Short of Money? Don’t Blame Your Income
A few years ago two economics professors, Steven Venti of Dartmouth and David Wise of Harvard University, studied the issue of income versus wealth for the national bureau of economic research, using social-security lifetime earnings and net-income assessments for 3,992 households who were near retirement age.
What they found was that:
There is a huge variation in wealth at every income level. Many low-income families have almost nothing. But the same is true of many high-income families.
Income alone does not explain wealth discrepancies. Some of the lowest earning households had managed to accumulate significant wealth. In fact, income differences explained as little as 5% of wealth dispersion.
What the researchers called ‘chance events’ i.e. Inheritances, unexpected expenses, marital status, number of children - all accounted for only 4% of wealth dispersion.
Investment choices explained about 7% of the variations.
In other words, the vast majority of the differences in wealth had nothing to do with income, chance events or investment choices.
According to Venti and Wise the major determinant of wealth creation was simply based on how much individuals chose to save.
Those who made it a priority to save built wealth, regardless of their income level, individual circumstances, or choice of investment. And while life can be unfair and sometimes deals devastating blows, it would seem that the people who survive and thrive tend to be the ones who have a plan and stick to it.”
Business Day, December 1, 2006 Research reference: Choice, Chance and Wealth Dispersion at Retirement, U.S. National Bureau of Economic Research, 2001.
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