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Wealth Building Insights from Latest Federal Reserve Study

The Federal Reserve’s newest Survey of Consumer Finances provides at least a couple of big, actionable, wealth building insights.

Ironically, much (most?) of the news coverage of the survey misses or ignores these insights. So, I want to talk about them here.

Wealth Building Insight #1: A College Degree

A first big insight from the survey: A college degree makes a huge difference to both your and my income and our net worth. I want to quote an actual statement from the survey:

…families in which the reference person had a college degree had twice the median income of those with some college but over three times the median net worth

The reference person by the way is the person in a family who the researchers guess is the primary breadwinner. And a college degree, according to the survey documentation, refers both to a two-year associate’s degree or a four-year bachelor’s degree.

But the big point here:  Obtaining and then selling higher-level skills into the labor market? A gamechanger in terms of both income and wealth building. (I know we all guessed a college degree probably made a difference… but a doubling of income and a tripling a wealth? Wow.)

Wealth Building Insight #2: Small Business Ownership

A second big insight from the survey: Small business ownership on average doubles your net worth—and that’s before counting the value of the business. Again, I want to quote an actual statement from the survey:

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.

Note that word “nonemployer” means a business without employees other than the owner. And most businesses are “nonemployer” firms.

But businesses with employees? Those families enjoy even higher mean net worths. Families owning a business employing from two to five employees? They average a net worth of $1.6 million before considering the business. Families owning a business employing more than five employees? They average a net worth of $4.1 million again before considering the business.

Again, I’m not surprised that entrepreneurs enjoy better balance sheets. But I am impressed with the size of difference.

Closing Comments

Two quick comments to close: First, I don’t think it has to matter much where you got your degree. An online degree works fine, for example. (Our small CPA firm has regularly paid for employees to get accounting degrees from online Western Governors University and those students have become good team members. Someone with some college credits can maybe finish their baccalaureate accounting degree in a year for $6,000 to $8,000.)

Second, I think you get a compounding effect if you combine a college degree with small business ownership. In other words, if a college degree triples wealth and a small business doubles wealth? I think someone who both gets a degree and establishes a small business ends up with six times the wealth. (Three times two equals six.). That’s a hunch. I admit it. But people should get synergies from a combination.

Additional Resources

The short summary I’m quoting from for this blog post appears here: 2023 Survey of Consumer Finances.

The actual Survey of Consumer Finances includes a bunch of publications and resources. You can get a list of those here: full list

We’ve talked before here at the blog about how to view college degrees as investments and how to maximize your return: What Lifetime Earnings Data Say About College Majors and Graduate Degrees.

Finally, we’ve also talked here at the blog before about the idea that we all (you, me, your kids, my kids and so on) ought to focus more on our human capital. If the latest Federal Reserve research makes you think the same thing, you might find this earlier blog post interesting: Human Capitalists in the Twenty-First Century