WELL-ED­U­CATED PEO­PLE CAN LAG IN WEALTH

CityPress - - Business -

Imag­ine that you go to your 20-year school re­union and are catch­ing up with old school friends. You speak to John, who says that he got a three-year qual­i­fi­ca­tion in me­chan­i­cal en­gi­neer­ing and now owns an en­gi­neer­ing work­shop. You also speak to Steve, who stud­ied for 14 years and is now a spe­cial­ist physi­cian with his own med­i­cal prac­tice. John was an av­er­age scholar and Steve was the top pupil in your ma­tric year. Who is likely to be the wealth­ier of the two by the time you see them at the re­union?

Stud­ies have shown that John, with his me­chan­i­cal en­gi­neer­ing work­shop, is likely to be wealth­ier. There are a num­ber of rea­sons for this in­ter­est­ing sit­u­a­tion.

The first is that John, after get­ting his three-year tech­ni­cal qual­i­fi­ca­tion, started gen­er­at­ing an in­come, while Steve still had an­other 11 years to go be­fore he started get­ting paid as a fully qual­i­fied spe­cial­ist physi­cian. While John saved money dur­ing those 11 years, Steve spent most of what he earned as he worked and stud­ied to com­plete his qual­i­fi­ca­tion.

Let’s say that, once fully qual­i­fied, Steve ul­ti­mately gen­er­ates an in­come three times more than John and they both save 10% of their re­spec­tive in­comes. Once he starts work­ing, it would take Steve 10 years to catch up with John. They would have been out of school for 24 years be­fore Steve caught up with John’s wealth po­si­tion.

In re­al­ity, though, it would prob­a­bly take longer. Steve would not be able to save 10% from the be­gin­ning of his ca­reer be­cause of stu­dent debt, and he would prob­a­bly in­cur even more debt to set up his pri­vate prac­tice.

Ul­ti­mately, Steve’s su­pe­rior in­come would give his wealth the po­ten­tial to catch up and over­take John’s wealth. But there is an­other ob­sta­cle for Steve to over­come be­fore he achieves that.

This hur­dle has to do with the sta­tus as­cribed to Steve. Doc­tors and oth­ers with ad­vanced de­grees are ex­pected to ful­fil the role of an up­per-class ci­ti­zen.

John would not be out of place liv­ing in a mod­est home and driv­ing a non­de­script bakkie or sedan. The cost of set­ting up and main­tain­ing his do­mes­tic sit­u­a­tion is much lower than ser­vic­ing the high­sta­tus life­style that Steve would ex­pect.

Pro­fes­sion­als of­ten say that so­ci­ety ex­pects them to live in ex­pen­sive homes, wear ex­pen­sive clothes and drive ex­pen­sive cars. We judge a book by its cover – there­fore of­ten judg­ing pro­fes­sion­als by their out­ward ap­pear­ance rather than their net worth.

And, un­for­tu­nately for them, the pres­sure to main­tain an im­pres­sive out­ward ap­pear­ance can re­strict the growth of the pro­fes­sional’s wealth.

An­other dis­ad­van­tage of liv­ing in af­flu­ent neigh­bour­hoods is that you are bom­barded with cold calls from so-called in­vest­ment ex­perts.

In a sur­vey con­ducted by the au­thors of The Mil­lion­aire Next Door, Thomas Stan­ley and Wil­liam Danko, some pro­fes­sion­als said they had bad ex­pe­ri­ences with these cold-call­ers – to the point where they would no longer in­vest in eq­uity in­vest­ments, thus fur­ther im­ped­ing their wealth.

Re­search shows that peo­ple who spend their money on lux­u­ries tend not to be price sen­si­tive about things, but they iron­i­cally be­come very price sen­si­tive about pay­ing for good le­gal and fi­nan­cial ad­vice, which would help them get ahead.

Suc­cess­ful wealth ac­cu­mu­la­tors, on the other hand, are price sen­si­tive to most things, but, in­ter­est­ingly, less price sen­si­tive when it comes to buy­ing ser­vices that will help them con­trol their fam­ily’s con­sump­tion be­hav­iour.

They will also hap­pily spend good money on le­gal and fi­nan­cial ad­vice that they know will help them.

Sur­veys show that the more time you spend on the pur­chase of lux­ury items, the less likely you are to be­come wealthy.

The rea­son for this is that time and en­ergy are fi­nite re­sources, and re­search has shown that, when you al­lo­cate a lot of that re­source to the ac­tiv­i­ties of re­search­ing and pur­chas­ing big-ticket items, you have less time avail­able to plan your in­vest­ments.

This sounds ob­vi­ous, but what is not so ob­vi­ous is the in­verse cor­re­la­tion be­tween time spent pur­chas­ing lux­ury items and wealth ac­cu­mu­la­tion.

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