Homes tend to significantly boost a person’s financial status, often leading to homeowners having substantially more net worth than renters. While renters encounter their own set of affordability challenges, there are still viable routes they can explore to boost their financial health.
A revealing 2022 report from the Aspen Institute highlights that American renters typically had a median net worth of $10,400. While this figure marks a new high, it pales in comparison to the almost $400,000 median net worth seen among homeowners.
Renters generally grapple with hurdles like lower income, more debt, limited savings, and fewer owned assets, as noted in the report.
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The wealth disparity isn’t merely about home equity. Although homeowners’ median home equity stands at $200,000, slightly above half of their median net worth, they evidently rely on numerous other assets, according to the Aspen Institute.
When comparing different income levels, renters tend to lag behind homeowners in possessing assets like cars, retirement accounts, and securities. Renters who do hold such assets typically have lower median values than their homeowner counterparts.
Experts suggest that renters can kickstart their wealth-building journey by tackling any existing debt, boosting their income and savings, and evaluating the feasibility of homeownership.
Let’s delve into some key financial challenges faced by renters within three distinct income brackets, as outlined by the Aspen Institute, and explore potential wealth-building strategies they can adopt.
### Renters Earning Less than $25,000 Annually
As of 2022, over a quarter of renter households fell below the $25,000 annual income mark, per the Aspen Institute’s findings. Janneke Ratcliffe, a vice president at the Urban Institute in Washington, D.C., elaborated that these renters frequently find themselves financially “cost burdened,” heavily allocating income to housing and utilities, leaving little room for financial growth.
“A bump in your income or savings might mean you lose certain benefits,” Ratcliffe noted.
For families in this bracket, the Aspen report suggests the primary goal is financial stability, setting the cornerstone for future wealth building. Establishing a positive cash flow through increased income, reduced expenses, or a combination of both, alongside bolstering savings and resources, can help pave the way. Access to supportive benefits is also crucial for stability.
Tackling high-interest debt is an astute first step, according to Clifford Cornell, a certified financial planner based in New York City. Credit card debt can quickly erode savings progress.
“It’s insidiously destructive and can obliterate financial plans if left unattended,” Cornell warned.
Given that housing expenses often dominate the budget, Shaun Williams, a private wealth advisor at Paragon Capital Management, emphasized the importance of evaluating one’s living location.
“Relocating to areas with better opportunities and lower living costs can be pivotal,” Williams advised.
### Renters with Annual Incomes of $50,000 to $75,000
In 2022, around 18% of renter households earned between $50,000 and $75,000 each year. A family in this category likely has some financial footing but could significantly benefit from enhanced cash flow achieved by either upping their income or reducing debt, as per the report.
Cornell suggests renters in this income group scrutinize their cash flow for saving opportunities. “Once all your expenses are settled, what’s left over?” he queried.
Achieving the point where you can save 5% to 10% of your income is ideal, said Williams. “This is when you start to make savings headway.”
### Renters Earning $100,000 or More
The Aspen Institute notes that about 20% of renter households made over $100,000 in 2022. Even with a robust financial outlook, many in this category might prefer renting over buying for various reasons.
In certain places, renting can be more economical than owning. While renters cover insurance, utilities, and any relevant amenity fees, landlords typically shoulder property taxes and maintenance.
“For homeowners, your mortgage payment is merely the foundational expense,” Cornell explained.
Although these renters aren’t building home equity, they can still prioritize growing their investments and savings. As Williams illustrates, if a hypothetical mortgage payment is $2,500 while rent is $2,000, the $500 difference could be channeled into a retirement account instead.
“That way, you’re still saving, potentially at a pace that might outstrip property appreciation,” Williams said.
