Climbing the Wealth Ladder

People have always had a fascination with comparing themselves to one another.  We want to know how others are doing relative to ourselves, for any litany of reasons that can be deeply personal.  Nowhere is there more historically taboo to compare oneself against than the categories of both wealth and income. 

Often, presenting any numerical data for comparison comes in the form of a percentile.  Ranging from one percent to one hundred percent, the percentile format takes all available data and sorts them numerically along this scale according to their value.  The advantage of going through such an exercise is that it helps to describe the relative standing of a particular value within the dataset, which can be useful in analyzing and understanding the distribution of values as well.  We can research what percentile we stand at in terms of income and net worth and have an answer in minutes.  Yet, the true underlying meaning of comparison within these percentiles is often neglected.  

Keep reading, because here is a fun exercise.  Bored one day in 2022 (reliable 2023 data is not yet available), let us say you and a friend both live in the United States of America and decided to do some digging and wanted to find out where you stand relative to the rest of the country when it comes to how much you earn, and what you are each worth.  After a few minutes, you both decide to use the 2022 Survey of Consumer Finances and share your findings:

Your net worth is $300,800 while each year you earn $115,660 before tax.

This puts you in the 60%-79% percentile range of Americans in 2022. 

Your friend’s net worth is $793,120 while each year they earn $189,160 before tax.

This puts them in the 80%-89% percentile range of Americans in 2022.

Upon learning this, your ego gets the better of you and you compare yourself to your friend.  There is nothing that they do that you cannot do, so surely you must be able to save and invest your earnings and eventually be in the same bracket as them.

Get comfortable where you are, as you are probably going to stay there for longer than you may think.  In this hypothetical, the entirety of your net worth is investable.  Assuming your friend saves the historical ten-year average of 7.09% of their pre-tax income, that would mean they save approximately $13,400 which they can then add to their investible net worth.  For you to do the same on your income, you would need to save 11.59% for these two to equal one another.  Off the get-go, proportionally you are sacrificing more than your friend.

But you are alright with this since you know you have a secret advantage.  While your friend invests in the S&P500, which through 2022 returned a 38-year historical average of 9.11%, you developed a system that you know for a fact can outperform the market by at least one percent each year without incurring more risk.  Earning 10.11% each year should help you in the long run as your net worth will grow faster than your friend’s.

If you are a visualizer, imagine two cars are moving along the highway at the same speed. The car in back begins to slightly accelerate toward the other, and with each mile they move down the highway the driver accelerates even faster until they are both at the same spot on the highway for a moment in time.  How long would it take the driver in the back to catch the car in front?

Your system worked!  You did move into your friends bracket, 84 years later.  This tiny hypothetical scenario, while impractical in the real world, reveals a lot about what actions one can take outside of being a superior investor to move up a rung on the wealth ladder a little faster.  My observations are as follows:

1. Focusing on increasing your income, early on.

2. Think of ways to safely add leverage to the equation.

3. Thinking beyond your lifetime aids in the creation of wealth.

For starters, increasing your income early on in your investment journey has profound implications for your financial future.  Simpler said than done right?  Probably.  If generating wealth is truly a life goal of yours, accomplishing this task will take quite a bit of change.  You would need to drastically reorient your life to acquire the necessary skills for a higher income at a faster pace relative to your friend.  In short, one alternative to saving a higher percentage of your salary to match your friend is to spend more time upfront trying to increase your income.  More time spent outside of working hours learning, practicing, and developing new skills and honing others to become more marketable.  While practically this does result in sacrificing life experiences, it is the safest and surest way to move up a rung on the ladder.

Another way of adding leverage can create more risk.  When most people hear the word leverage they believe it to be synonymous with debt.  There is a space for this type of leverage, but not at the beginning of any wealth-seeking journey.  Debt induces the need for stable cash flows for interest payments and the ability to repay what you owe depending on the terms of the loan.  To illustrate, imagine you have a new idea for a business and it will cost $100,000 to get off the ground.  Like most citizens of the U.S., you do not have that lying around in cash right now.  You decide you can afford to put in $20,000 of your cash and borrow the rest.  Initially, the capital put into the business is its value on day one.  Time progresses and your business is profitable!  You figure you are just going to keep making the bare minimum interest payments for now.  The years go by, one by one, until someone approaches you with an offer to sell your business for $1,000,000.  Drooling, you sell your business and now have the cash to pay back your creditor the $80,000 you owe them with a spare $920,000 for your pocket.  That is a whopping 4,500% return on your own invested capital of $20,000.  What a way to kickstart your journey toward the next bracket!  Had you not incurred debt, you would not have been able to start your business.  Had you decided to fund the business with the entirety of your capital, your returns would have been smaller in comparison, only 900%.

Debt is one of the riskiest places to begin inducing leverage into your life.  Unless you are operating in an area of absolute expertise, within your circle of competence, and have other sources of cash to finance debt payments, do not do it.  Even in the most common debt, the traditional mortgage, banks are verifying to ensure that you have adequate resources and a history of stable cash flows to pay them back.  Starting a business on day one where you have uncertainty of cash coming in and certainty of cash going out is a quick way to start behind.

Thankfully, there are other ways to leverage.  The easiest of course is utilizing time.  Pairing well with trying to increase your income, time is a valuable resource.  Learning on your own is essentially stumbling from one roadblock to another without being able to see how high or wide the obstacle is, while still trying to figure out a way around it.  Struggle is good, but unproductive struggle with no lessons is a fool's errand.  Leveraging the expertise of those around you to help you learn, quickly, is low-hanging fruit in this endeavor.  Odds are, with 7.88 billion people in the world, you are not the first to experience something akin to your problems.  Leaning on others to speed up your learning curve not only lets you acquire skills to become more marketable and increase your income but also expands your circle of competence where you eventually may be able to incur the aforementioned financial leverage.

Before we dive into the last observation, take a look at the two images below, paying close attention to the 1% in the first image and incorporating your observations into the second.

Did you see it?  Approximately 96% of all assets within the top one percent of wealth are held within three categories: real estate, stocks, and business interests.  Yet there is a clear trend within the second image showcasing that young people on average seem to prioritize buying cars first, thereafter thinking about buying a house, and only then do we see some allocation towards stocks or a venture onward toward starting their business.

That makes complete sense.  You want security first and foremost, so you need a car to travel to earn income.  Once you earn income, you need a place to call home.  From our little exercise, we know it takes a long time to build wealth within our lifetimes.  But you can ensure others do so more quickly.  When we are young, we are told to invest.  Why?  For retirement.  That is a ridiculous notion where too much emphasis is placed on the self.  Building true wealth transcends the bounds of a single lifetime, let alone working years.  By focusing on providing for future generations rather than just personal gain, we give them a chance.  From the images above, we learned that the journey to financial security often starts with basic needs like acquiring a vehicle for reliable transportation and a home for stability. These are essential steps in wealth accumulation. Investing with a long-term perspective, spanning over a century, shifts the focus from individual retirement to a legacy that supports future generations. By investing with this extended horizon, you are not just planning for your retirement, but enabling your ability to make significant life purchases like cars, homes, and even securing retirement funding for descendants. This approach goes beyond immediate needs, setting up a cycle of wealth generation that benefits many generations, rather than just one's lifetime.

Upon writing this article, I hesitated to even share it.  It can be intimidating to stare down the entirety of your financial future knowing that the status quo is that nothing drastically changes.  Hence why it is drastically important to realize early on what actually can produce the sought-after outcome.  Many who do make that jump are quick to share their stories of success, sharing common themes of learning marketable skills, leveraging in a focused area of their lives, and doing so with an intent to bring value to others aside from themselves.  The dream is alive and well for anyone who wishes to pursue it, with plenty of available resources to lean on should we choose that adventure.  But you have to choose it.