It’s sort of the first step I really made on my own with my children—independent, big stuff. Everything in here I chose … I put so much love and personality [in it] for the children, I just don’t ever want to leave it. I just hope things work out [financially so I can hold on to it].
Kim Johnson, the owner of a modest home in a Charleston suburb, quoted in Edin 2001: 211
I’ve been told to pay the full year’s rent up front. If I could do that, would I be so deep in debt? … I’ve spent over $14,000 in the past 3 years, servicing my debt instead of going to the doctor. I’m 28 years old, and I’m worse than broke.
Randy Carter, communications professional, quoted in Draut and Silva 2004: 13
Starting five years ago, it was like, wow. You know, we have all this friggin’ money. We sold [some assets]. We were getting fourteen thousand a month from [family sources]. And I have, like, just all this money in investments. Like, I don’t know, a million dollars. And I’m like, “Well, I guess I can buy this leather coat for five hundred dollars. I mean, I really love the coat.”
Nadine, quoted in Sherman 2017: 109
What (exactly) is wealth?
Wealth has various meanings and serves different functions in people’s lives. These functions tend to vary over the life cycle and are contingent on people’s rank on the wealth ladder. The quotations selected for this chapter epigraph form a small sample of the wide-ranging meanings of wealth. In them this phenomenon represents, by turns, the difficult path to homeownership and the pride expressed by a first-time homeowner; the burden of debt and its cumulative impact on the life prospects of a young professional; and the financial security and privileges associated with excess of wealth.
How can one measure of economic resources embody such different personal experiences? An operational definition of wealth might serve as a good point of departure for investigating this question.
Personal wealth, as it was briefly introduced in the previous chapter, is generally defined as the sum of tangible and financial assets people own and is usually measured as the total value of those assets (e.g. main residence, other real estate, bank deposits, stocks, bonds, cars, other tangible assets) minus any outstanding debts (e.g. mortgages, credit cards, student loans). Information on household wealth is usually collected through surveys that ask household members—typically, the head of the household—to list all tangible and financial assets held by their household and to report the value and liabilities associated with each asset.
What wealth is not
The first point revealed by the definition is that wealth is not income. Both measures gauge economic status and standards of living, but they are markedly different. While wealth represents a stock of material resources accumulated over the life course and transferred across generations, income is measured as a monthly or annual flow of financial resources, typically in the form of earnings and wages. This important distinction is often illustrated by the analogy of a stream and a pond. Income is likened to the flow of water that runs into a pond. Because this source can dwindle or completely vanish in years of drought (unemployment), a household must rely on its “pond”: the stock of economic resources, or wealth, that sustains a family during a dry season. To quote Haslett (1986: 123):
A family’s financial well-being does not depend upon its income nearly as much as it does upon its wealth, just as the strength of an army does not depend upon how many people joined it during the year as much as it does upon how many people are in it altogether.
It is also noteworthy that commonly used official measures of poverty in economically developed countries are based exclusively on family income. Social scientists have urged policy makers to develop more comprehensive measures of economic deprivation that incorporate wealth ownership (Shapiro and Wolff 2001; Headey 2008), stressing that the exclusive focus on income produces an optimistic picture of the actual extent of economic hardship. Some more innovative measures of asset-based poverty estimate the period of time during which a household can meet its basic needs by relying solely on the conversion of wealth holdings into monthly income (Haveman and Wolff 2004: 149; Rothwell and Haveman 2013; Caner and Wolff 2002).
The tendency to focus solely on income as a measure of economic status is often justified on the grounds that wealth and income are so strongly associated with each other that the functional differences between them are inconsequential for stratification research. This assumption is largely misguided, however. Although wealth and income are positively correlated, the magnitude of the correlation is modest (estimates range between .26 and .50), and the association between the two measures tends to vary considerably by income bracket (Keister and Moller 2000; Keister 2000: 10–11). For example, Inhaber and Carroll (1992: 90) found that estimates of the wealth-to-income ratio for the middle-income category are about 3 to 1, but the ratio for those in the top income bracket was 20 to 1, a pattern that reflects an extreme concentration of wealth. A particularly weak correlation between income and wealth occurs in the case of young, highly skilled professionals who have high-paying jobs but substantial debt in the form of student loans, or in that of economically well-off retirees, a population characterized by low wages but relatively large sums of wealth accumulated during pre-retirement years. Beyond correlation, then, these examples underscore the intricate causal relationship between income and wealth across social classes and over the life course. For many working-age households (except the wealthy), surplus income received in exchange for labor effort is the most important source of savings and accumulated wealth. Among the wealthy, the direction of this causal relationship is reversed: wealth is a major source of income in the form of interest payments, dividends, or capital gains. Hence a general, correlative approach to wealth and income tends to overlook the causal relationship that exists between the stock and flow of economic resources, further demonstrating the need to distinguish wealth from income.
In addition to drawing a clear distinction between wealth and income, the definition of wealth reveals that wealth has three unique properties, which correspond to three points of focus of the social research carried out on wealth attainment. These foci are wealth as private property, wealth as portfolios, and wealth as net worth.
The three properties of wealth
Wealth as private property or assets
Research on wealth as private property deals with the social and economic advantages associated with asset ownership. In industrialized countries, where property rights are protected, regulated, and often encouraged by the state (De Soto 2001), ownership of tangible assets—even those of modest value—is associated with a heightened sense of economic security, control over life, and personal efficacy and is an integral part of individual identity and social status (Sherraden 1991; Shapiro and Wolff 2001). The “social construction of future possibilities” (Sherraden 1991) summarizes the view that ownership of tangible assets incentivizes productive activity and investment in human capital and enhances the owner’s confidence about, and orientation toward, the future. Accordingly, owning assets extends the owner’s responsibility beyond the sphere of personal financial planning and into the domain of political accountability and citizenship.
The link between assets and well-being has inspired calls from scholars worldwide for a policy shift from traditional welfare programs to asset-building programs such as individual development accounts (IDAs), which encourage low-income families to save by matching their personal savings for specific goals (home purchase, business start-up, or higher education and training) (Sherraden 2005; Sherraden et al. 1995; Schreiner and Sherraden 2007). The primary assumption guiding these recommendations is that the long-term social, psychological,
