I turned on the news again, as I do every morning, to hear yet another conversation regarding the widening gap between the wealthy and the poor in our country. The conversation centered on political solutions. There were ideas exchanged regarding an increase in minimum wage and an increase in the tax rates for the wealthiest. I have difficulty weighing in on this issue politically because I find it difficult to believe that any particular piece of legislation will solve the core problem that has created an income disparity in the first place. Every economy is made up of millions of individual financial choices. I believe that the only way to solve the financial problems of our country lies with changing the behaviors of the individual. This is my first true academic love, and it’s referred to as behavioral microeconomics.
Please know before I begin this quick conversation regarding financial stewardship that I recognize that the problems of the wealthy, the middle class and the working poor are very real. A lack of stewardship can be found across all income levels and all ethnicities. I recognize that some individuals do not have the power to change their situation or possess the necessary free mental space to do so. High stress levels, poor health and Maslow’s hierarchy have shown that it’s difficult to make a move when your basic needs are not met. If, however, you are one of the readers of this column who is ready to make a move, I address these comments to you. I believe, as you should, that we live in a country where social mobility is still a reality. By taking control of your finances, you can also help others around you. In time, after enough individuals have changed, we can change the economy on the macro level.
Wealth stewardship first starts with changing our state of mind. More than 80 percent of millionaires in this country are first generation millionaires. That means that it can be done! The vast majority of these millionaires also happen to save or invest nearly 20 percent of their income. Even more stunning is the fact that the average millionaire lives on less than 7 percent of their accumulated wealth. If you studied the lifestyle of Buffet or Slim, you would also note that they lived in modest homes for more than 30 years. These simple facts go to show that the successful stewards of wealth are successful for one primary reason: These people live below their means and have likely done so for some time.
The next step in wealth stewardship is shifting our often myopic focus from cash flow to balance sheet. While having a net positive cash flow at the end of the month is nice, we should also carefully monitor how we are increasing our holdings in the asset section of our personal balance sheets. It is not enough to make $50,000 a year if you have spent $60,000 by Dec. 31, unless that extra $10,000 purchased an asset. As a 21-year-old banker, a financial advisor in my office sat me down, showed me the numbers and practically forced me to start a Roth IRA with a measly $25 a month in contributions. That simple act of recognizing a need to set money aside, and the discipline gained to do so since then, have permanently changed my life. Is your balance sheet growing in the asset section each month?
Finally, hedge your money for downside risk. This is especially true in our community. Seasonality, job losses, injuries and divorce can drastically change your future. Medical expenses and job loss accounted for more than 60 percent of bankruptcies last year. I encourage us all to take control and plan for the downside. If you happen to be faced with a bankruptcy though, never fear, the average millionaire has filed 3.5 times.
While these three steps are certainly not all-inclusive, they provide a great way to get started on the path of wealth creation or retention. Let’s start the new year right and put ourselves in the same class as those steady, but often quiet savers who account for only 5 percent of the population.
Benjamin A. Gochberg lives in Avon.