The fact that homeowners often have larger net worths than renters is no secret. Although renters have particular difficulties with affordability, they can still take action to strengthen their financial position.
According to a recent analysis by the Aspen Institute, the median net worth of the average renter in the United States in 2022 was $10,400. Despite making up less than 3% of homeowners’ roughly $400,000 net worth, it is a record high.
According to the survey, renters typically have financial difficulties include lower income, higher debt, less savings, and lower rates of asset ownership.
Home equity is not the only factor contributing to the wealth divide. According to the Aspen Institute, the median home equity of $200,000 only makes up a little over half of the median net worth of homeowners, indicating that other assets are the source of an owner’s wealth.
According to the survey, homeowners are more likely to own assets such as shares, retirement accounts, and cars than renters, regardless of income level. When compared to homeowners, renters who do own such assets typically have lower median values.
According to experts, tenants can start accumulating wealth by reducing their outstanding debt, boosting their income and savings, and determining whether and when buying a home makes sense.
According to the Aspen Institute, renter households in three sample income categories have the following financial difficulties and opportunities for asset accumulation.
Renters who earn less than $25,000 a year
According to the Aspen Institute, about one-fourth of all renter households earned less than $25K annually as of 2022.
According to Janneke Ratcliffe, vice president of housing finance policy at the Urban Institute in Washington, D.C., renter households in this income bracket are more likely to be cost burdened, meaning they must spend a sizable portion of their income on housing and utilities. Because of this, they find it difficult to pay for other necessities, much less accumulate wealth.
“You get kicked off as soon as you reach a certain level of income or savings if you’re relying on any kind of benefits,” Ratcliffe said.
According to the Aspen research, a hypothetical family in this group must first achieve financial stability in order to fulfill the prerequisite for wealth accumulation.
According to the report, they require consistently positive cash flow, which can be achieved by increased income, decreased expenses, or both, as well as greater personal resources and savings, as well as easier access to benefits that will promote greater stability.
Clifford Cornell, a certified financial planner and associate financial advisor at Bone Fide Wealth in New York City, stated that it can be wise to take on any high-rate debt. “Any savings progress you make is eroded by a credit card balance,” he said.
According to Cornell, it’s extremely poisonous and may completely ruin someone’s financial condition if you allow it to accumulate.
Be careful where you reside because housing costs might be the largest line item in your budget, advised Shaun Williams, a private wealth advisor and partner at Paragon Capital Management in Denver, which is ranked as the 38th business on CNBC’s 2024 Financial Advisor 100 List.
Living in a different region or state could boost your salary and provide you with better employment opportunities, he said.
According to Williams, a crucial component there is attempting to relocate where there are more favorable prospects and reduced expenses.
Renters who make $50,000 to $75,000 a year
According to the research, approximately 18% of all renter households made between $50,000 and $75,000 per year in 2022.
According to the paper, a hypothetical family in this wage range has some financial security at the outset, but greater financial standing could be made possible by increasing cash flow from higher income and/or lower debt servicing.
According to Cornell, renters in this income range can keep an eye on their cash flow to identify ways to save money each month: What remains after all costs have been covered?
Finding ways to preserve between 5% and 10% of your salary while also looking for ways to boost your wages is a terrific situation to be in, Williams said.
According to him, that’s where you should begin saving a little.
Renters who make $100,000 or more a year
The Aspen Institute estimates that 20% of all renter households earned over $100,000 annually in 2022.
Despite having the best financial situation, this group of renters may decide to rent rather than buy for a number of reasons, according to experts.
Renting a property might sometimes be less expensive than buying one. Landlords usually fund the unit’s maintenance and property taxes, even if tenants may be responsible for utilities, renter’s insurance, and any applicable amenity fees.
According to Cornell, a homeowner’s mortgage is the bare minimum they will have to pay each month.
According to experts, these tenants can concentrate on increasing their savings and investments even when they aren’t increasing their home equity.
Say, for instance, that your rent is $2,000 and your fictitious mortgage payment is $2,500, Williams said. According to him, a mortgage payment will deposit $500 into a savings account known as “your house.”
Take the $500 difference from your rent and put it into a retirement account. According to Williams, you may still save money in this method, and it might even grow more quickly than real estate.
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