Comments: More Fun With Wealth and Class, Part II

Household net worth: does this mean you subtract what you owe on your home from the equity you've accrued?

If so, I find this a bit of an odd measurement. Net Worth isn't income, or discretionary income. If I pay on a 15 year mortgage every year, my Net Worth in the first year is quite low, probably even negative, while my Net Worth near the end of the contract is high. Yet my *wealth*, or the way I live day to day, hasn't appreciably changed throughout the contract (we're assuming everything else is equal). Then after I pay the last payment, I'm free to invest or spend the money I used to use for the house payment on whatever I want--my wealth has suddenly changed dramatically, yet my Net Worth has barely changed.

Posted by Kevin White at August 12, 2003 01:39 AM

Hi Kevin,

In this usage, "household" generally has the same meaning as family.

However, when it comes to housing wealth, remember that as one pays down one's mortgage, one's equity in the house grows. This provides a comfortable cushion for a homeowner, and provides real wealth that he can draw on if he needs to. And while I agree that paying off one's mortgage leads to having more ready cash, one still shouldn't look at one's INCOME as a gauge of how rich one is. I would submit that there are plenty of low-income and middle-income people out there who are well on their way to achieving financial independence, while there are plenty of upper-income people maxed out to the hilt.

Posted by Benjamin Kepple at August 12, 2003 09:33 PM

I don't disagree with anything in your comment. But the way the Household Net Worth stat appears to work means that someone who lives pretty well with a decent job in a brand new house with a brand new mortgage is going to have a negative net worth for years.

By this measurement, I'm "wealthier" than my old college roommate, who drives an Infiniti and lives in a gorgeous five-bedroom home (though I understand that students muddle these kinds of results sometimes).

It's true that the equity loan/line of credit can temper the disproportion for those who've accrued some equity.

I think wealth is also a measure of how one lives day to day -- is one pampered on the way to work by rich Corinthian leather and a sublime ride, or does one have to climb into some tiny, underpowered econobox; can one afford to eat well, or must one settle for "budget" food regularly; can one afford to work out at a state of the art gym; can one afford to keep the home nice and cool, or do record highs and rising energy costs necessitate pushing the thermostat up into the 80s; is vacation time spent sitting at home watching the 13" working on the sofa's butt crease, or skiing Aspen...

Financial security/independence is important, but so is cash flow; HNW ignores intangibles like free cash flow, discretionary income, and the creature comforts one is able to surround oneself with.

But you're right on about upper-income folks who live well beyond their means. And I've read numerous articles in the past two years about those who were making well into six digits but spending most of it as they made it, so that as the Bubble Burst, they fell back down to earth and had nothing to show for their huge incomes. No sympathy.

Posted by Kevin White at August 13, 2003 01:26 AM

It's also complicated to separate those part of the 15% with no net worth who are college students or graduate or professional students in debt, for whom it's quite normal to have no net worth and who will likely grow wealthier shortly in the future from those who are older and have dimmer prospects.

Posted by John Thacker at August 13, 2003 01:58 AM