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:
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:
- 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%.
- 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.
- 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.