According to the Federal Reserve's latest Survey of Consumer Finances, the wealth and income gaps in the United States may be growing even faster than you might think. For starters, the average and median incomes dropped for every group except the top 10% of American families. And, the average net worth of the bottom 20% income group fell by a staggering 31% since 2010, despite the fact that the economy has been growing, and the stock market continues to hit new all-time highs.
What's the data telling us? What are some of the possible causes? And what can you do about it?
The data looks pretty dismal
The average household net worth of the bottom 20% income group fell from about $125,000 in 2010 to about $86,000 currently. There are several possible reasons for this, but the biggest reasons are falling wages and the use of savings for everyday expenses.
For starters, the median household income for the lowest 20% dropped by 8% during the past three years. In fact, the median household income fell for every single group except for the top 10%. And the average net worth fell by nearly 17% for the bottom 60% of U.S. households, and rose by about 5%, on average, for the top 40%. This is quite a gap!
The less money that lower-income households earn, the more likely they'll be to dip into savings to cover expenses. This helps to explain the drop in net worth.
Why are the rich getting richer, but no one else is?
One of the best explanations is that the rich are more likely to invest their money, rather than simply put extra cash in savings. In the same Fed survey, the stock ownership rates of different net worth levels were examined, and revealed that there is a major difference in the investment habits of the wealthy and everyone else.
Ninety-three percent of the wealthiest 10% of Americans own stocks, either directly or indirectly (such as through a retirement plan or mutual fund). Among the bottom 40% of households by net worth, just 26% have any money invested in stocks. Another possible explanation is that more of the upper-income households are headed by college graduates, which is the only educational demographic that experienced wage growth during the past three years.
The average household headed by someone who never finished high school saw its income fall by 17% since 2010. High school graduates, and those who completed some college, saw only a 2%-3% decline. However, the average household whose head is a college graduate actually saw a 5% rise in income during that time.
In addition, the more your income rises, the lower your potential need to dip into savings for everyday expenses. This explains the growing net worth for this educational demographic.
What can you do about it?
If people who invest in stocks and get educated do better than those who don't, the solution is a no-brainer. While it's certainly not practical for every adult to go back to school, changing one's investing habits is a pretty attainable goal for most people, even if it's a simple increase in your 401(k) contributions at work.
If your employer doesn't offer a retirement plan, it's easy to set up a traditional IRA to set aside money for retirement. And the tax benefits can be great. If you meet certain income requirements, all of your contributions can be deducted on your tax return. There's even a saver's credit available that's worth up to $1,000 ($2,000 for married couples), and is designed to encourage lower-income individuals to invest.
Once you set aside the money, investing doesn't need to be too complicated. If you don't feel comfortable picking your own stocks, or simply don't feel like spending much time doing research, you can put your money into index ETFs, or exchange-traded funds, which trade like stocks and track the overall performance of the market, or a specific sector. For a more comprehensive discussion about index fund investing, check out this article.
The bottom line is that the data confirms that the wealth gap in America is very real, and growing. However, there are some things that you, as an individual, may be able to do about it to put yourself on the winning side of things.
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