when 42% of homeowners don't have a mortgage,
00:08:58.000 | and when 80 plus percent of homeowners with a mortgage have a mortgage rate below 5%, it's probably not going to get crushed.
00:09:06.000 | The housing market is softer now, for sure. You can definitely find deals depending where you are, down 5% up to 20%, also depending on the price point.
00:09:16.000 | But I don't think it's going to get crushed. And I think people who have been waiting to buy a home should be intently looking right now and over the next 12 months.
00:09:26.000 | Here is the most interesting data point for why the average and the median American net worth is higher over the past three years from 2019 to 2022.
00:09:37.000 | And that is 20% of all families, 14% of families in the bottom half of the usual income distribution, and nearly half of families in the top decile of the usual income distribution, own a privately held business.
00:09:54.000 | Families that own businesses had higher income and wealth than those that did not. Further, a family's income and wealth increased with the number of employees in their business.
00:10:05.000 | I wish the survey would write more succinctly, but there you have it. The people who own businesses saw an increase in level of wealth.
00:10:14.000 | So when you own a business, you build wealth through the income that you pay yourself, and also through the equity value that you grow.
00:10:22.000 | So businesses are valued based on a multiple of revenue, of operating profits, or of net profits. And so let's say you boost your net profits from $100,000 to $200,000.
00:10:35.000 | Well, is the value of your business, if it's based on a multiple of net profits, $200,000 now? Well, no. If the multiple is, let's say, 5x.
00:10:45.000 | So at $100,000 net profit, your firm was valued at $500,000. But if you doubled your profit from $100,000 to $200,000, your business is now worth a million. Not bad, right?
00:10:58.000 | So that is the power of business ownership. And this is why I've encouraged folks since 2009 to try to start side businesses.
00:11:07.000 | Go venture and try to start an online business. It's cheap, it's easy, it's free, and you can iterate as you go along.
00:11:15.000 | In addition, one of the best reasons to own an online business is because it can't shut down.
00:11:22.000 | As we saw during the pandemic, the government forced restaurants and other in-person businesses to shut down, and that really hurt the value of these businesses.
00:11:33.000 | So an online business, where it can't be shut down, can continue to operate, I think is becoming more and more valuable.
00:11:40.000 | Of course, there's going to be cycles of valuations, but private businesses, online businesses, is, I think, one of the best ways to grow your wealth.
00:11:51.000 | Of course, there are many, many private growth businesses out there, and you can't invest in all of them.
00:11:56.000 | And some of them, probably most of them, will not make you a lot of money, which is why you need to invest in, I think, a fund, a portfolio that does invest in private businesses.
00:12:08.000 | I think it's worth listening to a previous episode with Ben Miller and his Fundrise Innovation Fund, because this fund is investing in artificial intelligence, prop tech, fintech, and more.
00:12:19.000 | And I think it's pretty interesting. I'm bullish on AI over the next 20 years. It's probably a little bit hyped right now.
00:12:27.000 | Maybe valuations are a little bit too high right now. There's going to be some winners. There's going to be some losers, just like it always is when it comes to investing.
00:12:35.000 | But over a 10 to 20 year term, I don't want my kids asking me, "Hey, dad, how come you didn't work in AI or invest in AI near the beginning?"
00:12:45.000 | I don't want that to happen. And it's really clear to me that this is a positive long term trend.
00:12:51.000 | And also investing in AI is a way to hedge against your job getting eliminated by AI.
00:12:57.000 | So if you want to check out the Innovation Fund, go to financialsamurai.com/innovation.
00:13:07.000 | So if you're not a millionaire yet and you want to be a millionaire, well, it's clear from the Federal Reserve Consumer Finance Survey, you should try to get neutral housing by owning your primary residence.
00:13:17.000 | You should participate in your company retirement plans. You should invest in the stock market. And you should try to start your own business or invest in private businesses.
00:13:30.000 | Finally, here is a worthwhile goal to shoot for. And that is to shoot to become an average American.
00:13:38.000 | An average American has a net worth of $1.6 million. And we know the median age in America is about 39 years old.
00:13:47.000 | So if you want to have a net worth target to shoot for and to be average, then you can shoot to have a net worth of $1.06 million, inflation adjusted by the time you're 39 years old.
00:13:58.000 | Now, if you're above 39 years old or you're really close to 39 years old and you're nowhere near $1.06 million, don't worry.
00:14:07.000 | You can focus on what helps Americans and I think most people in the world build more wealth.
00:14:15.000 | You can always shoot for the median as well, which is about $193,000 at age 39.
00:14:21.000 | But do you want to be median or do you want to be average? Or do you really want to be average? Maybe you want to be above average.
00:14:29.000 | There are supposedly 22.7 million millionaires in America.
00:14:35.000 | So if you live in America, were born in America, are working in America, you have the greatest chance to become a millionaire out of any citizen in the world.
00:14:45.000 | Because the second most populous country with a number of millionaires is China.
00:14:51.000 | China has 6.2 million millionaires, but China's population is almost four times greater than America's population.
00:15:01.000 | So I say for Americans and those living in America and working in America, let's appreciate what we got.
00:15:07.000 | Let's take full advantage of our opportunities because goodness knows not everybody has a chance to be American or work in America.
00:15:16.000 | Thanks so much, everyone, for listening. If you enjoyed this episode, I'd love a positive review on Apple, Spotify or wherever you listen to this podcast.
00:15:24.000 | Also, don't forget to sign up for my free newsletter at FinancialSamurai.com/news.
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