House Rich, Cash Poor: The Hidden Truth About American Net Worth
In 2021 the median net worth of U.S. households was $166,900. Meaning if the average household added up all their assets and subtracted their liabilities (debts), they would own $166,900 of stuff. (property, bank accounts, collectables, stocks, bonds, cash etc.) 65% of this net worth was comprised of home equity. ($108,485) Home equity is the value you own in your home.
Example:
Your home is worth 200k and you owe 100k, you own 100k in equity.
The average U.S. household has 65% of their net worth in their primary home. WOW! You hear mainstream news say, "your home is your greatest asset". According to these statistics, for the average household, this is true. (somewhat)
Why this is bad:
Your home is not a real asset; it is a liability. Assets put money in your pocket, liabilities take money out of your pocket. Your home has property taxes, utilities, maintenance, insurance etc. Yes, it is appreciating at 3% annually on average but that number does not exceed the liabilities.
Your home is not liquid. You have to sell your house to have access to the funds. You can get a home equity loan but that takes 30-60 days, carries interest and closing costs, not fun.
Your home's value can decrease drastically. If you lived in Florida in 2008 and you had 65% of your net worth in your primary residence you wanted to jump off a bridge. Homes in Florida in 2008 dropped on average 50% from their peak in 2006. Your net worth would have effectively dropped 32.5% quickly. For many people that met disaster. (1 in 22 homes filed for foreclosure)
A portion of the 65% in net worth you have in home ownership should have been deployed into your Asset Army. Your Asset Army earns money while you sleep, your primary home does not.
You are missing out on higher rates of return. Your home is a liability meaning it has an overall negative return on investment. The SP 500 index has returned 10.54% since 1957. This is a much better option for most.
Focus should be on diversifying your net worth. The 1% (those with 11.6 - 13.7 million) have their net worth spread amongst 8+ asset categories.
Examples: Cash, primary residence, other properties, life insurance, stocks, bonds, fixed income investments, crypto currency, business interests, venture capital, vehicles, pensions, commodities etc.)
8 asset categories may be a bit aggressive for most of you reading this but 3 is do able.
Stocks/bonds (50%)
Cash (25%)
Primary residence equity (25%)
This is extremely generalized but it paints a different picture than the one above.
A diversified net worth = less volatility, more security and more freedom which equals more options in life which equals a happier life.
Source: Pew Research