November 1st 2023.
The Federal Reserve's newest Survey of Consumer Finances has provided us with some actionable insights into wealth building. However, many of the news coverage of the survey has missed or ignored these insights, so I want to take some time to talk about them here.
The first insight is that a college degree makes a huge difference to both our incomes and our net worth. According to the survey, families in which the reference person had a college degree had twice the median income and over three times the median net worth than those with some college. The reference person in the family is usually the primary breadwinner, and the college degree refers to both a two-year associate’s degree and a four-year bachelor’s degree. This goes to show that obtaining and selling higher-level skills into the labor market is a great way to increase both income and wealth.
The second insight is that small business ownership averages double the net worth, not counting the value of the business. The mean net worth of families without a business was about $570,000 in 2022, while the mean net worth — excluding the value of businesses — of families that owned a nonemployer business was nearly $1.1 million. This goes to show that entrepreneurs tend to have larger balance sheets. However, the net worth of families owning businesses with employees were even higher. Families owning businesses with two to five employees had a net worth of $1.6 million, and those with more than five employees had a net worth of $4.1 million.
I believe that you can get a compounding effect if you combine a college degree with small business ownership. This means that if a college degree triples wealth and a small business doubles wealth, someone who both gets a degree and establishes a small business ends up with six times the wealth.
I don't think it has to matter where you get your degree, as an online degree works just fine. Additionally, I believe that we should focus more on our human capital.
For more information, you can check out the 2023 Survey of Consumer Finances, the full list of publications and resources, or What Lifetime Earnings Data Say About College Majors and Graduate Degrees. You can also read Human Capitalists in the Twenty-First Century for more information about focusing on human capital.
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