The wealth gap is growing, and if the Occupy Wall Street and its satellite protests are any indication, those not within the top one percent of income earners are not happy with their circumstances or the policies that help foster the wealth of those at the top. It’s been called class warfare, but there are other dimensions to the wealth gap than the spectrum that includes poor, working middle class, upper middle class, and wealthy.

The gap in wealth between young and old Americans is growing. Today, the Pew Research Center released new data showing the widening divide between Americans 35 years old or younger and Americans 65 and older. In 1984, the median net worth for the younger group was $11,521 (adjusted for inflation). The same year, the median net worth for the older group was $120,457. Net worth includes the value of all one’s assets, including a house, minus the value of all one’s liabilities, including student loan debt, credit card debt, and mortgages.

The passing of twenty-five years makes a difference. Today’s median net worth — actually not today’s number, but 2009′s number — for Americans 35 years old or younger is $3,662. That’s a 68% decline! Today’s youth is significantly less wealthy than the youth of the previous generation. In 2009, the older group’s median net worth was $170,494, a 42% increase.

This is a comparison between age groups, which I would expect to be fairly similar to each other and similar to the past in terms of socioeconomic distribution. They would have to be, or the data would need to be standardized, for the numbers to have merit. There are great reasons to be happy about the increase of wealth in one group, but there is also a wide variety of reasons why young people (and I am one — I’ll remain 35 for just a few more months, if all goes well).

• Unemployment within the young age group is high, while older workers are opting to stay in their jobs longer. In fact, recent graduates facing unemployment may never reach their income potential. This problem isn’t just going to go away when the job market improves.
• Some call today’s young adults (or old adolescents) the Boomerang Generation. After college, they move back to their parents’ house while looking for a job. They delay marriage and purchasing a house, both activities that are correlated with increased wealth. Yesterday’s recent graduates had jobs and houses, both of which contributed to gains over the past 25 years, particularly if the house was purchased in advance of the real estate bubble.
• Student loan debt is a much more significant part of a young person’s life today than it was in 1984. College costs have far outpaced inflation, and lenders have always been keen to extend the availability of higher education to more students (otherwise known as borrowers and customers).
• A college education is increasingly seen as the gateway to a good career in any field. It’s difficult to compete in an information-based economy (opposed to a manufacturing-based economy) without a bachelor’s degree. A high school diploma is no longer enough for participation, particularly when companies can afford to be selective in hiring.

If you’re in the younger group, the question should always be what you can do to reverse this trend. While there can be some results by supporting public policies that don’t include bail-outs for the rich (socialization of losses) while cutting back resources for those with the least opportunity (privatizing the gains), it’s important to put yourself in the best position possible so that you don’t need to rely on public policy in your favor.

Assume you’re a major league baseball player. (That will easily put you in a position where your wealth is quite healthy, but that’s besides the point at the moment. Just go with the unexpected metaphor for a second.) You have three balls and two strikes, there are two outs, you’re down by one run, the bases are loaded, and it’s the bottom of the ninth inning. You hit your next pitch to the shortstop. He mishandles the ball but gets it over to first base. It’s a close play, a tie, but the umpire calls you out. Your manager rushes the field from the dugout to argue, but it’s no use. You head back to the showers momentarily defeated.

It’s easy to blame the umpire for getting the call wrong on such an important play. It’s your job to perform well enough that there’s never any question about whether you’re safe or out. The “system” that requires an umpire to make a snap judgment call on a close play is the same “system” that makes it difficult for people to succeed financially. By taking control of your finances, you make the “system” — the job market, the economy, politician’s policies, to name a few societal aspects that aren’t easily controlled by one person — less relevant to your long-term success.

Photo: Jinx!
Pew Research Center

{ 18 comments }

Steve Jobs may not have been as wealthy as his arch-nemesis Bill Gates, but after his successes with Apple and Pixar, he was one of the world’s richest men. Forbes recently listed Jobs as 39th on the Forbes 400, a list of the richest people in America, with a net worth of $7 billion. The author of Jobs’ biography has been offering some insight into the billionaire’s life in advance of the book’s release. Some of the insight pertains to his attitude towards being rich.

As success came to Jobs and his colleagues, he observed the effect of the influx of wealth after Apple became a public company. An excess of money turned those who benefited from the company stock into “bizarro people” who purchased unnecessary things like Rolls Royces and plastic surgery. Jobs said he wanted to avoid “that nutso lavish lifestyle.” Although he could afford to upgrade his lifestyle, Jobs lived with his family in a modest house in Palo Alto and didn’t hire help or an entourage.

Jobs was’t a complete stranger to living a finer life than most of the country could afford. He owned an apartment in The San Remo, a building in New York that featured residents including Steven Spielberg, Steve Martin, and Bono. Steve also owned a 17,000 square foot mansion in California. While he didn’t own a Rolls Royce, he drove a 2008 Mercedes SL 55 AMG.

If Steve Jobs gave to charitable causes, he didn’t want anyone to know. There is virtually no record of Jobs sharing his wealth with causes needing funding, unlike many of the other billionaires outranking him. His direction for the posthumous distribution of his wealth is not public information. While many have criticized Jobs for not being a philanthropic role model, using his wealth to inspire others to focus on worthy causes, those with opposing viewpoints argue that his work building a successful company, creating wealth for others as well as revolutionary technology that, among other things, facilitate larger and faster contributions to these worthy causes, has done enough to improve the world.

It’s a weak argument, but it’s one that caters to the more capitalistic approach to philanthropy. It relies on the idea that by providing salaries to his employees, they will go out and accomplish the philanthropic goals that Jobs did not set for himself. The argument assumes that organizations using iPhones, iPads, and MacBooks to collect funds wouldn’t have been just as capable with other devices. Furthermore, the argument ignores that Jobs shut down corporate philanthropy on his return to Apple in order to save money. Did reducing charitable expenses play a significant role in saving the company?

Despite some fancy homes that often went unused and a moderately flashy car, Jobs seems to have taken the ideology of The Millionaire Next Door to heart. He continued to live his life mostly as he always had, not flaunting his wealth and not drawing too much attention to himself outside of his job responsibilities. For someone whose motto and company marketing slogan was “Think different,” Jobs appeared to desire to keep his differences unseen.

The Millionaire Next Door changed the way people think about millionaires. Most millionaires worked hard building a company to earn money. They didn’t earn it. They tend to blend in with their surroundings, not flaunt their wealth. Those who buy items as status symbols tend not to be wealthy (purchasing items on credit) or are wealthy only temporarily due to overspending. This idea of an understated millionaire, comfortable with his wealth and free of a need to prove himself, seems to fit the profile of Steve Jobs.

It’s perhaps an approach that would befit anyone who found himself with any amount of wealth beyond what is needed to afford the necessities of life.

Photo: Annie Bannanie 06
Business Insider, Examiner, Forbes, Forbes #2, Washington Post

{ 26 comments }

A typical professional athlete may be a prime example of the situation in which an individual might find himself suddenly wealthy. The idea that a person could consider himself middle class or lower one day and wealthy the next is a recipe for financial disaster. It’s easy to look at athletes because their trials and tribulations are often front page news. Michael Vick had some problems with the law, but now he’s dealing with financial fall-out. He has declared bankruptcy, and for the first time, the public is getting to see the choices he made with his money.

Vick listened to the wrong people and was perhaps a little gullible and trusting. His seemingly unlimited income gave him the opportunity to spend with zeal. He paid $223,000 a year for dubious financial advice, $78,000 a year for allowances for his family members, and an extra sum of $209,000 for his mother. His obligations included various house payments for his family in addition to the allowances, salaries for his entourage, $10,000 per month on jewelry for a period of 20 months, payments for his own houses (four), boats (five), cars (eight), and horses (unknown).

And then he wasted his money on failed business ventures for which his friends and advisers convinced him to part with more of his money, like a rental car franchise, janitorial operations, a restaurant, and of course the issue that eventually landed him in jail, the dog fighting ring.

The result of all his money missteps was bankruptcy, with a variety of companies staking claim to his future earnings. At least in Vick’s case, he is getting a second chance. With his new contract, and with a new approach to managing his money, he should be able to meet all his financial obligations.

The thought of having a sudden influx of cash, particularly if it puts you in a significantly different financial situation that those who are closest to you, is frightening. Suddenly, friends and strangers might approach you with investment ideas or pleas for help. Many suddenly wealthy individuals are grateful for their situation and want to help others, but responding to these requests can be a quick road to losing everything.

Ron Lieber, columnist for the New York Times, offers a three-pronged approach for people, not just professional athletes, whose financial situation changes significantly, quickly: slow, small, and scrutiny.

Slow

Don’t make decisions right away, and keep the money invested safely in cash or bonds from the outset. Don’t give in to the immediate pressure you may receive from friends, family, and strangers looking for investment capital or financial help, even though you may strongly desire to help those closest to you. Decisions made quickly could end up hurting your financial security later, so slow down your approach and resist the temptation to immediately go after investments that promise to pay off handsomely. It’s true that the wealthier you are, the more access you have to potentially lucrative, but complicated, investments, but keeping money invested safely for a while helps you wait until you can make more rational decisions.

Small

The good-hearted among us will want to use newly-acquired wealth, particularly if there is more money available that any one family could use in a lifetime, to make grand gestures with large amounts of money, making the world a better place. The adviser quoted in Lieber’s article points out that many athletes invest in a city only to find out they would be traded to another city the next year. Keeping gestures small would make more sense.

Additionally, if we’ve seen anything from celebrities in Hollywood, there’s often a temptation to use wealth to buy a massive house. Many people, even the wealthy, aren’t prepared for the expenses involved with maintaining a house, particularly if that house is large. There’s always a chance that it proves to be a good investment, if another celebrity makes the risky decision to buy the mansion at a higher price down the road, but there are never any guarantees. In the case of athletes, many become wealthy at a very young age — and they may have never even lived on their own before. The article suggests buying a small home to start, perhaps even a condo.

Scrutiny

Shady advisers appear out of the woodwork when there’s money to be made. The article says it’s a good idea to have an adviser, but be very selective. I’ve written a series about selecting and working with financial planners, and weather you’re suddenly wealthy or looking to build wealth over time, the same concepts apply. The most important factor is finding a fee-only financial planner to serve as a fiduciary, which means they are bound to advise in your best interests only. Even this doesn’t prevent an adviser from taking advantage of a client, though.

I would also argue that a good, solid education about basic money management can go a long way in reducing the need for outside “expert” opinions about how to hold or invest your money.

An athlete signing a professional contract, a lucky individual who wins the lottery, or an entrepreneur selling his company to Apple all might have to deal with a sudden influx of wealth. Keep cool and don’t make any sudden moves. Wait before offering any financial help or investment capital to friends, family, and advisers. From a practical point of view, these are likely to be good priorities:

• Pay any taxes due.
• Put aside a year’s worth of expenses in a liquid investment like a money market account or a high-yield savings account.
• Pay off any debt.
• Update or create a will.
• Determine how your wealth can help you reach your non-financial life goals and plan accordingly.

ESPN, New York Times

{ 16 comments }