Ever wonder how your finances stack up against others? Are you accumulating assets faster than your peers? How does your income compare to people with similar backgrounds? Many of us enjoy a little financial rubbernecking – luckily the Federal Reserve collects the data for us every three years in their Survey of Consumer Finances.
On the more practical side, studies have found that people save more for retirement when they see how much others in their peer group are saving. Hence, a little financial voyeurism can be financially beneficial as well. What you might call the peer-pressure model for securing a comfortable retirement.
Income – Bringing Home the Bacon
The median household income in the United States is under $50,000 per year. But, as the Occupy Wall Street movement publicized, incomes in the UnitedStates are not normally distributed. Incomes are skewed with a long tail of high income households. If household income conformed to a normal distribution, the mean and median family income would be the same. Yet, the average (or mean) income is much higher than the median – $78,500 vs. $45,800 – primarily due to a small percentage of households with very high income.
Comparing the mean vs. median for different percentiles of income, you see (chart below) that a significant difference between mean and median family income doesn’t occur until the top 10%. Income distribution conforms fairly close to a bell curve for 90% of all households, but the distribution is highly skewed once you reach this rarified group of high earners.
[Quick refresher on statistics: the mean is the average of all observations (e.g., sum of all income divided by number of households), whereas the median is the middle value or the point where half are greater and half are less. In this example, half of all households have a higher income and half lower than the median.]
Net Worth – Most of Us are Below Average
According to the Federal Reserve, in 2010 the median family net worth in the United States was $77,300. The Fed study included financial assets (investments, savings, etc.), personal property (vehicles, residential, etc.), investment real estate, and equity in private businesses. Even more so than income, net worth is skewed dramatically by the folks at the top. The average family net worth was $498,300, which is approximately what a household in the 80th percentile was worth. In other words, over 80% of all households have a below average net worth. Yet, I would argue that median is a better net worth benchmark. The median is not skewed by Mark Zuckerberg, Bill Gates, Warren Buffet, and their billionaire friends at the very top end of the scale.
Maintaining Your Wealth – Surviving the Crisis
I wanted to include this last chart for two reasons. First, it provides a yardstick of how fast others your age are accumulating wealth. Secondly, it shows the impact the financial crisis had on families’ wealth. In the Fed’s 2007 survey, the median family net worth was $126,400. By 2010, the median had dropped to $77,300 (both in 2010 adjusted dollars), a loss of nearly 40% in real dollars even after three additional years of saving.