Dec 11 2006, 09:11 PM
I’ve been doing a lot of reading lately, in the process of trying to solve my income problems. I’ve run across a number of fascinating articles. Some of which are rather disheartening, others, conventional wisdom. I’ll discuss a bit about what I learned.
Also, I have some theories about poverty, crime and drug abuse, and how people get that way. First, the statistics that are eye-openers:
69% of wealth is inherited. 4% of wealth is acquired through marriage. the remaining 27% is obtained through criminal activity. Less than 0.0000047% is attributed to real innovation or talent. Only about 380 people in America have obtained wealth through their own unborrowed vision. Most people with good ideas end up losing their idea to some huge company that steals it and doesn’t compensate them fairly, or at all. Since it costs about $1,500,000 to litigate a patent infringment suit, the small time inventor is left unable to protect his ideas. Often times, once the inventor does manage a suit, the company that has stolen the idea will make dozens or hundreds of times in profit, what the court will award the inventor in compensation.
Another surpising statistic: 89% of the wealth obtained through crime was by government and corporate bigwigs. Senators and congressmen, CEOs, CFOs, etc. Only about 10.9% of wealth obtained through crime was by the “poster boys” of crime, the organized criminals, drug gangs, etc.
Getting independantly wealthy is defined by having investment income that meets or exceeds your expenses. To have a modest investment income, you need to have a couple million dollars in income-producing investments. The barrier is to achieve enough income to produce that wealth.
Most of the means to get rich are a matter of luck and as such, the odds very slim to none. The lottery, slot machines, even the stock market, or having a hit single on the top 40 charts. Or writing a best selling novel. But there are thousands of unpublished novelists for ever novelist who is published. And about one in five hundred novelists ever achieve wealth through writing.
The practical approach to wealth has barriers too. That approach is to get a job paying over $100,000/year, and investing 20% of the earnings in high-yield investments for ten years. One article I read says that you will achieve $1,000,000 in value by doing that. The problem is that $100,000 jobs are hard to get. Especially if you cannot afford to pay for the education that many of them require. Doctor, lawyer, architect, etc. Not to mention that it helps if your talents and natural interests lie in a field where there is money to be made.
Many people are trapped in poverty because that’s the way things shake out, statistically. Society makes life harder for the poor by design. The IRS in fact audits the working poor far more stringently than the wealthy. Some wealthy can get away with “tax cheating” and the IRS looks the other way—the richer the tax evader, the more the IRS leaves them alone. This is what I read. Take it with a grain of salt. But in many areas of life, the law seems to present problems for the poor. In New Jersey, for instance, many poor cannot afford auto insurance, so they take their chances and drive to work without it, until they get caught and their license is suspended. Then things snowball into a downward spiral and they either become homeless, or resort to criminal activity to put bread on the table.
America is one of the hardest-working nations in the world. We work more hours, have less vacation time and have less job security that most of the European nations, according to another study I read across several money-specific magazines. We also carry close to 7 trillion dollars in credit card debt. An alarming number of families are buying groceries on credit these days because they lack the cash to feed their families. Still more people are working and collecting welfare because they remain below the poverty level.
Many people cannot afford the things that make life worth living. Their existence becomes a drudge, working 2-3 jobs, commuting, fighting traffic, road rage, late for work because of accident delays, bad work environment, demanding bosses, ever more demands placed on a decreasing number of employees, demanding more productivity, while incomes decrease, spending power decreases and standard of living falls to levels far below where America was in the 1950s.
People can only take so much of that existence. Children see their parents rarely, and when they do, they’re always exhausted, angry or worried about finances. The rest of the time, they’re pressured to study hard so they can have the lifestyle their parents have. What lifestyle?
It hardly surprises me that in this world, where the government has us all tied up as economic slaves, when we’re too poor to afford a decent place to live, and the things that affirm that life is worth living, that when base existence is a living hell, those kids resort to escapes from this hell through narcotics. If life were worth living, there would be no need for escape in the form of altered consciousness through artificial means. Poor kids huff pain fumes, glue, etc. The kids with connections get the pot, heroin and cocaine. The more ambitious ones become career criminals, stealing and defrauding to obtain the cash to support their habits.
Much of this is tragic, because a better growing up environment would alleviate the need to use drugs to achieve relief from the hellish existence of poverty.
Many of us already believe that government is largely to blame for a lot of the problems that poverty is a part of. But free enterprise is no guarantee that the less gifted will succeed well enough to live comfortably. However, if the government’s burden on people were not so great as it is today, I think even the less gifted will be able to live comfortably on what they are capable of earning.
I knew a Romanian businessman who did a spreadsheet in 1987, which was a very deep analysis of the cost of taxation and inflation as taxation, on the average American at that time. His calculations included not only the obvious overt taxes, but also the taxes passed to consumers by business, the hidden taxes that show up in the form of government fees and mandatory auto insurance, inflation as a tax, taxes on utilities, etc., and his spreadsheet concluded that the total tax rate on all Americans is about 92%. No wonder people earning $100,000 annual salaries are racking up debt just to buy basic necessities, such as a home. They have only about $8000 of discretionary income!
I got to thinking that if there were no taxes at all, millions of Americans would be able to live a prosperous lifestyle. Even on $17,000 a year of wages, one could afford to buy a basic home for cash in ten years, if one saved aggressively and lived an austere lifestyle during that savings period. Live on $2000-3000 and bank the other $14,000 in high yield investments. If there were no taxes to pay. However, the reality of it is that one may be paying $15,000/year in property taxes to their town government, plus about 40% of their salary income in federal, state and local taxes, and social insecurity and unemployment taxes. Then the taxes on everything we buy and use add up substantially. Finally, inflation robs us of our buying power, so that by the time we save any money, it’s value is less than it was when saving began. That $170,000 home is now $495,000. Kinda’ puts the carrot on the stick just a little too far away now, doesn’t it?
An interesting anecdote was related to me the other day at a Primerica training session. We had a rep from MetLife give a talk on a certain kind of annuity that our companies teamed up to create, and he was talking about the influence of inflation on retirement funds. He related this story and I’ll paraphrase it as follows:
Thirty years ago, his parents bought a home for $38,000. Last year, he bought a new pickup truck for $42,000. Today, a starter home like his parents’ now goes for $250,000 at the least. Projecting this trend thirty years into the future, he predicted that a Honda Civic, if they’re making such a car by then, will cost $250,000 and a new starter home? He didn’t say, but if I do the quick math… $4,500,000?
So if you’re retiring in thirty years, having a couple million saved up by then is pocket change. Enough to buy a car, but not much else. Better to have ten or fifteen million dollars by age 65, because you’re all going to need that much in the economy of that decade.
As for me, my personal financial needs assessement says I have to put aside $5500/month for my retirement, if I bump my retirement off another 20 years past when I actually retired, and pretend I’ve stepped back into a time machine.
One thing I have been gaining awareness of is the power of compounded interest. Primerica’s training has taught me a lot about how fast money grows in various investments, and from what I can see, if you have a normal income of say, $60,000 annual, you should be able to invest 20% of that and accumulate a small fortune in 20-30 years. Part of the trick is to manage taxes carefully, and there are numerous strategies for this.
Not everyone is fortunate enough to have a good paying job. Some of us work in factories, or the local Wal-Mart, of at gas stations working the cash register. Some of us shovel pig dung on a farm for minimum wage. Even if the home has no mortgage, just trying to keep up with the taxes on such wages is a losing battle.
And these scenarios are best-case—barring any accidents, illness or other unforseen tragedies that could bankrupt one. Most American middle class families, according to one of the major news organizations, are one paycheck away from foreclosure or eviction. There is a rising tide of middle class families who are spending their first night in a homeless shelter because the breadwinner was laid off from his job. It’s not just bums, emotionally ill and drug addicts anymore. Our whole society is so hooked on credit, with the average family carrying $8500 in credit card debt, $160,000 in mortgage debt, and some really unfortunate souls who got suckered into A.R.M.s which are now resetting this year to, often double the minimum payments. Lots of folks were sold a bill of goods when these first appeared and it looked like the holy grail for middle class folks wanting that dream home. “Wow, you mean I can borrow $500,000 for just $480/month? Sign me up!” Fools. Anyone with basic math skills could have figured out there was a big, dead, stinking rat in this loan concept. Interestingly, the resetting ARMs coincide nicely with the new, stricter bankruptcy laws. The lenders sure knew what they were doing, this time.
So there are these get rich schemes all over the Internet. Anything that looks good is a scam. There are even “front” web sites that act like independent review sites, reviewing “get rich quick” schemes. There is this one I discovered that claims to have tried 37 different scams and found two of them to be legit. So I checked out the two that the writer claimed worked for him. Checked the BBB. Found multiple complaints about lack of response, no refunds, etc., when the product didn’t generate any results. Then I checked the domain registration info for both the referrer site and the site being referred to. Both the same registrar. Probably setup as a clever new scheme. After all, you would trust a guy who’s tried 37 different work-at-home programs and found only two that worked for him, right? I smelled this rat from a block away though, and my findings about the domain owners bore out my hunch. A clever new ploy. Watch out for these referral sites when you see them.
So where am I going with all of this? My research indicates that there is no easy way to get rich. But if you have a very good job and live an austere life for 10-20 years, you can set aside enough money that you can eventually live off the investment income. The trick is to find that good job. In a world of $12-15K/year jobs, for many without the fancy credentials, those $100K jobs are the stuff of legends and fantasies—they just don’t happen.
It boils down pretty much to this: if you were born to a rich family and your parents put you through college, then give them a big kiss. Your Phd., BS., or other degree is your ticket to the good income, income that is sufficient to allow you to pay your basic expenses while saving for retirement at the same time.
If you were born into a poor family, you’d better have good stamina, the ability to work two or three jobs and go to night school with just 3-4 hours a night of sleep, and do it without suffering a breakdown that could land you in the hospital or worse, in a fatal car crash because you dozed at the wrong time.
If you can’t manage that kind of lifestyle for 6-10 years in a row, then your best bet is to hope you get lucky, and get a job better than your education deserves, or start your own business and hope you have a marketable skill or idea. Because you aren’t going to get past the room in a boarding house full of Hispanics on your lowly technician job or working at the 7-Eleven. I actually had a longtime friend who was stuck in this very situation and let me tell you, it is very frustrating. When layoffs started happening, once he hit 50+ years of age, he could not find a job anymore. So he took one with a brother-in-law who was in the mob. They were running some shady operation and he was hired as their IT guy, in charge of the network of trading/investment computers. He knew something wasn’t quite right with the organization, but he was desparate for any work he could find and took it. For a year, he made a bare living, but then one day the feds showed up. Busted. Big trucks, computers, desks, books and records, all hauled off. Even the telephones. I felt badly for him. But he just didn’t have a good set of circumstances to work with.
As for me, I’ve always tried to avoid organized crime as a source of income. It just doesn’t pay in the long run. I’ve had offers to drive a truck to North Carolina for $10,000 cash. There have been times when I was tempted to take the offer, but the possibility of a long prison sentence and a felony record was a worse outcome than having to live with no electricity and telephones for a year, so I chose to bear the latter and consider myself fortunate to still have my freedom.
It’s tough to remain moral in this world, where the government, by the design of its justice system, almost encourages criminal activity as a means of getting ahead. But for some reason, I never felt comfortable with setting up a fraudulent internet scam, becoming a spammer, or committing other nefarious acts with financial gain as the motive. Perhaps I’ve been too moral all these years, but at least I can enter the homeless shelter with a clear conscience.