With rising wages for the entire spectrum of workers, the professional faultfinders have had to find something else to complain about. They seem to have found it in the wide disparity in net worth. After all, 90% of the population has only 25% of the wealth (net worth), while 10% has 75%. How unfair is that? We agree, on the surface, it seems a small number of people are leading a decent life and the rest has bupkis. A closer look, however, might lead to a different conclusion.
First, it is good to renumber how we calculate wealth, Assets-liabilities=Net worth or wealth. What is important to realize is in many cases net worth has little or nothing to do with income. It has everything to do with what we have left after we deduct what we owe. For instance, X earns $50,000 a year, but rents, owns a fully paid for a clunker and pay all bills in full on time. X has some savings and contributes to an employer-sponsored retirement plan. These savings total approx. $10,000. With no debt that amount constitutes X’s net worth. Y earns $100,000 a year, has a $500,000 residence with a $400,000 mortgage, is paying off a $50,000 BMW over 5yrs and has $25,000 in student debt. With the payments required Y has put aside only $5,000. On paper X has more wealth than the deeply underwater Y. The later actually has a negative net worth of well over $400,000. Yet, who do you think appears wealthier? Early on in life, we obtain many of the good things in life by borrowing. As our life goes on many of us pay down our debt, as our assets such as our homes, retirement and savings accounts, investments, and maybe ownership in a business gain in value. Our net worth changes from negative to positive. This accounts for much of the wealth disparity between households. 20-35 olds average net worth is $100.800 and the 52-70 group’s 1,210,100. Of course, some simply continue to borrow against any appreciated assets and never get positive which drags down both group averages.Continue reading