Every three years, the Federal Reserve’s Survey of Consumer Finances (SCF) provides a detailed snapshot of the financial situation among American households. The report examines income, asset ownership, debt burden and wealth across different demographics.
The most recent SCF was conducted in 2022 and published in October 2023. The report found that the average income among American families was $141,390 and the average net worth was $1.06 million. Read on for an age breakdown and find out why S&P500 (SNPINDEX: ^GSPC) index funds are a great way to build wealth.
The average income of American households
The chart below breaks down the average income (before taxes) of U.S. households by the age of the reference person, defined as the man in mixed-sex couples and the older person in same-sex couples.
|
Age group |
Average income |
|---|---|
|
18-34 |
$82,660 |
|
35-44 |
$168,720 |
|
45-54 |
$170,840 |
|
55-64 |
$175,440 |
|
65-74 |
$141,700 |
|
75+ |
$107,820 |
|
All households |
$141,390 |
Data source: Federal Reserve 2022 Survey of Consumer Finances.
The average wealth of American households
The chart below breaks down the average net worth (assets minus liabilities) of U.S. households by the age of the reference person. For context, assets refer to (1) financial assets such as bank accounts, retirement accounts, and other investment accounts, and (2) non-financial assets such as vehicles and real estate. Likewise, liabilities apply to all forms of debt.
|
Age group |
Average net worth |
|---|---|
|
18-34 |
$183,380 |
|
35-44 |
$548,070 |
|
45-54 |
$971,270 |
|
55-64 |
$1.56 million |
|
65-74 |
$1.78 million |
|
75+ |
$1.62 million |
|
All households |
$1.06 million |
Data source: Federal Reserve 2022 Survey of Consumer Finances.
The average income and wealth of American households
Some readers may be surprised to learn that the average American is a millionaire with a six-figure income. But those big numbers come with a big caveat. Averages are often misleading when dealing with asymmetric data, that is, data sets that contain values that are unevenly distributed.
Income and net worth fit the definition of asymmetric data perfectly. According to the Federal Reserve Bank of St. Louis, the top 10% of U.S. households are responsible for 66.9% of total household wealth. As such, the average values discussed in the previous sections are displayed higher by a relatively small portion of the population.
The median (middle value) is often more useful when dealing with asymmetric data. The chart below shows the median income and net worth of US households based on the age of the reference person.
|
Age group |
Average income |
Median net worth |
|---|---|---|
|
18-34 |
$60,530 |
$39,040 |
|
35-44 |
$86,470 |
$135,300 |
|
45-54 |
$91,880 |
$246,700 |
|
55-64 |
$82,150 |
$364,270 |
|
65-74 |
$60,530 |
$410,000 |
|
75+ |
$49,070 |
$334,700 |
|
All households |
$70,260 |
$192,700 |
Data source: Federal Reserve 2022 Survey of Consumer Finances.
As shown in the chart, the SCF reported a median income of $70,260 for 2022, meaning 50% of households reported less income and 50% of households reported more income. Similarly, the 2022 SCF reported a median net worth of $192,700, meaning 50% of households had less wealth and 50% had more wealth.
Some readers may be dissatisfied with their current financial position, but virtually anyone can build wealth with the right mindset and good budgeting. Financial experts often recommend the 50-30-20 framework, which divides income into the three spending categories described below.
-
Needs: 50% of income must be allocated to necessities such as food, housing, utilities and minimum debt payments.
-
Want to: 30% of income should be allocated to discretionary expenses such as travel, entertainment and luxury items.
-
Savings: 20% of income should be spent on paying off debt (above the minimum) and retirement savings.
The last category in particular is of great importance. With the right investments, savings can increase in value many times over over a lifetime. An index fund that tracks the S&P 500 is a great option for most people.
Owning an S&P 500 index fund is an excellent way to build wealth
The S&P 500 measures the performance of 500 major American companies. The index includes growth and value stocks from every market sector, which together represent almost half of global equities by market capitalization. In short, an S&P 500 index fund allows investors to spread money across many of the most influential companies in the world.
Personally, I prefer the Vanguard S&P 500 ETF (NYSEMKT: VOO) because it has a low expense ratio of 0.03%, and Vanguard is one of the largest and most renowned asset managers in the world. But the differences between that product and other S&P 500 index funds are relatively small. The important thing is that you select one and add money to it regularly.
There are three reasons to own an S&P 500 index fund. First, the S&P 500 has beaten virtually every other asset class in the world over the past decade, including international stocks, real estate, precious metals and fixed income. Second, most professional asset managers have underperformed the S&P 500 over the past decade. Third, the S&P 500 has produced positive returns over every twenty-year period in history.
In short, patiently holding an S&P 500 index fund has historically been a surefire way to build wealth at a fairly rapid pace. For example, the S&P 500 has returned 1,970% over the past thirty years, which equates to an annual return of 10.6%. At that rate, the $400 invested monthly in an S&P 500 index fund would be worth $84,800 in ten years, $328,400 in two decades, and $1 million in three decades.
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Trevor Jennevine holds positions in Vanguard S&P 500 ETF. The Motley Fool holds and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Here is the average income and net worth of American households by age, originally published by The Motley Fool
