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It’s no secret that homeowners often have higher net worth than renters. But while renters face unique affordability challenges, there are still steps they can take to improve their financial situation.
The typical U.S. renter had a median net worth of $10,400 in 2022, according to a new report from the Aspen Institute. That’s an all-time high, even though it accounts for less than 3% of homeowners’ net worth of about $400,000.
Renters commonly face financial challenges, including lower incomes, increased debt, lower savings, and lower asset ownership, the report said.
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The gap between rich and poor is not only caused by housing assets. According to research from the Aspen Institute, median home equity is $200,000, just over half of homeowners’ median net worth, and owners’ wealth comes from other assets. is suggested.
Depending on their income level, renters are less likely than homeowners to own assets such as cars, retirement accounts, and securities, according to the report. Renters who own such assets tend to have lower median values compared to homeowners.
Experts say renters can start building wealth by paying off outstanding debt, increasing their income and savings, and determining if and when buying a home makes sense.
According to the Aspen Institute, here are some of the financial challenges faced by renter households in three sample income brackets and the ways they build wealth.
Renters with an annual income of less than $25,000
As of 2022, more than a quarter of all rental households had an annual income of less than $25,000, according to a study by the Aspen Institute.
Renting households in this income group are more likely to be “cost-burdened,” or spend a significant portion of their income on housing and utilities, said Janique Ratcliffe, deputy director of housing finance policy at the Urban Institute in Washington, D.C. He said it is likely that he will have to spend it on expenses. This makes it difficult to cover other necessities, let alone build wealth.
“If you rely on any kind of benefits, you’re kicked out as soon as you reach a certain income or savings level,” Ratcliffe said.
The Aspen report states that hypothetical families in this category “need financial stability first to meet the prerequisites for wealth creation.”
“They secure positive cash flow on a daily basis through increased income, decreased expenses, or both, have more savings and personal resources, and have access to benefits that support increased stability. need to be increased,” the report says.
Clifford Cornell, a certified financial planner and associate financial advisor at Born Fied Wealth in New York City, says addressing high-interest debt can be a smart move. Credit card balances can eat up all your savings progress, he says.
“This is incredibly toxic and can completely destroy someone’s financial situation if left unchecked,” Cornell said.
Housing costs can be the biggest budget item for Sean Williams, a private wealth advisor and partner at Paragon Capital Management in Denver, No. 38 on CNBC’s 2024 100 Financial Advisors list. He said people should take this into consideration when deciding where to live.
Living in another region or state could improve job prospects and earn more money, he says.
“The key factor is trying to move to places where there are better opportunities and lower costs,” Williams said.
Renters earning between $50,000 and $75,000 annually
In 2022, about 18% of all rental households were earning between $50,000 and $75,000 a year, according to the report.
According to the report, a hypothetical family in this income bracket would have “some basic financial security, but a stronger position would be possible due to higher incomes or increased cash flow from reduced debt service.” There is a possibility.”
Cornell said renters in this income bracket can monitor their cash flow and find opportunities to save money each month: “After you pay all your expenses, what’s left?”
The “sweet spot” is to find ways to save about 5% to 10% of your income while looking for ways to increase your income at the same time, Williams said.
“Start saving little by little from there,” he says.
Renters with an annual income of $100,000 or more
According to the Aspen Institute, in 2022, about 20% of all rental households had annual incomes of $100,000 or more.
Experts say this group of renters has the strongest financial position, but they may choose to rent instead of buy for a variety of reasons.
Depending on your location, it may be cheaper to rent than own. Tenants may pay renter’s insurance, utilities, and applicable amenity fees, but landlords typically pay the unit’s maintenance and property taxes.
For homeowners, “a mortgage is the absolute bare minimum you have to spend every month,” Cornell said.
Experts say these renters aren’t building home equity, but they can focus on investing and building savings.
For example, say your mortgage payment is $2,500 and your rent is $2,000, Williams says. When you pay your mortgage, you put $500 into your “house savings account,” he said.
If you rent, save the $500 difference in your retirement account. That way, you can save money and potentially grow faster than real estate, Williams said.
