Common sense would tell us that net worth increases as income increases. However, it’s not as simple as that, as you can see in the infographic I created using data from the 2019 Survey of Consumer Finances.
Net worth increases exponentially relative to income
The first observation we can make based on the infographic is that, as expected, median net worth does increase as median before-tax family income increases. However, this relationship does not appear to be linear. It looks closer to exponential growth. You’ll notice that income percentile is broken down into 20 percentile groups up to the 79.9th percentile, but the top 2 groups are only 10 percentile each. This is because there is a huge increase in net worth at these high income percentiles. The difference between net worth at the 40-60 and 60-80 income percentiles is about $100,000. However, the difference between net worth at the 80-90 and 90-100 income percentiles is a massive $1.2 million.
One potential reason for this is that higher income families have more money to spare after paying for both necessities and wants. You’ll notice that families with incomes in the bottom 20% have lower net worth than their income. This is because their income can barely cover necessities and they likely have various types of debt. For families with higher incomes, their savings can quickly add up, especially since higher income individuals tend to take more advantage of investing in the stock market. A recent Gallup poll from March-April 2020 found that 84% of Americans with a household income of $100,000+ owned stocks, while only 65% and 22% of Americans with incomes of $40,000-$99,999 and <$40,000, respectively, owned stocks. This can make a big difference over time due to the power of compound interest.
Age has a bigger impact on net worth than it does on income
Age has a big effect on both income and net worth, but its effect on net worth is much bigger. The biggest increase in both income and net worth occurs during the jump from the under 35 group to the 35-44 group, when income increases by 50% and net worth increases by a whopping 551%. This is likely because the under 35 group includes many people who have not yet gotten their first job and are on the hook for student loans. The jump from no income (potentially with debt) to income from a full-time job is enormous. This also allows people to start saving, possibly for the first time.
Income is the highest from 35-64, with little change between 35-44 and 45-54 and then a slight drop off from 55-64. This makes sense as these are generally considered the prime earning years. The drop off may be due to higher earners retiring or cutting back to fewer hours earlier than the standard retirement age. There is a bigger drop off in income after 64, with little change between 65-74 and 75+. The drop is likely due to retirement. Interestingly, the median income for those over 65 is essentially the same as the median income for those under 35, which could be because only part of the population is working in both cases.
Meanwhile, net worth continuously increases as people get older until 75, when it dips slightly, which is likely because people who have retired begin to dip into their savings. As I mentioned before, the biggest increases in net worth happen early. Median net worth increases by about $77,000 both from under 35 to 35-44 and from 35-44 to 45-54, representing a 551% and 85% increase, respectively. From there, net worth grows slowly but surely by about 25% from 45-54 to 55-64 and from 55-64 to 65-74, which are increases of $44,350 and $52,920, respectively. It makes sense that net worth would increase over time, as people steadily earn money, save a portion of it, and grow their investments. If your net worth is not increasing as you get older, this is a major problem, and you should take steps to turn this around as soon as possible.
There is a huge difference in the net worth of home owners and renters
It should come as no surprise that home owners have a bigger median net worth than renters, since at least part of mortgage payments go towards home equity and thus net worth while rent payments are merely expenses that do not help to grow wealth. However, the stark contrast between the median net worth of renters (only $6,270) and the median net worth of home owners (a huge $254,900) was shocking to me. That means that renters’ net worth is only 2.5% of home owners’, even though their median income is about half as much.
One simple explanation for this is that people with more money can afford to own homes, while people who have less money may have to rent. This seems a little too simple, though, to explain the huge disparity. It could also be related to age. Younger people tend to rent, while older people buy homes once they settle down with jobs and families. This could be skewing the data, as younger people, especially those under 35, have a very low median net worth as discussed above.
To sum up, higher net worth is correlated with higher income, increasing age, and home ownership. Net worth appears to increase exponentially with increasing income levels. It increases rapidly when people are young and more steadily as they age. It is also significantly higher for home owners than for renters, though this may be due to a combination of factors including both income and age.