Today, the Urban Institute posted more of the answer in their report, The Balance Sheets of Low-Income Households: What We Know About Their Assets and Liabilities.
The report explores the balance sheets of low-income households, and evaluates their assets and debts–a critical piece in building true economic security. Often, people consider income as a sign of economic security, but income is just money that flows into a household and then right back out.
Assets describe those critical savings and investments that enable an individual or family to build wealth over time and to guard against unknowns like unemployment, illness or disability.
For a recent example of what happens when a family doesn’t have a strong base of assets and then suddenly loses their income, check out one of Will Smith’s most recent films.
Even someone earning $100,000 a year in income, if some of that isn’t being turned into savings and assets, won’t fare well for very long should s/he suddenly be unable to work.
Just like an illness can brew under the surface, without symptoms for a long while, so too can financial insecurity.
And yet, according to the report, much of the policy around alleviating poverty focuses on increasing income, and meeting basic consumption needs, but not on savings and building assets. Asset-building economic policy does not tend to benefit low-income families, the report says, for three primary reasons:
- First, this population is less likely to own homes, investments, or retirement accounts, where most asset-based policies are targeted.
- Second, with little or no federal income tax liability, the low-income have little or no tax incentives, or other incentives, for asset accumulation.
- Third, asset limits in means-tested transfer policies have the potential to discourage saving by the low-income population. In many respects, this population does not have access to the same structures and incentives for asset accumulation.
So, who are these families, and how do their assets and debts balance out? A few findings from the report:
Low income families:
- The typical bottom quintile family may own a car valued at $4,500 and hold a checking or savings account valued at $600.
- Most families do not own a home, have no retirement account, and have no business equity.
- Social Security and Medicare, if considered wealth, comprise roughly 90 percent of expected wealth for low-income families.
- The typical bottom quintile family may hold debt valued at $7,000, one-sixth the amount of debt that most third quintile families hold. Bottom quintile family debt is most likely to be credit card debt valued at $1,000, installment loans valued at $5,600, and home-secured debt valued at $37,000.
- 27 percent of bottom quintile families made debt service payments that exceeded 40 percent of family income.
The combination of assets and liabilities for bottom quintile families results in median net worth valued at $7,500, nearly one-tenth the net worth of third quintile families.
- The typical single-headed family may own a home worth $120,000, a car valued at $7,600, and hold a checking or savings account valued at $2,000.
- In total, a typical single-headed family may own assets worth $83,400, or less than one-third of the assets owned by the typical married or cohabiting family.
- Most singleheaded families do not own any retirement accounts, financial assets beyond their checking or savings account, or any business equity.
- The typical single-headed family may hold debt valued at $24,000, a little more than a quarter of the debt that most married or cohabiting families hold. The reason for the disparity is that, very similar to less-educated families, only 32 percent of single-headed families owe mortgage debt compared with 59 percent of married or cohabiting families.
- The typical debts owed by a single-headed family, therefore, are most likely to be credit card debt valued at $1,000 or installment loan debt valued at $8,600.
The combination of assets and liabilities for single families results in median net worth valued at $40,000, or about one-fourth the net worth of married or cohabiting families. The net worth gap by marital status starts out small at younger ages and then widens sharply with age.
Nonwhite or Hispanic families:
- The typical family headed by someone who is a nonwhite or Hispanic owns a vehicle worth $9,800 and a checking or savings account worth $1,500, compared to the typical white non-Hispanic headed family who owns a vehicle worth $15,700 and a checking or savings account worth $5,000.
- This nonwhite or Hispanic headed family may own a home worth $130,000 or a retirement account worth $16,000.
- A typical nonwhite or Hispanic headed family holds total assets worth $60,000, or a little more than a quarter of the assets held by a white non-Hispanic headed family ($224,500). While only 49 percent of nonwhite or Hispanic headed families do not own a home, 67 percent have no retirement account and 94 percent have no business equity.
- The typical nonwhite or Hispanic headed family holds debt valued at $30,500, less than half of the debt that most white non-Hispanic families hold, or $69,500.
- Nonwhite or Hispanic headed family debt is somewhat more likely to be credit card debt valued at $1,600 or installment loan debt valued at $9,600, than mortgage debt.
The combination of assets and liabilities for nonwhite or Hispanic headed families results in median net worth valued at $25,000, less than one-sixth the net worth of white non-Hispanic-headed families.
The report explains the value of looking at these numbers in evaluating financial security–and policies to help build it, particularly among low-income families–saying, "Building assets and avoiding excessive debt can help low-income families insure against unforeseen disruptions, achieve economic independence, and improve socio-economic status."
The key (or the Stepping Stones if one were to be shamefully self-promoting) to true long-term social change then–within individuals, within families, within communities–lies not only in getting families into better, more high paying jobs, but into helping them grow their assets by paying down debt, buying homes and increasing savings and other investments.
Just ask Coach Tate with the Marshall Heights Community Development Organization or check in with Capital Area Asset Builders. They’re helping women in our area do this every day, and are seeing their self-worth grow right along with their net worth as they achieve their goals and dreams.