Money in the Media # 18

The Richest 10% Own 70% of the Country’s Wealth

Happy Cyber Monday! Hopefully, you are scoring some good deals on items you already determined you were going to buy today. In between plunging deep into the depths of internet deals, let’s discuss today’s Money in the Media Monday article from Yahoo! Finance: “The Richest 10% own 70% of the Country’s Wealth.”

This article discusses a new study by Deutsche Bank Securities that can be summed up in the following chart:

What Does This Mean?

The most important thing to glean from this chart is the overall trend of the past 20 years of wealth inequality. Wealth held by the top 10% was close to 60% in 2000 and is now closer to 70%. Meaning that the remaining 90% of the country (296 million out of 329 million people) only hold about 30% of the country’s entire wealth.

The Financial Crisis

The increase seen by the top 10% has been taken from the lower 90% of the country. Knowing that financial crisis of 2008 takes place right in the middle of this charge, it’s a bit easier to see why this split occurred. The rich were able to ride out the lower market with the utilization of large cash reserves, while those in the lower 50% specifically were most likely living paycheck to paycheck and were harder hit by the losses in markets and jobs.

While the federal reserve rate lowering may not be something that we look at in the short term as an indicator, over the long term it can have great effects. The federal reserve interest rates were continuously lowered to help banks cope with the financial crisis. This in turn raised home prices, taking homes out of reach for those who already could not afford a home.

Why do home prices and home ownership matter? Home ownership tends to coincide with a much higher net worth than those that rent. This can be attributed to the fact that a forced part of every payment goes towards their net worth calculation by most standards. I’m not a proponent that a primary home value should be added to the net worth calculation overall, but that’s a topic for another day.

Overall, home ownership could help increase net worth for those that are in the lower 90% if they were in the position to keep their home through the financial crisis. However, the increases in home values over the last 10 years has been minimal, compared to the stock market.

The decade long bull market following the financial crisis is the major reason why the rich just seem to get richer. When the markets were down, those that needed the funds (retirees or those who lost their jobs and needed to use those assets to live) had to take them out for ~50-60 cents on the dollar of what they’d previously been worth. However, those that had the funds to sustain the downturn outside of the markets were in for a huge stroke of luck. Stocks were on sale!

If a share of Amazon, for example, was worth $100, but then the markets dropped and it was only worth $60. You could buy 10 shares for $600 as opposed to only 6 shares. Then, when the value of the markets and of that particular stock come back up, your 10 shares are now worth $200 each or $2,000 versus the $1,200 you’d have if you only owned 6 shares.

What Does This Mean for You?

Presumably, you are not in the top 10% and would be interested in growing your net worth for the reason of one day retiring. The best advice that I have with all of this is to secure your emergency funds and cash reserves. That way in the event of another financial crisis, you will not be forced to sell your home or stocks for less than their previous value.

The way to build these safety funds is slowly over time. Find the wiggle room in your budget to put even $5 away at first and then build up from there until you have first $1,000, then one month and then 6 months worth of savings for your normal spending. In the event of a crisis, you can scale back your normal spending to only the essentials, which would make your 6 months of savings last even longer. Save slowly and then rest easy, knowing that you will be protected against financial hardship should the worst occur.

Are you part of the lower 90% of the US wealth? How did you get through the financial crisis? Let me know in the comments below!

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