The Worth of “Net Worth”

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.

So age and good habits more than income determine net worth. Bad financial habits can give one the high life for a while ending up with no real wealth. Just something as simple as paying your credit cards on time can lead to a huge difference in eventual wealth. Think about it, how many people would choose to pay an additional 18+% tax on most everything you buy? Yet that is exactly what you do when you run a credit card balance. If you instead invested what you paid in interest in say an S&P index fund, it alone could be the difference between negative net worth and one that’s positive. Saving and investing in your own business or someone else’s has always been a path to higher net worth. Thrift, risk-taking, and just plain hard work are great contributors to one’s net worth. Yet, there are those who get a credit card limit raise or lower interest rates and take on even more debt. Instant gratification for them is more important than some possible long run good. After all, they can point to the “Great” economist John Maynard Keynes who informed us, “in the long run we’re all dead.”

Now some of the Democratic Presidential Contenders want to tax wealth because they say it’s unfair so few have so much of it. Of course, they say they mean to tax only the top 1%. That’s exactly what we were told in 1913 about the income tax. If you’re not in the 1% and still sending the government big bucks, you know where this is headed. Forgoing instant gratification in order to acquire assets or risking time and capital to build a business are to be rewarded by having the fruits of your endeavors taken from you and given to others. Yes, your savings and time created jobs and added to your community but as President Obama has informed us, “you didn’t build that.” and he questioned how much you actually need. This now seems to be the mantra of the whole Democratic Party.

Now it isn’t that the government is currently very helpful to savers. Far from it. Since “the Great Recession,” the Federal Reserve has maintained a very low-interest policy. This seems to be backed at every level of government. President Trump wants even lower rates. The idea behind this is to force investors into riskier assets such as stocks or real estate, raising their value. As people see their portfolios rise in value they’ll feel richer and spend more. It’s called the “wealth effect”. This will goose the economy to higher levels and we’ll all be better off. Well, while we’ve implemented this policy we’ve had a long but abnormally weak economic expansion. The ones that really got the most benefit were those that already had wealth. They’ve seen the stock market and other assets soar in value. Small savers have received zilch on their money. It seems the height of derangement to complain the wealthy have become wealthier than others when the government’s policy directly added to the gap. You can’t even look aboard for relatively safe returns. Places like the European Union you have to pay the government borrowers to take your money.

The plan seems to be to penalize good habits such as thrift and industry. As we have seen, generally our net worth grows with age, so we are going to nail the older Americans. Take from their success in order to give it to others that didn’t build anything. Not a winning strategy to win an election as older folks vote or more importantly, build a nation.

Logic in government, while never a strong suit, has been taking an even greater beating lately. As we have seen, good financial habits lead to larger individual wealth. One would think the Federal Government would at least attempt to practice them. One would be wrong. It seems what is called “Modern Monetary Theory” (MMT) has taken hold in Washington. It postulates as long as interest rates are low and people are willing to lend to us we can borrow to provide the things we “desperately need.” After all, so long as we borrow only in our own currency, we can print what we need to pay it off. Sounds like someone offered more credit at a lower rate and thinks it’s great to spend more . You have to realize this works for people or governments right up until the moment it doesn’t. Then it’s too late. Our recent budget deal agreed on by both our major parties, wildly increases our future debt. It shows us how far down this road we’ve traveled. Why are these obviously bad ideas gaining so much currency? Where has common sense gone?

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