The Finances of the Average American

Here's a piece I found that details the finances of the average (median numbers used) American. As you may know, the U.S. just hit the 300 million citizen benchmark, and MSN decided to look at the stats as of this milestone. The figures I want to highlight include:

Mr. and Mrs. Median's $46,326 in annual income is 32% higher than their mid-1960s counterparts, when adjusted for inflation, and 13% more than those at the median in the economic boom year of 1985. And thanks to ballooning real-estate values, average household net worth has increased even faster. The typical American household has a net worth of $465,970, up 83% from 1965, 60% from 1985 and 35% from 1995.

The fact is that in real terms, the Medians are doing great. After adjusting for inflation, Mr. Median makes 25% more than his father did 30 years ago. Mrs. Median is a lot more likely to work in the professional ranks than her mother was and to be paid about three times as much doing so. And though she still makes only 77% of what her male counterparts earn, this is up from 33% in 1965. They dote on the same number of children -- two -- but waited longer to have them, until both careers were well under way. They also pay less tax to the federal government and have 8% more purchasing power than they did 20 years ago and 5.7% more than they had just 10 years ago.

So basically, we're a lot better off now than we were then. However, the piece goes on to say that people are less happy now. Why? There's some speculation (not doing as well as they want to, having more choices shows them lots of things they can't afford, etc.) but no one really knows why.

I'm going to side-step the happiness issue and just comment on the financials. My thoughts:

1. The average American isn't making a fortune, but they aren't bad off (from an income standpoint) either. $46k per year is a respectable average. (Maybe not in New York City, but it sure is a good wage in the cornfields of Iowa.)

2. I'm surprised that the income/purchasing power is so much higher than previous generations. I would have guessed that it was up only slightly.

3. Decent net worth numbers, though those do have the value of homes in the figures. The issues here are: 1) home values may currently be over-stated and 2) many people (not me) advocate that net worth should be calculated without the value of your primary residence in the numbers.

4. We pay less tax to the federal government? Really? Does that mean we pay less tax overall? I doubt it.

Comments

[Duane Gran]

I wish the article would have compared the debt load carried over time. I suspect that Mr. and Mrs. Median have taken on an alarming amount of debt, which negates some of the advantages noted in the article.

[MrAtoZ]

That net worth figure of nearly $500k seems way high.
If you note the source, it's Moody's, and it says that figure is AVERAGE net worth, which of course gets skewed high by the Gates and Buffets of the world.

The Federal Reserve numbers for median household net worth for a 40-something are about $120k, you look at FMF's own Nov. 6 posting on median net worth in different age percentiles.

[Lord]

The truth is much less impressive. The main reason incomes are higher is that both work. With the median home worth $212k, the wealth figure is overstated as well. Taxes are lower but spending is not leading to the deficit.

[Terry]

I have a theory why people think they are worse off. It today's society, kids leave home expecting to start at, and continue, the lifestyle they were accustomed to growing up. In this instant gratification world, you certainly cant expect kids to want to "downgrade" when they get out on their own! (Ha)

Generally their parents spent more than they earned. Living in too big a house, driving new cars, going to expensive schools. When the kids got out on their own, they discover quickly how "hard" it is to keep up that lifestyle.

A few other comments on this article:

1. A house should counted in your Net Worth. It is a major asset. When I do my net worth, I count all my investment accts and house. I leave out cars and "things" I own which have very little liquid value.

2. I don't believe the net worth figure stated above. Maybe they forgot to apply liabilities? It would be nice if it were true....

[Val]

If you believe the inflation numbers (you know, the same ones that are used to determine social security payments) then I guess you can buy this argument. If not, check out shadowstats.com.

The only reason housing prices have gone up is monetary inflation of our purely fiat currency. This inflation has only been covered up by our ability to import cheap goods and export expensive services jobs.

My house is worth more now than it was previously and it certainly hasn't done me any good. Are you suggesting I take out a loan to tap into that equity? More interest payments, just what I need. And don't forget, equity doesn't even actually exist because as soon as the market drops that supposed equity just vanishes but guess what, you stil owe the money!

I'm not sure what a "typical" American household is but this whole story just wreaks.

[Margo]

I don't like counting your primary home in net worth - here's why:
If your home, like my parents, triples in value over a decade...so have all your neighbors! So the only way to realize the majority of that capital gain is to sell and move to a completely different metro area. How many of us would really want to leave our friends, neighbors, & communities in order to cash out the appreciation of our primary home? Besides, it's so hard to get an accurate estimate of the value of your home. Zillow admits to +/- 30% in its estimates.

Perhaps to show the value of paying down the mortgage you could consider the purchase price of the home as the asset value, and the principal remaining on the loan as the liability value? What do you all think?

[Terry]

I have to disagree. I calculate my Net Worth as what I could pocket in a relatively short time if I had to sell everything.

Your house should be part of your net worth - it is a major asset. I dont think it is a matter of "I dont want to sell my house", but what if I had to sell my house. However, I do think it is important to value the house correctly. It is easy to think your house is worth more than it is, so I keep mine on the low side based on what other houses have sold in the last year.

This brings up a good question - What should go into your net worth? I include:

1. Investment Accounts
2. Retirement Accounts
3. House equity
4. Other liquid investments

What I don't include:

1. Cars - I keep them forever. I guess it is ok to include the blue book value, I just choose not to.
2. Jewelry - guess I really should include them. Hard to value - maybe the insured value? But that is always inflated. (Plus it would not be good to sell my wife's wedding ring!)
3. Possessions (Furniture, Appliances, TVs, computers, etc) - Dont include. I am sure they are worth a good bit of money if I had a 'fire sale', but lets face it - we always think they are worth more than they are. In addition, they are not easy to sell.

[Duane Gran]

Whether you count your home as an asset depends on what stage of life you are in. While you still have a loan balance it makes sense to track it because certain financial planning hinges on having sufficient principal in your home. As Val points out, home appreciation doesn't add to your passive income if you don't plan on moving.

As a compromise I would track a home's value in your net worth statement until the loan is paid off and then keep it constant. The next stage in life where it matters will be when it comes to estate planning and working within the laws for the estate tax. At this point you will want to calculate your home in your net worth to understand the impact when it is deeded to your heirs.

[Susan]

The typical American household has a net worth of $465,970, up 83% from 1965, 60% from 1985 and 35% from 1995.

I would like to see the source (s) for this figure.

[FMF]

Click through the link at the top of the post for the source.

[Lisa]

I can think of two reason people would be less happy.

1-High level of stress. The modern world gives us more flexibility and choice but the old style was easier to follow.

2-Drop in reality vs. expectations.
Typically, your circumstances will go up over time (get a raise, better job, etc.) and your expectations go up too. As soon as you get a drop in your situation, the gap between expectations and reality widens up and makes you unhappy...even if you are better off than you were 5 years ago.