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Artificial affluence includes both cash flow and net worth. This post will look at what The Averages are worth by examining their net worth.
Let’s first do a quick review. Based on cash flow, The Averages appear to be artificially affluent.
The Averages have an after-tax take home pay of $90,000.
The Averages have annual living expenses of $96,000.
The Averages have an annual shortfall of $6000.
In addition to the challenge of cash flow, artificial affluence can also impact saving and investing for the future. When monthly living expenses consume or exceed income, the willingness and ability to set aside money for retirement, college expenses, or emergencies suffers.
How much are The Averages worth?
In my post What does a ‘well off’ educator look like?, I examine net worth and wealth in more detail, but for the sake of The Averages, we’ll just cover the basics. Net worth is a simple calculation of assets minus any debts.
It’s important not to confuse income with wealth.
Income is what shows up in your paycheck
Wealth is what’s in your investments, home equity and/or your bank accounts.
Meet the Above Averages
Sometimes artificial affluence does look (a little) flashy. As I wrote in my post about understanding what it might mean to be ‘Well Off,’ I grew up and worked with many educators who had more than I did. While I don’t bear any grudges because of it, I noticed when my colleagues had things like:
- a boat or RV (with trailer, storage, and necessarily beefy hauling vehicle),
- a new house (which now averages well over $500K in my area),
- a vacation cabin or home (furnished, of course),
- a renovated kitchen,
- a $75K+ vehicle, and/or
- a kid going to college.
As a lifelong educator, I was puzzled about how my colleagues could afford such things. Both my wife and I were full-time teachers with advanced degrees and rocking the top of the pay scale. AND we didn’t have any of the above. Okay, we did remodel our kitchen. But we paid cash for it.
Some educators make more than The Averages, particularly those who have seniority, advanced degrees and/or work in school or district administration.
So for the sake of argument, let’s give The Averages a raise, let’s say 20%. Taking their original $90K after tax income, a 20% pay raise gets them to $108,000 after taxes.
If we deduct their previous living expenses of $96,000, that means the Above Averages now have a positive cash flow of $12,000 or $1000 a month.
The Above Averages now have a positive annual cashflow of $12,000.
But the math still doesn’t add up.
None of the above items (boat, new house, vacation cabin, college education, $75K vehicle) can be purchased for $12000.
Unless they are purchased with credit.
Charge It!!!!
Whether they are Average or Above Average, this family is more than likely artificially affluent. It’s not their fault — it’s expensive to raise a family of four in these United States. So how do they do it?
Enter credit. In addition to mortgages and car loans, retail and credit card balances continue to climb after the pandemic. In August 2023, Americans owed $1 trillion in credit card debt, a new record.
Calculating net worth for The Averages
Let’s examine what The Averages are worth. Net worth is a simple calculation of your personal assets minus your debts. A detailed exploration of net worth can be found in my post, How to understand and measure net worth.
Unlike income and expenses, it’s harder to determine ‘average’ assets and net worth among Americans, largely because while all or most households have debt and have to pay for rent, food, and living expenses, not all adults have the following types of savings and investments. With that in mind, let’s ballpark some possible debts and assets for The Averages.
Debt (by The Averages)
In the Pacific Northwest, here are the average total credit card balances per cardholder by state. Feel free to look up your own state.
- Idaho – $6073
- Oregon – $6682
- Washington – $7365
Depending on whether the parents have their own credit lines and cards, the Average Family could have anywhere between $6682 and $13364 in combined credit card debt beyond their (likely) mortgage and (possible) car payment(s) and/or student loans.
According to Wallet Hub analysis of New York Federal Reserve and the U.S. Bureau of Labor Statistics data, the average household owed $146,084 at the end of 2023. This includes consumer debt (credit cards), car and student loans, and a possible mortgage.
Based on this, let’s say that The Averages have $145,000 in debt.
The Above Averages have household debt of $145,000.
Assets (by The Averages)
The most common household assets include savings, retirement accounts, and home equity. Let’s take a look at what The Averages might have set aside.
Emergency fund
An emergency fund is cash or savings to cover unexpected expenses.
According to the 2024 Annual Bankrate survey:
- 56% of U.S. adults would be unable to cover an unexpected $1000 expense
- 27% of U.S. adults have no emergency savings at all
According to Motley Fool, for those American households with an emergency fund, the average was $16,776.18
The Averages have $10K in an emergency fund.
Educational savings
Don’t forget that The Averages have two charming children. And college will be more expensive for the Average kids than it was for the Average parents.
According to the Education Data Initiative
- Americans on average want to save $57,981 for their child’s college expenses.
- On average, parents saved $5,143 last year for their kid’s college.
- The average amount saved by those with 529 accounts was $26,783.
The Averages have $25K in some kind of educational savings account.
Retirement savings
According to Forbes, “The national average for retirement savings varies depending on age, but according to the Economic Policy Institute, the median retirement savings for all working age households in the US is around $95,776.”
The Averages have $100K in retirement savings.
Home equity
According to Forbes, in the third quarter of 2023, the average U.S. homeowner had $300,000 of equity in their home.
Of course, this presumes The Averages own a home vs. rent. While homeownership among educators used to be more common, increases in living and housing costs mean that more educators, particularly younger adults, are renting vs. owning.
But let’s assume that The Averages have a modest home. Using the data above, let’s give them some equity, a key piece of net worth in the U.S.
The Averages have $300K in home equity.
Calculating net worth
On the asset side, The Averages have the following:
- $10K in an emergency fund
- $25K in an educational savings fund
- $100K in retirement savings
- $300K in home equity
Their assets total $435,000.
Their debt is $145,000.
When we subtract debts from assets, The Averages have a positive net worth of $290,000.
The Averages have a net worth of $290K.
How The Averages stack up
At first glance, you’re thinking that The Averages aren’t artificially affluent after all. Sure they’re spending more than they’re making, but they have a positive net worth just shy of $300K. But let’s see where $300K puts them relative to other American households.
Most net worth calculators are based on age, recognizing that net worth (ideally) increases over time. Remember that we’ve established that The Averages were both 35 years old.
Based on this calculator, The Averages are just under the top quartile relative to other American households at that age. They rank at the 74th percentile.
Again, this presumes that they own a home and have equity which is the largest percentage of their wealth. If The Averages are renting and we back out the equity, The Averages would hover around zero or negative net worth.
Conclusion — the Averages are artificially affluent. Like many American adults,
- They have too much debt relative to their income,
- They don’t have enough in their emergency fund,
- They don’t have enough money saved for their kids college or post-secondary education,
- They don’t have enough saved for their future retirement, and
- Each month, they are falling behind, spending more than they are making.
Learning from The Averages
Artificial affluence is the result of three financial hallucinations:
- Deficit spending (when living costs exceed income),
- Confusing (or prioritizing) income vs. assets, and
- Neglecting saving for emergencies and future costs.
I’ll acknowledge that The Averages are sort of a ‘straw family’ (actually, Gemini AI made them into metal sticks). I’ll also acknowledge that I have made some assumptions about their composition and financial condition. And working with data averages and medians can be deceptive.
That said, almost any personal financial indicator signals that many, if not most Americans, are living in a state of financial dependency and peril. Here are some articles which confirm the challenge for educators.
- 60% of Americans are living paycheck-to-paycheck
- Credit card debt is at an all-time high
- More than half of Americans couldn’t pay for a sudden $1,000 bill from their emergency savings
- The cost of a four-year college education has increased by 180% since 1980
- Nearly half of American households have no retirement savings
Remember that Fire Me is a no judgment zone. We won’t dwell on blaming or shaming. Instead, we’ll try to find simple ways to build your financial intelligence and begin your hike toward financial independence.
Charting a path from artificial affluence to financial independence is not a one-size-fits-all solution, despite what financial bloggers and writers might say. But if you’re reading this, you’re looking to build your financial intelligence. So that’s where we’ll begin. With building your knowledge and confidence in personal finance.
You. Can. Do. This.
Now
- Creating a personal definition of financial independence is a good first step. These posts explore what financial independence might mean for you.
- Creating an emergency fund is a concrete win-win-win for your financial planning. This post will get you started
Next
- Planning for retirement is also planning for financial independence before you turn 65. Check out this basic post on retirement planning.
This is a FIRE Me 201 post.
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