Wednesday, November 2, 2011

Wealth versus Income - there IS a difference!

The revolution will not be Tweeted!  Occupy protester with iPhone.

In my last post, I mentioned that a lot of people fail to grasp the simple concept of the difference between wealth and income.  And understanding the difference is essential to getting ahead in this country - or anywhere, for that matter.

While 1% of this country controls about 42% of the wealth (which is far short of "half") the same 1% has only about 24% of the income in this country.  This basic statistic should tell you that there is a huge difference between wealth and income.  And that one factor affecting this difference in percentages is the decision to spend or save.  There are a lot of people with high incomes in this country, but no real wealth - and vice-versa.

Most middle-class (and lower-class) people fail to grasp this concept, as to them, income and wealth are the same thing.   You make more money, you can buy more stuff, and that means you are "wealthy" - right?

Not really.  You can be making $100,000 a year and be broke - and even bankrupt.  And as I have noted here, even people making $250,000 a year can be broke - even Congressmen!  They view income as wealth and then spend up to their income and borrow even more, until they are insolvent.

You can have a high income and be a high earner and be flat broke.  A lot of people are doing it these days, and they are upset about it - as if it somehow happened due to external circumstances.

On the other hand, you can be very wealthy and have very little in the way of income.  As noted in the book, The Millionaire Next Door, your typical millionaire these days has a lot of assets (an apartment building, a Laundromat, whatever) but not a lot of income.   They live modestly and invest their money.  And re-investing in your business is usually not taxable.

If you have wealth - money in the bank - but not a lot of income (and expenses) then you can weather economic storms much more easily.  The millionaire making $68,000 a year - and living on it - pays little in the way of taxes and isn't too worried about losing his job, making car payments or making mortgage payments - because, chances are, he has no payments to make.

The fellow making $100,000 a year and spending $110,000 a year, pays a lot of taxes, a lot of interest, and lives in fear of losing his job, as all his "stuff" will be repossessed in short order.

And today, that fellow is protesting, arguing that he should be allowed to keep all his stuff, because he lost his job. 

In nearly every income bracket, the choice between wealth and income is there to make.  Granted, people living below the poverty line, making barely enough to buy food, don't have much of a choice.  But then again, look into the homes of many "poor" people and see how many of them have Cable TV, the latest cell phone, and multiple cars on the front lawn.  It will surprise you.

For the middle-class, this situation is even more tragic - and pointless.  A young man starts out in a career, and quickly makes close to $100,000 a year.  This is a sufficient income to build up dynastic wealth, over time.   But instead of saving, he chooses to spend - on cars, on houses, on electrical gadgets with subscription services, on restaurant meals, clothes, etc.  And in short order is broke.

And this is no fantasy of mine - but a pretty good profile of about half the country - spending more than they make - voluntarily enslaving themselves to Visa, Mastercard, the mortgage company, Salle Mae, GMAC, or whoever.

And then they bitch about how unfair it all is.  And this in an era of sub 5% interest rates.  Can you imagine what would happen in this country if rates went up to 14% like they did when I was starting out?

You think things are bad now!

The secret, of course, is to get off the consumerist bandwagon and start thinking about owning money rather than owning things.  Despite all the hoopla about how bad the Stock market is doing, if you have investments - in a well diversified portfolio - it is far better than not having investments at all.

And a lot of us did just that - put aside money, invested, scrimped, saved, and tried to live within our means.  And you can understand why we might justifiably feel that is wouldn't be right to bail out someone who spent it all, bought fancy houses and cars, and has nicer stuff that us.