What is Wealth...
Wealth and income are related but separate terms. While income refers to the amount of money earned as compensation for work, wealth refers to the total amount of assets a household has. Wealth can include savings, investments, or property. It is entirely possible to have a high income with low wealth, or vice versa.

Relativity
Wealth can have different meanings for different people. In a recent survey by LendingTree, a majority of respondents said they consider being wealthy to mean living comfortably without concern about finances. The survey also showed that just 1 in 5 Americans consider themselves wealthy. While 32% of the survey participants think you need to earn at least $100,000 a year to be considered wealthy, only 16% of participants who make that much believe it’s enough to be wealthy.

Investment Attitudes
The survey also gathered interesting information about how Americans view investing by asking what the participants thought was the best way to become wealthy. The majority of survey respondents said real estate (45%) is the best wealth-building strategy. This was followed by the stock market (32%) and cash (21%). A 16% portion of survey participants said a tax-advantaged retirement account is the best way to build wealth.

Top Tiers
Two terms are often used in finance to describe the wealth of households and individuals. While the term high net worth typically refers to those with 1 million or more in assets, the term mass affluent describes those with more than $100,000 in total assets, not including their home. Only around 30% of Americans are mass affluent, with just around 10% having a high net worth. This leaves a majority of the population, around 70%, having less than $100,000 in assets.

Real Estate
Although real estate was cited by most survey participants as the best way to build wealth, just 14% of respondents said they invest in real estate besides their own homes. One of the primary reasons that many do not invest in real estate may be the cost barrier. With only around 30% of households having $100,000 or more in assets, owning properties in addition to a residence may not be a sound financial decision, as it would most likely involve piling more debt on top of an already existing mortgage. For many households, such a level of debt may not be the best way to pursue wealth.

401k Holds Stocks
Perhaps one of the most interesting aspects of the survey is how although the stock market was cited by 32% of respondents as a good way to build wealth, only 16% said the same thing for tax-advantaged retirement accounts. This may reveal misconceptions about retirement accounts, as retirement accounts serve the purpose of holding stocks, much like a savings account holds cash. Any type of retirement account, including employer-sponsored accounts such as 401ks and 403bs, as well as individual Roth or traditional retirement accounts, are brokerage accounts set up for stock transactions. Therefore, there is really not much of a difference in owning stocks in a retirement account versus any other type of brokerage account. The responses to this survey question may be related to misconceptions about retirement accounts, such as perceiving a 401k as an investment itself instead of an account that can hold stock investments.

Expected Returns
Even if there were more Americans who were financially able to invest in real estate outside of their own home, would real estate be the best option? Although renting and leasing properties may provide a steady source of income, many people may perceive the appreciation in value of a property to be its primary feature as an investment. While home prices have historically risen, the value of homes do not typically appreciate as much as stock market investments. For example, since 1990, average home prices have risen by about 230%. By comparison, the overall stock market has risen by more than 1,200% within that same time. Therefore, the stock market may provide a higher long-term return than purchasing property. Stocks also provide the ability to invest an appropriate amount based on a household’s situation without using debt.

Long Game…
Instead of trying to become wealthy through investments, the average American may benefit from an approach of growing wealth over time. Get-rich-quick schemes may likely involve more financial risk than is appropriate for the average American. Having a long-term approach to investments can allow time for the appreciation of assets through inevitable economic ups and downs. That’s why tax-advantaged retirement accounts may be a good option for holding long-term stock market investments. When discussing the survey results, a LendingTree analyst said “one part of the basic wealth-building strategy is long-term, regular investing in a broad-market, low-cost stock market mutual fund or ETF.”

November 15, 2023