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Are Americans getting rich or going broke?

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Credit Sesame discusses how household wealth may not be enough to stop you from going broke at the end of 2023.

As we enter fall 2023, the news carries conflicting signals about household finances. One report said household wealth had reached a new record. Another showed continued signs of rising debt levels. So which is it? Are Americans getting rich or going broke?

This apparent contradiction between growing wealth and rising debt provides insight into the difference between assets and cash flow. Assets and cash flow are both important to financial security. However, they perform different functions.

Latest Fed figures show record wealth

The Federal Reserve recently reported that the net worth of U.S. households reached $154.28 trillion in the second quarter of 2023. That’s $5.49 trillion higher than the previous quarter, representing an all-time high.

Distributed among approximately 131.4 million households in the U.S., this represents an average net worth of $1.174 million per household. This was partly thanks to a gain of $41,781 in the second quarter of 2023 alone.

This sounds positive but begs the question, why are so many households sinking deeper into debt?

Statistics also point to record debt

In the second quarter of 2023, credit card debt exceeded $1 trillion for the first time ever, according to Federal Reserve Bank of New York figures. All consumer debt now exceeds $17 trillion, another all-time high.

Not only are consumers still borrowing to spend, but interest costs threaten to make that debt grow faster than ever. Credit card rates have risen to an average of 22.16%. That’s the highest level ever reached, according to Federal Reserve data as far back as 1994. Mortgage rates recently reached their highest level since 2001.

In short, debt burdens are not just getting bigger, but the cost of carrying debt has become more expensive. There are signs that consumer budgets cannot keep up. TransUnion’s recent Credit Industry Snapshot shows that not only are average balances up across all consumer debt categories but also delinquencies.

The rising percentage of late payments is evidence that an increasing number of budgets can no longer handle the debt payments consumers have taken on. With student loan payments now scheduled to resume, this problem seems likely to worsen.

Asset-rich vs. cash-poor

To recap, recent reports show that household wealth is at an all-time high, yet a growing number of consumers can’t pay their bills. To understand the contradiction, it’s important to distinguish between asset wealth and cash flow.

Household wealth is primarily made up of long-term investments. For many households, the biggest part of this is the value of their home. Investments such as stocks and bonds also represent a big chunk of household wealth.

Home values took a rare step back in the second half of last year, but they’ve since rebounded with five consecutive monthly rises. As for the stock market, after a bad year in 2022, the S&P 500 earned 13.88% in the first half of this year.

That explains the recent boost in household wealth. However, much of that wealth doesn’t help pay the bills from month to month. Your home gives you a place to live, not short-term liquidity. The money tied up in the house is not readily available to pay the bills. You could borrow against equity in your home, but this would give you more debt to pay off in the future.

As for stocks, fluctuations in the market make it necessary to invest for the long term rather than being able to count on it being a good time to sell these investments whenever you want. Also, stock investments are often tied up in retirement plans. There are generally penalties involved in taking this money out before retirement age.

Thus, the things that have been added to household wealth do not provide the liquidity that helps pay the bills. This requires cash flow – regular income enough to cover expenses and debt. It looks as though cash flow is where households have been coming up short recently.

Signs of going broke aka cash flow running short

The lack of cash flow shows up in multiple ways:

  • Personal savings rates have been unusually low since the start of 2022. Prices shot up due to inflation, and households had less money after paying expenses.
  • Deposit balances, which soared in the first months of the pandemic, have declined for over a year as consumers burn through their savings to make ends meet.
  • Late payments are up over the past year for mortgages, auto loans, credit cards and personal loans as more consumers struggle to pay the debt obligations they’ve taken on.
  • Consumer default rates have been rising for nearly two years, perhaps indicating that many borrowers have given up on paying their debts.

In the business world, cash flow is a common cause of bankruptcies. A company may have billions tied up in plant and equipment, but that doesn’t help much if it isn’t earning enough from quarter to quarter to pay operating expenses.

On a smaller scale, you can think of the distinction between personal asset wealth and cash flow in the same way. Owning a home and a healthy retirement account balance are great builders of long-term wealth. In the short term, it’s also critical to have enough cash flow in your budget to meet immediate expenses.

Inflation puts heavier demands on liquidity

Steep price increases over the past couple of years have put a lot of strain on cash flow. In many cases, expenses have risen faster than income. This hurts cash flow much more immediately than it affects long-term wealth. However, as consumers take on more debt, it will also erode long-term wealth. This is especially true at high-interest rates.

While inflation has eased in the third quarter of 2023, it hasn’t gone away completely. And it is unlikely that prices will drop to where they were before the bout of high inflation.

It’s important to take a fresh look at the household budget to address the cash flow issue to account for higher prices. This may require some lifestyle changes to get spending back within the net income coming in. Tough as that may be, this is a better idea than continuing a lifestyle maintained by ever-increasing debt.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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