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Measurement of Household Wealth

December 8th, 2006 at 01:44 pm

There have been a many discussions on the pf blogs about how one calculates new worth - should we or shouldn't we include our cars, our stereo, our collection of yo-yos (not so silly: see this recent article about the value of old yo-yos) in our estimation of new worth? I came across some useful information about this which is worth sharing [ref: Annual Review of Sociology: Vol 26, p.502]
* Wealth is commonly identified with net worth and assessed as the difference between the total value of family assets and the amount of debt.
* There are various categories of household assets, with different features, so it is important to distinguish between them. Depending on which assets you include, net worth can be defined [Wolff, 1995] as:

Marketable Wealth - net worth excluding consumer durables such as automobiles, television and household appliances. The rationale being that these have less resale value than their consumption service to the family, so would usually not be sold to raise funds. This exclusion tends to impact poorer households to a greater extent, as consumer durables, especially cars, are the main "asset" of such families.

Financial Wealth - marketable Wealth minus equity in owner-occupied housing. As you need to live somewhere, it is often difficult to convert it into cash in the short term. In places such as Australia where superannuation is "preserved" (unable to be used for any purpose) until retirement age, it may be worth also excluding the value of your retirement account. I do both - my Net Worth tracked with NetWorthIQ is by "Marketable Wealth", and in my daily Net Worth spreadsheet updates I also have a column of Net Worth minus home and super.

Augmented Wealth - this includes some items not normally included in net worth estimates. Specifically, a discounted present value is calculated for any pension and social security retirement benefit.

BTW - while reading this paper I also came upon the following factoid:
"According to the Lampman-Smith_schwartz time series [Committee on Ways and Means 1992, p.1564], the richest 1% of the US population owned 36% of household net worth in 1929, but by 1982 the figure had dropped to 20%" although the data since 1982 is less clear - the decline may have continued or reversed somewhat.

ie. The Rich are getting POORER! This is probably why social commentators have recently started lamenting the income gap between CEO salaries and the average wage, rather than the traditional cry that the wealth gap between rich and poor is widening (although they still raise this topic on occasion - they simply refer the difference between rich and poor increasing in dollar terms, rather than in % terms, which wouldn't support their agenda.

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