Back in February, with little fanfare, the Federal Reserve Board released their latest edition of Survey of Consumer Finances. It is a statistical look at the finances of households across the country.
This report is released every three years and is a treasure trove of information. But there are certain consistent indicators that appear year after year.
For the ‘rich’ –the top 10% of income – only 46% of their total annual household income is from wages (W-2). Almost 25% of their income is from a business, farm, or self-employment. And 22% is from interest, dividends, and capital gains – so called ‘portfolio income’.
For all other income categories, the picture is far different. Wages for regular people make up 72% to 85% of total income. Business income is less than 10% and portfolio income makes up less than 3%.
So, what does this mean?
Well, I’m not suggesting that you run out and start your own business. That can be hard – trust me, I know.
Each ‘job’ can be categorized into 4 types – either Employee, Self-employed, Business owner, or Investor. This is discussed in the book Cash Flow Quadrant by Robert Kiyosaki. For most people, the only choice is employee.
However, you may want to consider the investor, where money does the work.
When was the last time your bank account called in sick? Or the mortgage went on a sabbatical and didn’t charge you interest?
If you truly want the wealth and all it can do for you, then saving smartly and spending smartly become extremely important.
This is not about the next great hot stock tip. Or some magic day trading strategy. Building wealth is more like a marathon. Ask yourself: are you saving as efficiently and effectively as possible? Borrowing as efficiently and effectively as possible? Taking advantage of the tax code?
The rich, after all, are different. To paraphrase Donna Summer - They work hard for their money, but their money also works hard for them.
Answer to last week’s trivia question: The average net worth of a household headed by a business owner is $1.96 million versus $352,000 for a non-business owner household.
This week’s trivia question: According to the Survey of Consumer Finances, on average, how much greater is the net worth of a household headed by a college graduate compared with a household headed by someone with only a high school diploma? Is it:
A. 10% more
B. 50% more
C. Twice more
D. Four times more
