Why it can take highly qual­i­fied peo­ple longer to grow their wealth

Weekend Argus (Saturday Edition) - - FRONT PAGE -

Imag­ine that you at­tend your 20-year school re­u­nion and are catch­ing up with old friends. You speak to John, who tells you that he earned a three­year 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 pupil and Steve was the dux in your ma­tric year. Who of the two is likely to be wealth­ier?

Stud­ies have shown that John, with his engi­neer­ing work­shop, is likely to be wealth­ier than Steve. There are a num­ber of rea­sons for this in­ter­est­ing sit­u­a­tion. The first is that John started gen­er­at­ing an in­come af­ter study­ing for three years, whereas Steve had an­other 11 years to go be­fore he started to gen­er­ate the in­come of a fully qual­i­fied spe­cial­ist physi­cian. John saved money dur­ing those 11 years, whereas Steve spent most of what he earned while he worked and stud­ied to com­plete his qual­i­fi­ca­tion.

Let’s say that, once he is fully qual­i­fied, Dr Steve gen­er­ates an in­come three times that of John’s and they both save 10% of their in­come. Once he starts work­ing, it will take Dr Steve 10 years to catch up with John with his engi­neer­ing busi­ness. They will have been out of school for 24 years be­fore Dr Steve catches up with John.

In re­al­ity, it will prob­a­bly take longer. Dr Steve will not be able to save 10% of his in­come from the start of his ca­reer, be­cause he has to pay off stu­dent debt, and he will prob­a­bly in­cur more debt to set up his pri­vate prac­tice.

Ul­ti­mately, Dr Steve’s su­pe­rior in­come will en­able his wealth to catch up with, and even­tu­ally over­take, the wealth of John the en­gi­neer.

But there is an­other ob­sta­cle that Dr Steve must over­come be­fore he can achieve that. This has to do with the sta­tus as­cribed to Dr Steve. Doc­tors and other peo­ple with ad­vanced de­grees are ex­pected to ful­fil the role of an up­per-class cit­i­zen. John the tech­ni­cian would not be out of place in a mod­est home with a non­de­script bakkie or sedan. It costs John less to main­tain his stan­dard of liv­ing than it costs Dr Steve to ser­vice his high­sta­tus life­style.

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, 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 im­pede their abil­ity to grow their wealth.

An­other dis­ad­van­tage of liv­ing in an af­flu­ent neigh­bour­hood is that you are bom­barded with cold-calls from so-called in­vest­ment ex­perts. In a sur­vey by the au­thors of “The mil­lion­aire next door: the sur­pris­ing se­crets of Amer­ica’s wealthy”, some pro­fes­sion­als said they had bad ex­pe­ri­ences with these cold-call­ers, to the point where they would no longer in­vest in equities, thus fur­ther im­ped­ing their prospects for grow­ing their wealth.

Re­search shows that peo­ple who spend on lux­u­ries tend not to be price sen­si­tive to most things, but, iron­i­cally, they are very price sen­si­tive when it comes to pay­ing for good le­gal and fi­nan­cial ad­vice that would help them to get ahead.

Suc­cess­ful wealth ac­cu­mu­la­tors, on the other hand, are price sen­si­tive to most things, but less price sen­si­tive when it comes to pay­ing for ser­vices that will help them to con­trol their fam­ily’s con­sump­tion. They will also hap­pily spend good money on le­gal and fi­nan­cial ad­vice, which they know will help them.

Sur­veys show that, the more time you de­vote to pur­chas­ing of lux­ury items, the less likely it is that you will be­come wealthy. The rea­son is that time and en­ergy are fi­nite re­sources, and re­search has shown that, when you al­lo­cate a lot of those re­sources to re­search­ing and pur­chas­ing bigticket items, you have less time to plan your in­vest­ments. This sounds ob­vi­ous, but what is not so ob­vi­ous is the in­verse cor­re­la­tion be­tween the time spent on buy­ing lux­ury items and wealth ac­cu­mu­la­tion.

Many pur­chasers of lux­ury cars spend a dis­pro­por­tion­ate amount of time re­search­ing (some­times for months at a time) a par­tic­u­lar ve­hi­cle be­fore buy­ing it. If they had spent even 25% of that time plan­ning their in­vest­ments, they would be much wealth­ier to­day.

Such buy­ers of­ten ar­gue that they bought the ve­hi­cle at cost, or be­low cost, but be­cause they paid as much for a car as many peo­ple do for a house, they are mas­sively out of pocket de­spite the dis­count.

It’s all a ques­tion of fo­cus. Paul Leonard, who holds the Cer­ti­fied Fi­nan­cial Plan­ner ac­cred­i­ta­tion, is the Eastern Cape re­gional head of fi­nan­cial ser­vices com­pany Citadel.

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