Wall Street Journal Reviews the Balance Sheet of the Wealthy and Upper Middle Class

//Wall Street Journal Reviews the Balance Sheet of the Wealthy and Upper Middle Class

Wall Street Journal Reviews the Balance Sheet of the Wealthy and Upper Middle Class

A few years back I wrote a post highlighting the common traits I often saw on high net worth balance sheets on a weekly basis at my job.  It wasn’t scientific at all, but rather, anecdotal similarities I saw working as back office support in a financial and estate planning office.  Notwithstanding my 200 word post on the topic, Wall Street Journal just highlighted some amazing statistics from a recent study titled, “Household Wealth Trends in the United States 1962 – 2013.”  I didn’t read the whole study, so I am relying just on the Wall Street Journal Article, “How to Save Like the Rich and the Upper Middle Class (Hint: It’s not in your house).”

The Goal is NOT to Have Your Main Residence as Your Biggest Asset by Percentage

Again, I didn’t read the actual study, but the WSJ provides us with the following breakdown:

Asset Mix

The top 1% of Americans–who have a net worth of more than $7.8 million–hold nearly half their gross assets in unincorporated business equity and other real estate. They have an additional 27% of wealth in financial securities, such as corporate stock, mutual funds and personal trusts.

But typically, little of their wealth is tied up in their personal residences.

For the middle class, the picture could hardly be more different. Nearly two-thirds of their wealth is in their residences. It’s easy to see why: Imagine a young family with a $200,000 home, a $150,000 mortgage, and $50,000 in cash and retirement accounts. That’s not a family that’s putting their bottom dollar into their home. But that family would have 80% of their gross assets in their principal residence.

The upper-middle class has a very different financial profile as well. The “next 19%”–those with more than $400,000 in assets, but less than $7.8 million–have less tied up in business equity and financial securities than the rich, and less tied up in housing than the middle class. But comparatively, they have more of their wealth–hundreds of thousands to millions of dollars–in their pension accounts (which includes accounts like IRAs, Keogh plans, 401(k)s, defined contribution pension plans).

If I were to pull an easy lesson from the data it would be that you aren’t going to move from the middle class to the upper middle class in terms of net worth and these percentages if you over extend yourself on home ownership. If I had to hypothesize (and I have to since this my blog) there are three reasons why this is presumably true:

  1. Your home grows at a slower rate than the market – Every article you read is that the normal real estate market grows at 3% while over the long term equity markets grow at 6 to 7%.
  2. Higher the value of the home the higher the upkeep of the home – Not sure how it works around the rest of the country but in New York property taxes are directly tied to the assessed value on the home.  The higher the value of the home in relation to your income the higher your taxes (also in relation to your income) are going to be.
  3. Lastly, your main residence is a money drain.  The larger your main residence is in relation to your total net worth the more you are likely to justify additional upgrades.

This isn’t about buying or not buying a nice or even an expensive home.  It is about not over-extending yourself so that you can build other portions of your net worth.  If you are making $500K net go ahead and buy that $3 million dollar home…but if you are making $120,000 a year there is no way you are going to be able to build up your balance sheet if you buy a $1,000,000 home.

 

By | 2015-01-27T19:33:22+00:00 January 12th, 2015|Random|6 Comments

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Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

6 Comments

  1. Lazy Man and Money January 12, 2015 at 10:42 am - Reply

    I didn’t read the study or the WSJ article, just what you’ve written here.

    Having said that, this strikes me more as correlation rather than causation. Someone with a billion dollar net worth might be fine in a 10-20 million dollar primary residence that is only 1-2%. Someone with $100 million dollar net worth might be fine in a $3-6 million dollar home that is only 3-6%.

    It would be absurd for this group to average spending 63% of that whopping amount of money on their primary residence.

    The next 19% (upper middle) is where you’d expect the primary residence percentage to be, somewhere between the top 1% and the middle-class 60%.

    I’m not sure that I buy your first hypothesis. That isn’t to say that it isn’t true, but if you look at the richest 1% their largest holding does include real estate. It’s a shame that isn’t broken down more, but I’m not sure we can say that real estate grows faster as long as it isn’t your primary residence.

    I think #3 probably makes the most sense. It’s true. We’ve made some improvements to our home for our convenience and happiness. They were tens of thousands of dollars that we didn’t invest in the stock market or another business.

    I’m not very happy with that mentality, because it essentially leads to a road where everyone lives in trailer parks, drives old broken down cars, and dines on Ramen noodles. It doesn’t strike me that the top 1% of people are doing those things in general.

    In the end, I think the winning formula is to find a good balance of having adequate comfort for you and saving enough money that you can put it into investments that can grow to be millions over time.

    • Evan January 12, 2015 at 10:53 am - Reply

      I agree with your first point, insofar as, eventually enough is enough in terms of housing so there is a natural drop off. That is why I didn’t really hypothesize on the move from 19% to 1%, rather really focused in on the move from middle 60% to 19%.

      I don’t think other types of properties grow faster, but they are providing an income. That same $500K property would be providing some type of income which, as long as it isn’t be consumed, is used to invest (either back into the property or in other vehicles).

      “I’m not very happy with that mentality, because it essentially leads to a road where everyone lives in trailer parks, drives old broken down cars, and dines on Ramen noodles. It doesn’t strike me that the top 1% of people are doing those things in general.”
      – There is a difference between Ramen noodles and broken down cars vs buying a main residence (which provides no income) that takes 49% of your after tax income to maintain.

      I think there is enough evidence that says a good portion of people that move from the middle 60% to that top 19% are slowing their consumption just a bit (think Millionaire next door type stuff not MMM).

  2. Paul N January 12, 2015 at 12:12 pm - Reply

    I’m with responder 1 on this. Just because I am a billionaire (not me, just hypothesizing here) I won’t try to purchase the CN tower and try to renovate it for a cool pad to bring the ladies home to impress them. I don’t see these particular stats doing much more then reporting outcomes that really are a result of various stages in the average persons lives.

    However… I do see the point you are trying to make which is important. There are a lot of mitigating factors outside of this. I don’t think that ones house value choices (and how they actually got the property) will as a rule limit their long term financial success. I really don’t believe renting saves you a lot more money over purchasing a home when you tally up ALL the costs associated with both forms of living accommodations. For me personally I only see myself saving the property taxes I pay a year vs. renting somewhere.

    • Evan January 12, 2015 at 12:16 pm - Reply

      Paul, you and LM, are focusing in on the 19% to that 1% where I am focusing on the jump from sub $400K net worth to above $400K net worth.

      ” I don’t think that ones house value choices (and how they actually got the property) will as a rule limit their long term financial success. I really don’t believe renting saves you a lot more money over purchasing a home when you tally up ALL the costs associated with both forms of living accommodations. ”
      – The choice/discussion isn’t between renting and buying. It is the choice between buying home A and home B. If home A costs you 10%+ lower to own and maintain wouldn’t that mean you have more to invest and grow?

  3. Paul N January 12, 2015 at 12:59 pm - Reply

    Hey Evan,

    That is why I wrote – “I see the point you are trying to make”. I live in way to big of a house for me theoretically. But I forgo other things that maybe other families can’t do without that are not important to me. You are 100% correct adding even 10% more a year will give you a huge benefit 35 years later.

    Again housing is a very opportunistic commodity. Maybe you run a home business in it, maybe you need space for 2 or 3 cars that you would have to pay several hundred a month additionally at a smaller residence. If I would have purchased the house I wanted originally really only about 14 years ago, I would have paid less than $100,000 more then I did for the one I purchased a few blocks away. I would be sitting on a $650,000 gain in value vs. only a $300,000 one…

    So it also depends on being a little bit smart when you purchase your house. Your net worth could increase substantially particularly if you are not an idiot and get in a bidding war and overpay for a property. How do you think the red piece of pie you have in your pie chart got that big? “business and other real estate” Maybe their leveraged first home purchase became a partial or full rental? Then subsequently more after that? Maybe a second or third property. You really have to dissect the holdings and the path that got them to the point of your snapshot of stats IMO.

    I don’t think it’s the house size itself, its the overall choices surrounding it that determines final outcomes. Maybe that’s a better way to sum up my thought?

    • Evan January 12, 2015 at 4:57 pm - Reply

      We may be discussing the same point, but I don’t believe it to be house size, but rather house cost in relation to your income. It doesn’t matter if your home is 9,000 square feet, but if it takes up 70% of your after tax income I think you’d be hard pressed, on average, to move from the 60% to 19%. Are there outliers, of course!

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