WHO OWNS THE MOST -- AND WHY THOSE WHO EARN GOOD MONEY AND PUT IT INTO ASSETS THAT WILL GROW
By DIANE HARRIS

(MONEY Magazine) – The guy next door tools around in a new Mercedes, while you drive that sturdy Plymouth Reliant you bought four years ago. On sunny weekends, his family relaxes on their sailboat; you, on the other hand, mow the lawn and enjoy a late-afternoon snooze on the back porch. When he entertains at home, he serves Brie and Chateau Margaux. Your guests get chips, dip and Meister Brau. Financially, you figure, he must have megabucks -- or, at least, a lot more mega than you do. Maybe. But then again, maybe not. Life style is not always an indicator of net worth -- the difference between assets and liabilities, which is the ultimate measure of wealth. In fact, according to market researchers, consumers at all but the very lowest income levels buy luxury goods nowadays. Those who cannot afford what they want with cash simply use credit. Last year, for example, while household income increased around 6%, amounts charged by credit-card users soared 32%. What really counts in figuring net worth are the assets you cannot see: the equity in your home, the cash in interest-bearing accounts and your investments, including your stake in a business or in corporate retirement accounts. Personal property such as boats, jewelry, furniture and the like only make up about 2% to 5% of the average household's wealth, according to Federal Reserve Board researchers. Just as important as assets are your liabilities: the outstanding mortgage on your home, car loans, credit-card balances and other debts. Despite his flashy Mercedes -- or, perhaps, because of it and his other possessions -- your neighbor may find himself in the red when he does his net worth arithmetic. You, on the other hand, may be surprised to learn that you are doing a lot better than you had thought. Most of us can count our wealth in five figures. According to the Census Bureau, the median net worth of U.S. households in 1984 was $32,670. But for the 34% of all American households who rent rather than own their homes, that median drops sharply to a scant $1,921. And, according to a Federal Reserve Board study, nearly a fifth of the nation, or roughly 16 million households, had zero or negative net worth in 1983. The most widely held asset in U.S. households is a car. Nearly 86% of the families surveyed by the Census Bureau in 1984 owned at least one. Almost 72% held cash in one or more interest-earning accounts. The most valuable asset, however, is equity in a house; it accounted for 41% of the median net worth of the households surveyed. Far distant in terms of value: those interest-bearing bank accounts, which constituted roughly 14% of total net worth. Investments in stocks and bonds were relatively insignificant assets for most households. Only a fifth of the families surveyed, for example, owned shares of either companies or mutual funds, and these holdings made up less than 7% of the net worth of the households studied. On the liability side of the U.S. balance sheet, the Fed reports that mortgages accounted for nearly three-quarters of all liabilities, though only 37% of the households surveyed had such debt. Median mortgage debt: $21,000. While the amounts borrowed were much smaller, a far greater proportion of families (62%) held non-mortgage debt, including car loans, outstanding credit-card balances and student loans. Median non-mortgage debt: $2,382. The Census Bureau and Fed studies, both published in their entirety for the first time this year, are the most up-to-date and comprehensive assessments of the net worth of American households. But the studies have some limitations. They do not include in their calculations the value of vested pensions and of such personal possessions as furniture, antiques, art and jewelry. Moreover, the worth of some components of wealth have changed since the Census Bureau's data were compiled in 1984 and the Fed's in 1983. Stock and bond prices, for instance, have surged. The increase in average household debt, however, may well have offset any rise in gross assets. Thus researchers consider the government's data to be valid, albeit rough, benchmarks of wealth today. While national norms for net worth give a general idea of how you are doing, you probably care more about where you stand compared with your peers. If you have a net worth of $50,000, you are doing better than about 60% of all U.S. households. And if you are a salesperson worth that much, you will be pleased to learn that your household is wealthier than two-thirds of those headed by someone in your field. But if you are in banking, you may be chagrined to find that three-quarters of families headed by someone in your line of work are wealthier than yours. Likewise, age matters; to be a millionaire at age 35 is a far greater accomplishment than achieving that status at 65, after you have had nearly a lifetime to accumulate assets. Of course, having a net worth above that seven-figure mark is quite a feat at any age. Although the Internal Revenue Service estimates that the number of millionaires has more than doubled over the past decade, only 2% of all families, or about 1.3 million households, make it into this rarefied club, according to the Fed. And only half of them are self-made; the rest inherited more than 50% of their wealth. Most of us build net worth the old-fashioned way -- we save it. We put a portion of the income we earn from our jobs into savings accounts and investments, and those assets appreciate slowly over time. As a result of this gradual process, income and age correlate closely with net worth. As income increases, net worth accelerates at an even faster clip both because you are able to save a greater percentage and because the earnings are compounding on the assets you already own. For example, when household income rises from below $50,000 to between $50,000 and $99,999 a year, median net worth more than quintuples from $29,255 to $158,923. Because of the relationship between earnings and net worth, such demographic characteristics as education and race affect personal wealth as well as * income. Families headed by college graduates, for example, tend to be twice as wealthy as households headed by someone who sports only a high school diploma ($60,417 compared with $31,892). Similarly, white families, which have a median net worth of $39,135, are more than 10 times as affluent as black families. Half of all black families have a net worth of less than $4,000. The link between age and net worth is equally clear. The majority of households headed by someone younger than 45 have net worths of less than $50,000, while the majority of families whose primary earner is 45 or older have more than $50,000. Younger adults not only are likely to have lower incomes and fewer assets than older colleagues but also tend to have substantial debt. As they set up independent households, they may have to borrow to buy a car, furniture and other consumer goods at the same time as they are struggling to pay off student loans and, later, a mortgage. So if you are under age 35, you should not be discouraged if your net worth is modest. You are not alone; more than half of your peers have a net worth below $6,750. Not surprisingly, the kinds of assets you own are linked to how old and rich you are. When you are young, you are likely to have most of your money tied up in your home, while in more affluent households, home equity takes a back seat to investments as a component of wealth (see the chart above). Then too, the wealthier you get, the more diversified your investment portfolio is likely to be. While most stockholders have shares in just one company, more than half of the shareholding households with incomes between $50,000 and $99,999 have two or more stocks. Meanwhile, the majority of families with incomes of $100,000 or more own stock in at least five companies. Just as the assets you have are likely to change as wealth increases, so also is the nature of your liabilities. The greater your income and net worth, the more money you are likely to owe. But that debt load becomes proportionately smaller. Households earning between $50,000 and $99,999 have liabilities averaging 16% of their total assets. For families making $100,000 to $149,000, debt falls to 11% and it drops to 3% for households with incomes of $150,000 to $279,999. Not only do the assets and liabilities of well-to-do people differ from those of the general population, so too do their behavior and attitudes; to paraphrase F. Scott Fitzgerald, the rich are different. According to the Fed $ study, for example, the affluent generally do business with several different institutions to get the best deals available -- opening an IRA here, buying certificates of deposit there, taking out a mortgage somewhere else and so forth. The rest of us tend to take all our business to the place where we maintain a checking account. Affluent families are also twice as likely as the general population to seek professional advice about their finances and usually count on the opinions of brokers and accountants more than those of bankers. More than two-thirds of families with incomes above $50,000 say they are willing to tie up money in long-term, illiquid assets to earn higher returns, compared with only 38% of the population as a whole. And such families also indicate a greater willingness to take risks in search of higher profits. Indeed, less than 20% of these wealthy households indicated that they were unwilling to take any financial risk, compared with nearly half of the general population. Of course, the rich can afford to take a flier. If they lose, they won't have to yank their kids out of college or eat catfood in their old age. Still, as the saying goes, no guts, no glory. Or, to put it more constructively, for those of us seeking to enhance our wealth, taking calculated risks often does pay off. BOX: How you measure up: NET WORTH This worksheet will help you figure your net worth and compare yourself with other Americans your age. Begin with your assets, then subtract from that the sum of your liabilities. To see how your net worth compares with medians compiled by the Federal Reserve Board, check the table at the bottom of the page. Note, though, that the worksheet ignores any equity you may have in a pension plan as well as such personal possessions as furniture and jewelry. The reason: the Fed's data do not include such assets. Therefore, in all likelihood, you are a bit wealthier than the worksheet will show. And so is everyone else. ASSETS Personal property: The market value of your home $ The market value of your car(s) $ TOTAL PERSONAL PROPERTY $ Cash: Bank accounts and certificates $ Money-market funds $ TOTAL CASH $ Investments: Securities and mutual funds $ Treasury securities $ Real estate $ Business equity $ Cash value of life insurance $ TOTAL INVESTMENTS $ Retirement assets: IRAs and Keoghs $ Employee savings plans $ TOTAL RETIREMENT ASSETS $ TOTAL ASSETS $ LIABILITIES Home mortgage $ Other mortgages $ Car loans $ Other consumer loans $ Margin account loans $ Other $ TOTAL LIABILITIES $ NET WORTH $ Age of head Median of household net worth Under 35 $6,739 35 to 44 $41,959 45 to 54 $55,509 55 to 64 $68,608 65 or older $53,982