On Income and Wealth

True or False: a household whose income is $160,000 is "wealthy" or "rich"?

I asked this simple question on Twitter earlier in the month and it sparked a small debate. Some people said true, others said false, a few said the issue is way too complicated for 140-characters, which is probably right.

(from badlyricpolice on Flickr)

$160,000 is what I'd estimate was the household income of my former 4-person group house in Arlington. We lived comfortably enough, always had money for the rent and the bills with a little left over at the end of the month, but I don't think any of us ever necessarily felt financially rich.

With all the Occupy rhetoric about the 1% and what it means to be wealthy, a lot of nuance has been lost. On paper, a person like me would seem to be doing pretty well, if the only data point you look at is my household income. But that ignores the fact that my cost-of-living is very high, that I have (student) debts, that only a fraction of my household income actually belongs to me, and that only a certain amount of my income is actually discretionary.

But let's back up to this question of household income. Consider four different types of households:
  • Single person
  • Married couple, no kids
  • Married couple, two kids
  • Group house with four adults
This is by no means the complete list of household structures, but for simplicity and the sake of argument, let's go with it.

Consider the person living alone. Let's say she makes $160,000 and rents a nice downtown loft apartment and pays $4,000 per month for it. That's a ton of money, but at the end of the year, her leftover income (before taxes) is $112,000 - not bad.

Now let's consider the 4-person group house. Each person earns about $40,000 so they also have a household income of $160,000. They rent a decent house with 4-bedrooms, but not nearly as luxurious as the loft. They also pay $4,000 a month for it. At the end of the year, each person in this household will have (before taxes) $28,000 leftover. It's still a decent amount of money, but it's hardly what the single person household has at her disposal.

This data can easily be manipulated. For example, I could say that 17% of households in DC earn more than $150,000. Which sounds astounding, especially when only 8% of households nationally earn this much. I could manipulate a headline that says something like "DC has twice as many rich people as the national average".

So is the city of Washington really that much wealthier than the national average? Or is it a data point that exists because of circumstance... Does the high cost of living tend to push wages higher, but not so high that all adults can afford to live alone, which subsequently pushes up some household income numbers? Does being a city with such a high degree of college degree holders mean that it's also a city where a lot of people have a lot of student debt? Or maybe there are some people in the city who are actually just filthy rich?

The answer is probably all of the above. And using household income as a proxy from wealth is far from crystal clear.


    On January 18, 2012 Kevin Reeves said...

    Household income info come from tax returns. Your four-person house would show up as four single-person households make $40K each, not one household making $120K.

    But I love the blog -- please write more!