Americans define “rich” as having a personal net worth of $2.4 million or more, according to a recent survey by Charles Schwab. That’s 30 times the median net worth of US households, which means most of us are far from rich.
Why is that? Why are more of us swimming in piles of cash like Scrooge McDuck? The folks at Schwab have identified three major obstacles to wealth-building:
Student loan debt. This is a killer, no doubt. Americans, most of them younger, are on the hook for $1.5 trillion in education loans. College students graduate with $37,000 in debt on average. One-in-six grads leave school carrying debt that exceeds their annual income. Students who go on to borrow for graduate degrees can easily amass six-figure loan balances.
That level of debt can hamper a young person’s ability to save, invest or buy a home, all of which play key roles in building one’s net worth. Even worse, grappling with massive debt can make debtors lose faith in their future financial prospects. Because they can’t even imagine paying off their obligations, they stop trying. Instead of taking on a second job and/or trying to refinance their loans, these dispirited borrowers simply struggle along for years.
This is why I encourage parents to think carefully and work closely with their kids when comes to choosing and financing higher education. Hard questions need to be asked and answered on such topics as the true value of name-brand colleges, and whether the young person even needs to attend college to pursue their chosen profession.
Taxes. Uncle Sam takes his pound of flesh, for sure. The average household owed $8,367 in federal taxes in 2018. That load will lighten in 2019 thanks to the recent tax reform, but taxes will remain a serious consideration in family budgets. Even in the wake of tax reform, I continue to recommend earmarking 30% of your gross income for taxes – federal, state and local.
Kids. Yes, they are expensive. Americans spend an average of $233,610 raising a child to age 17.
But they are so worth it. At least that’s what I tell myself when my four boys are running amok, or I’m writing checks for everything from clothes to school expenses to summer camps to the pediatrician to the dentist to Christmas presents to birthday parties…
Spending habits. This, in my opinion, is the real issue for most Americans. We just don’t prioritize saving and investing for the future. It’s right there in the historical data. Since the end of World War II America has transitioned from a nation of savers to a nation of spenders.
The temptation to spend-instead-of-save has grown stronger in recent years with the boom in consumer technology and other high-end products that didn’t exist a generation ago. Think about it. Did your parents have a cable TV or cell phone bill? Did they buy organic produce at Whole Foods? Can you imagine your dad paying $4.25 for a cup of coffee? Or $60 for a “designer” t-shirt?
With some effort and discipline, we can control the spending issue. It all starts with setting long-term goals and budgeting to meet those objectives. Here’s a simple way to start budgeting: allocate 30% of your gross income for taxes, another 20% for savings, and the remaining 50% for all living expenses.
Of course, for a long-term savings plan to work, you must commit to actually saving. There are ways to make this almost painless. If your employer has a 401k or similar tax-deferred savings plan, enroll today. Otherwise, arrange to have your allotted savings direct-deposited into an investment account.
In my opinion, long-term vision, commitment to saving and frugality are key to achieving any financial goal, including amassing serious wealth. I can’t say that following such a program will give you a net worth of $2.4 million. But I know lots of school teachers and others with moderate incomes who prioritized saving and retired with enough money that they describe themselves as “rich.”
And that’s the most important definition, right?