Affluence Versus Wealth

Why do some people let their potential for lifetime wealth slip away? Some people are better off economically at 30 or 40 than they are at 50 or 60. In some cases, fate deals them a bad hand. In other cases, bad decisions and inaction are to blame.

They buy depreciating assets, instead of allowing assets to appreciate. In 2012, a Federal Reserve Survey of Consumer Finances noted that only 52% of American households earn more money than they spend. They rack up debt and live on margin. What are they spending so much on? It isn’t just consumer staples – it’s not unusual for a family to “keep up with the Joneses” and buy the latest nonessential items.

Contrary to the bumper sticker, he who dies with the most toys does not necessarily win, and he may leave a pile of debt and little savings behind. Today’s hottest cars, clothes, flat-screens, phones and tablets may be tomorrow’s discards.

They never contribute to an IRA or qualified retirement plan. For all the flak directed recently at workplace retirement plans and IRAs, they still provide a tremendous opportunity to save and invest. They are tax-advantaged, which contributes to greater compounding of the assets within them. With a Roth IRA, qualified withdrawals are tax-free for the original owner.

They never build up an emergency fund. Financial challenges will arise, and a rainy-day fund can help you meet them. Even the wealthy need cash reserves.  Striving to save for that rainy day also helps to promote good lifelong saving habits.

They never seek to own. Who gets rich by renting? Ownership of real property or a business comes with its headaches, but it may also leave a middle class or working class individual much wealthier over time.

They invest without a strategy. Chasing the return at any cost, impulsive stock picking and market timing – these are behaviors that may lead to frustration instead of financial freedom. Clichés become clichés because they are true, and the financial cliché of “get rich slowly” has proved true for many. Instant wealth seldom comes from picking a hot stock or fund; indeed, that wealth may be fleeting. These truths don’t stop people from “putting it all on black” – hazardously assigning an excessive portion of their assets to one investment or market sector.

They accept a “forever middle class” mindset. Some people define themselves as middle class and accept that definition all their lives. The danger is that this can amount to a kind of psychological barrier, a sense that “this is it” and that “getting rich” is for others.

With all the dire articles out there about the diminishing middle class in America, the fact is that upward mobility is much more common here than in many other nations. Yet in this land of opportunity, people have some intriguing perceptions about the middle class.

Last year, the Pew Research Center conducted a poll of 2,508 American adults which had some interesting results. Only 48% of those earning at least $100,000 identified as upper class or upper-middle class. Amazingly, 6% of respondents at that income level actually felt that they were lower class or at least lower-middle class. Additionally, 18% of those with incomes from $50,000-99,000 identified themselves as lower class or lower-middle class, though 65% (correctly) believed they were middle class.

The poll also asked how much money a family of four would need to live a middle class lifestyle. Answers to that question varied by income bracket: while the median response across the poll was a reasonable $70,000, respondents with family incomes of at least $100,000 gave a median response of $100,000, while families earning less than $30,000 said $40,000 would do.

Behavior & belief may count as much as effort. It takes some initiative to create lifetime wealth from present-day affluence, but a person’s outlook on money (and view of the purpose of money) can influence that effort – for better or worse.