Having wealth is essential in order to weather financial hardships like an unexpected medical expense or a job loss. For many families, building wealth can be difficult or impossible when there are credit card bills, student loan debt, rent or mortgage payments due every month, with little or no money leftover to save and invest.
Wealth can be defined as a family's assets minus their liabilities. Your assets can include the money you have in your savings and checking accounts, your retirement savings or the home and/or car you own. Your liabilities are your debts, including a mortgage, car note, credit card balance and/or student loan debt.
In 2021, the total net worth of U.S. households grew as the and home prices surged. The total net worth of U.S. households increased 1.7% in the third quarter of 2021, according to a recent Federal Reserve Report.
However, not all U.S. households experienced gains in wealth through the stock market or real estate investments. Only about one-half of Americans have some type of investment in the market, typically through employer-sponsored retirement accounts like 401(k)s. Rising real estate prices coupled with stagnant wages are pushing many out of the housing market, making it increasingly difficult for families to build wealth.
The Aspen Institute recently released a report examining the barriers that low and middle income families face when building wealth. Below, Select digs into the reports findings on the types of assets that make up the wealth of families across the income spectrum, and we offer some advice on how you can get started building your own wealth.
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How assets are distributed across different wealth levels
Researchers at the Aspen Institute looked at Federal Reserve data from the 2019 Survey of Consumer Finances and found the kinds of assets households of different wealth levels hold.
First wealth decile (0-9.9%): car ($7,700) and checking/savings accounts ($1,250)
Second wealth decile (10-19.9%): car ($1,972) and checking/savings accounts ($500) (Note: The second decile households have lower asset values than first decile households because second decile families have less debt. As a result, the second decile households have a higher net worth.)
Third wealth decile (20-29.9%): car ($8,700) and checking/savings accounts ($1,500)
Fourth wealth decile (30-39.9%): car ($12,865), checking/savings accounts ($3,000), primary residence ($3,500)
Fifth wealth decile (40-49.9%): car ($13,000), checking/savings accounts ($3,695), primary residence ($95,000)
Sixth wealth decile (50-59.9%): car ($17,000), checking/savings accounts ($7,109), primary residence ($164,017), retirement accounts ($4,086)
Seventh wealth decile (60-69.9%): car ($18,874), checking/savings accounts ($12,000), primary residence ($200,000), retirement accounts ($14,000)
Eighth wealth decile (70-79.9%): car ($21,000), checking/savings accounts ($14,400), primary residence ($250,000), retirement accounts ($50,402)
Ninth wealth decile (80-89.9%): Car ($25,600), checking/savings accounts ($32,000), primary residence ($325,000), retirement accounts ($162,248), securities ($2,500)
Tenth wealth decile (90-100%): car ($34,296), checking/savings accounts ($80,000), primary residence ($600,000), retirement accounts ($600,000), securities ($120,000), other property ($30,000)
Why retirement accounts and home ownership are essential for wealth building
Homes and retirement accounts "are the first types of assets that the typical household begins to build beyond transaction accounts and vehicles, making them the entry point to wealth for many households with low or moderate incomes," the report states.
Ida Rademacher, executive director of financial security at The Aspen Institute, notes that intergenerational wealth, or wealth that's handed down from one generation to another, is typically held in real estate and other financial assets, that have the potential to appreciate in value over time.
However, many households, especially those considered to be low or middle income, don't have any home equity or retirement savings. Home equity only becomes a primary asset for households starting at the 30th wealth percentile. For the bottom 30%, wealth is held primarily in checking and savings accounts and cars.
Starting at the 50th percentile, households begin to have retirement accounts in addition to traditional assets like a checking and savings account, a car and a home. The median worth of assets held by a family between the 50th and 60th wealth percentile is around $192,000, with a mere $4,086 invested in retirement accounts.
It's not surprising that retirement savings are low, or even non-existent, for many low and middle income families: A 2021 Federal Reserve report found that more than a quarter of Americans had no retirement savings at all and 45% of respondents thought their retirement savings were not on track, or they weren't sure about the status of their savings.
Households in the very top wealth deciles (the top 20%) have financial assets that go beyond retirement accounts and real estate in their primary residence, including securities like stocks, bonds, investment funds and trusts. The top 10% have a median asset value of $145,000 invested in these securities and financial assets and $30,000 in a real estate property that's not their primary home.
For the top 10%, business equity also becomes a significant source of wealth. Of those in the top wealth decile, 40% hold equity in a business while only 2.5% of those in the bottom wealth decile hold business equity.
How to start building wealth if you don't stand to inherit it
While many Americans won't be lucky enough to receive an inheritance trust or own multiple real estate investments. Investing for retirement as early as possible is key to ensuring they have enough money to make ends meet in their non-working years. If you have an employer that offers a 401(k) or 403(b) with matching contributions, you should prioritize earning the match as you're essentially getting a 100% return on your investments.
Most employers typically match between 3% to 4% of your annual salary. If your employer doesn't offer matching contributions, consider opening an individual retirement account such as a traditional IRA or a Roth IRA. As of 2022, a Roth IRA is only available to single-filers who make less than $140,000 or married couples filing jointly making less than $214,000.
With a Roth IRA, individuals contribute after-tax dollars to their account and watch it grow tax-free. When you withdraw the cash at retirement, you won't have to pay any taxes on your investment gains. A Roth IRA is a good option for individuals who anticipate being in a higher tax bracket in retirement as investments are taxed up front and not later in life. The contribution limit for a Roth IRA is $6,000 or $7,000 for individuals who are above the age of 50.
A traditional IRA, unlike a Roth IRA, has no income limits. Individuals contribute money before taxes and pay income tax on their withdrawals in retirement. For some, depending on whether you're offered an employer-sponsored retirement plan, traditional IRA contributions are tax deductible, which means you'll owe less in taxes because your taxable income is reduced.
Charles Schwab, Wealthfront, Betterment and Fidelity Investments all offer Roth IRAs with low or no minimum deposits and commission-free trading of stocks and ETFs.
Investing beyond retirement
Once you've started saving for retirement and have a plan to pay off your debt, you should consider opening a brokerage account and investing some of your discretionary money in investment funds and individual stocks or bonds.
If you're new to the world of investing, you could opt for a robo-advisor, which will create a portfolio for you based on your time horizon, your financial goals and other information.
Most robo-advisors invest in low-fee, passively managed stock and/or bond funds which are intended to match the performance of a stock index like the S&P 500. By putting money into index funds, you'll be investing in a basket of stocks and bonds from different sectors of the economy, so a downturn in one sector of the economy likelt won't negatively impact your overall portfolio.
Passively managed funds charge low fees because there's not a fund manager actively picking and choosing stocks for the fund. Robo-advisors will also automatically rebalance your portfolio by regularly selling and purchasing funds, so you can meet your financial goals.
Select found that Betterment, Wealthfront and Charles Schwab were some of the best robo-advisors based on factors like minimum deposits for accounts, fees and the educational resources available.
For many families, owning a home and having retirement savings are key to building wealth and ensuring they have enough money to weather financial difficulties and to hand down to future generations.
If you haven't started saving for retirement, prioritize investing enough in your 401(k) to earn your employer match. For those looking to invest beyond retirement, consider opening a brokerage account to invest in individual funds, stocks, bonds or other riskier financial assets like crypto or options.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.