Saturday, January 18

Why You’ll Never Be Rich: The American Dream Is Dead

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I’m starting to see some a lot of talk about wealth disparity on the web these days. I worry that it means we’ve hit our tipping point of sustaining the you-too-can-be-rich dream. For most of us, it’s a farce, but we so desperately want to believe we can all be millionaires, we’re refusing to let go of it.

If you have 6.5 minutes, this is an excellent short video on wealth disparity in America:

I mentioned in my recommendation of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry and The Value of Nothing: How to Reshape Market Society and Redefine Democracy that we need to take a real look at our finances from a more holistic perspective. Most of the points and statistics I mention in this post are from these two books, and that’s one of the main reasons they’re both on my list of The Only Personal Finance Books You Need To Read in 2014. Wealth disparity and economic mobility are topics I will touch on in greater detail in the future on the blog, because I feel these are becoming increasingly important issues.

We cannot think of our money only in the context of our bank accounts, we have to look into the system that puts it there — and takes it out.

It’s important to understand where you fit in the machine. When I say that, I mean where you fit as a consumer and driver of the market. Most people have a myopic vision of what’s actually playing out before them. You don’t worry about what your neighbour is doing unless what they’re doing is buying things you can’t afford for yourself. The media is selling you rags-to-riches stories, and “start-up” has transcended buzzword status to a lifestyle category that you, yes, you can become an entrepreneur rightthisinstant. Your wealth, or lack thereof, is your responsibility.

But how much of your financial situation is really in your control?

I like the bootstrap mentality of the personal finance community. It’s empowering to learn how to manage you money to meet your goals. Paying off debt and accumulating savings is liberating, but it’s only half of the equation. If you’ve been reading personal finance blogs for awhile, you’ve undoubtedly seen bloggers cope with financial challenges beyond falling off the wagon and splurging on a sweater: you’ve seen diligent savers hemorrhage their accounts for  job loss and unexpected medical expenses.

Truthfully, most personal finance success stories are not about getting rich, they’re about being lucky enough to successfully curate an elaborate defense mechanism against misfortune

Why? Because if you’re not winning, you’re losing, And you can only lose big. More than 1 in 4 people will become disabled in their working lifetime. This can knock you out of your job for years, or permanently, and if you don’t have a fat emergency fund or disability insurance, you’re screwed. You might think the odds are in favour for that one, but what about this: the strongest predictive factor that a woman will file for bankruptcy is motherhood. Most bankruptcy claims aren’t actually from people who grossly mismanaged their money by having a heyday with credit cards. More often than not, its your average citizen finally crumbling under the weight of medical bills or job loss.

We all want to believe that there is a simple formula to financial security: do this, be rich.

But it’s a much harder game than that.

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The real “1%” is the reality that people born to low-income earners only have a 1% chance of making it to the top 5% of earners. 42% of children born in the bottom 20% will stay there.

And that’s how the American dream died.

The old adage is true: the rich are getting richer and the poor are getting poorer. As tuition prices rise, education becomes inaccessible to lower income earners. If they do manage to attend post-secondary, they accumulate crippling amounts of debt that will reduce their ability to save in the future and leave them financially vulnerable to catastrophic events. To add insult to injury, expensive educations don’t automatically translate into lucrative careers, which means the highly educated can be left struggling to pay off their debts on pitiful wages.

Underemployed, highly leveraged workers delay marriage and children. The fertility rate in North America (and most of the world), has been below its replacement value for awhile now, which is leading to an aging population that neither the government or the too-small younger workforce can support. We’re living too long, but the real problem is we’re doing so too expensively for it to be sustainable. Retirement as we know it might be a relic before you are.

There is no white picket fence and 2.5 kids. You can’t afford it.

So what can you do? For now, play the game to the best of your ability. I know that’s not a good answer, but frankly, you don’t really have a choice. What I mean by this is be on the defensive: save as much as you can and pay off your debts, even if you think your efforts are futile. But ultimately we will need to make big changes, particularly to our thinking and way of life.

Personal finance is personal, but it’s not actually all about you.

Remember that when you’re struggling to find money to save or feeling smug about being debt-free. The game is being played with a loaded dice against you. Most of your financial struggles are inherently unfair, and your wins are too hard-won or the product of sheer dumb luck. Wealth disparity is an injustice that has existed across history, but it doesn’t mean we have to perpetuate it. How do we make changes?

Please share your thoughts and any links to articles or suggestions of books to read on the topic, I’m really enjoying looking at the economic “big picture” and hearing your perspective!

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

25 Comments

  1. This is something that I’ve been struggling with for the past year or so. The realization that the deck is permenantly stacked against me is pretty depressing, but I’m going to do all I can to avoid catastrophic failure by saving, paying off debt, and protecting myself as much as possible.

    I also try to look on the bright side and remember that even though I probably will never have as much wealth as my parents do, I’m still better off than the vast majority of the people in the world. I’m completely comfortable, I’m never hungry, and if I get sick I have a decent chance of getting good care. Those are the important things.

    Is there anything else we can do?

    • I think most of the change will have to come through legislation — but taxing the rich just makes them keep their money elsewhere.

      It’s a problem that’s like a snowball rolling down a hill, and no one really thought it would ever get this big.

  2. Those are some very eye opening stats in that video. I wrote an article about wealth inequality earlier this week. I think part of the solution to this disparity in not only the U.S. but around the world, is education. Specifically teaching people to think for themselves so they can be confident enough to take meaningful action to improve their own financial future 🙂

    • omg the education system.. that is broken (and breaking) in North America. I could talk about that forever.

      I’m going to check out your post right now!

      • The education system is so broken in the US. It’s so sad. I’m surprised I came out not so broken out of the system. I think it’s because I was so aggressive and willing to teach myself.

    • This argument is often made that higher education is the answer to all of the wealth and poverty problems. Perhaps it is true that on an individual level, one can further his economic fortune through education, but applied broadly I think it is a myth. Consider Canada, which has probably the highest post-sec attendance rates (40-60%) in the G8 (and public spending on same), yet sits in the middle of the pack on GDP/capita, unemployment, with a particularly poor showing on labour productivity, and high gov’t employment (20%).

      Interesting, but unrelated, Canada also has the highest public spending on healthcare, yet the longest wait times and access to care, but I don’t claim that wait times are indicative of quality of care.

  3. Relative wealth is entirely irrelevant. I don’t give a shit about the split of the wealth and its distribution. What I DO care about, very much, is how the bottom is doing. Can the poorest people in the country access medical services and feed themselves better than they could 30 years ago? In part, yes. Can we do more to ensure their lot continues to improve? Yes. I work with several people who did the catapult from very bottom to top and am very glad that we have subsidized tuition and respectable public education systems that have allowed them to do that. Some of those people work in trades, which is also a big ticket to earnings.

  4. Possibly my favorite article you’ve ever written, Bridget.

    I know there are a lot if issues with wealth disparity, but it seems so much could be changed for the better with affordable and effective education. I can’t speak for Canada, but so much of the American public (and some private) education system is broken. The fact the people can’t afford college is an issue, but getting people through high school to even get to college is also a problem. Last year, articles hailed the graduation rate had risen to 75%. So a C? We’re excited over a C?

    Hopefully, we can not only improve our education system but also put a focus on financial literacy in schools.

  5. Yeah, the bootstrapping mentality only goes so far. It’s great that there are people with the brains, drive, resources and luck to rise beyond their lot in life, but there are so many more who for various reasons (some of their own making, some not) who do not.

    • Exactly. That’s why I think sometimes the bootstrap mentality can be discouraging — if someone is suffering something that’s beyond their control, we can’t tell them to just “try harder”

  6. Such a great post and something I’m really passionate about. Sometimes it bugs me in the pf world to be like “just work harder! Save!”. That’s not it. There are real barriers to entry and we can’t all just be rich, millionaire, entrepreneurs. I’ve realized that higher education is big business and it got stacked against me. But I was sold that dream of being successful and moving up. I tried to buy my way into another class. The system is inherently flawed. I work with what I have, pay off debt, save, try to be a good person and realize I’m only person in this big structure.

  7. I wrote a very similar post that I think will be published on The Money Principle sometime in the next couple of days. Great minds think alike AND Maria can verify that she had my post before this one went live! LOL!

    Honestly, it actually kind of scares me that we have such similar takes on the “American Dream.” I didn’t realize that so many mothers were going bankrupt, but it totally makes sense to me. I’m going to spend some more time thinking about this topic…Great post!

  8. Great post Bridget! I agree that the American Dream is dead, but I don’t think all has gone to shit completely. Now is the time to dream but be realistic and stop wanting stupid things like big houses or crap the Kardashians have.

  9. I kind of agree with Anne’s point above – it would be interesting to see more stats on how the bottom 20% actually fare now compared with the past. With that said …

    My husband and I make a vey good income, probably something in or close to the top 5% in Canada (which sounds richer than it is, lol!). We live a very comfortable, but solidly middle-class lifestyle. The middle-class dream if you will: we have a house, splurge on some frivolous things occasionally, but also scrimp on other things and save a fair chunk for our kids and our retirement. The good thing is that we can afford it. Because our income is in that top 5% or whatever. I’m pretty sure not all of the people in our perfectly ordinary middle-class suburb are in the same position, yet they are living or trying to live the same “middle class” dream. Which is to say – most people probably don’t aspire to live like the Kardashians, they want to live like middle-class people do in the movies. Except those people ONLY exist in the movies nowaday.

  10. A big part of the reason for the growing wealth gap is the Federal Reserve printing money to prop up the banking system. That new money benefits the banks and well-connected first, who invest it in things like the stock market. By the time the money trickles down to the rest of us, the value of it has eroded and the necessities cost more. QE is form of redistribution from the bottom to the top. If we want to solve the growing income gap, we need to start by ending the Fed’s manipulation of the economy.

  11. The biggest issue facing us all is the costs of housing, education and healthcare.

    If those 3 costs leave people unable to afford anything else… we’ll all be in debt forever.

    Sometimes, even affording those 3 is not possible.

  12. This was a great post, thank you for writing it. You so clearly spelled out some true facts that many in our generation just refuse to believe. I’ve already forwarded this to a few people and will probably send it to a few more. It’s a great wake up call. Thanks!

  13. I have to admit videos like this always urk me because they point out a problem but don’t offer a solution. A lot of people like to point the finger at the 1% but what they don’t understand is a lot of that money has been built over generations. I am personally trying to establish generational wealth for my family.

    You raise a great point in regards to if the American Dream is dead. It’s not dead, but much harder to get and quite frankly it’s our fault as Americans. We’ve allowed ourselves to be taxed out of oblivion, say what you want but when you try and tax the rich it’s the middle class that gets stuck with the bill.

    As long as the 1% acquired their money legally I have no quarrel against them at all. I feel that people need to take more personal responsibility for their own financial situations – I wish they would simply educate themselves and stop going out and acquiring so much debt!

    Whew… rant over =)

  14. “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” — John Steinbeck paraphrased via Ronald Wright

    There’s a Harvard-sponsored study on wealth mobility that I think might add to the discussion: http://www.equality-of-opportunity.org/

    People still perceive America to be the land of opportunity, where it is possible to move from one economic wrung to the next. Which is great, but it also is part of the thing that drives us toward this pick-em-up-by-the-bootstraps, tax-recoiling reactionism. “What if I become wealthy one day? I wouldn’t want it all gone to taxes!” Taxes on the wealthy would limit the magnitude of their dreams, plus all the rigamarole about the “Puritan work ethic” and blah.

    Not even to begin to get into the issues of how to incentivize stakeholders of global corporations to reinvest in the country at large.

  15. Very thought provoking post. Many things have changed in the past few decades when it comes to wealth inequality. One other major change is that people rarely stay with the same job their whole life anymore. This was a common practice 30 years ago, but not anymore. Is it because the “grass is always greener”? Or people are too impatient to get a better position in a company? Or is it in fact the “craze” of starting your own million dollar business?

  16. HI All,

    Great post and replies!

    I posted this little anecdote on my site a few weeks ago. Apologies if you’ve already read it. I thought it quite relevant to this conversation (albeit British)…

    Suppose that once a month, ten men go out for beer and the bill for all of them comes to £100. If they paid their bill the way we pay our taxes and claim State benefits, it would go something like this;

    The first four men (the poorest) would pay nothing. The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.

    So, that’s what they decided to do. The ten men drank in the bar every month and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly beer by £20.” Drinks for the ten men would now cost just £80.

    The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men; the paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realised that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.

    So the bar owner suggested a different system. The fifth man, like the first four, now paid nothing.
The sixth man paid £2 instead of £3 .
The seventh paid £5 instead of £7.
The eighth paid £9 instead of £12.
The ninth paid £14 instead of £18.
And the tenth man now paid £49 instead of £59. 
Each of the last six was better off than before with the first four continuing to drink for free.

    But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10!”

    “Yes, that’s right,” exclaimed the fifth man. “I only saved a £1 too. It’s unfair that he got ten times more benefit than me!”

    “That’s true!” shouted the seventh man. “Why should he get £10 back, when I only got £2? The rich get all the breaks!”

    “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

    So, the nine men surrounded the tenth and beat him up. Funnily enough, the next month the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him.

    But when it came to pay for their drinks, they discovered something important – they didn’t have enough money between all of them to pay for even half the bill.”

    I believe this anecdote originated from Max King, Investec. Apologies if this is incorrect!

  17. Interesting. If you want further stats on wealth, to give perspective, check out the Credit Suisse Global Wealth Report which is published yearly.

    On page 26 of the 2015 report you’ll find a graph showing the distribution of global wealth. http://www.protothema.gr/files/1/2015/10/14/ekthsi_0.pdf

    In summary:

    * There are 124,000 people on Earth will a net worth of USD $50 million or more (these are big business owners, entertainers, investment bankers)
    * There are 1,330,000 people on Earth will a net worth of USD $10 million – $50 million
    * There are 2,500,000 people on Earth will a net worth of USD $5 million – $10 million
    * There are 30,000,000 people on Earth will a net worth of USD $1 million – $5 million (the equivalent of all people in Canada).

    In other words there are 34,000,000 people on Earth with a net worth of USD$1 million or more. However, there are 7,000,000,000 people on Earth.

    The USA alone has a population of 300 million people. Canada has 30 million. All of Western Europe, Japan, Australia a few hundred million more (these are the ‘wealthiest’ nations). So the number of people with a net worth of $1 million or more is very small and impossible number for most to achieve even in the most prosperous countries.

  18. Interesting. If you want further stats on wealth, to give perspective, check out the Credit Suisse Global Wealth Report which is published yearly.

    On page 26 of the 2015 report you’ll find a graph showing the distribution of global wealth. http://www.protothema.gr/files/1/2015/10/14/ekthsi_0.pdf

    In summary:

    * There are 124,000 people on Earth will a net worth of USD $50 million or more (these are big business owners, entertainers, investment bankers)
    * There are 1,330,000 people on Earth will a net worth of USD $10 million – $50 million
    * There are 2,500,000 people on Earth will a net worth of USD $5 million – $10 million
    * There are 30,000,000 people on Earth will a net worth of USD $1 million – $5 million (the equivalent of all people in Canada).

    In other words there are 34,000,000 people on Earth with a net worth of USD$1 million or more. However, there are 7,000,000,000 people on Earth.

    The USA alone has a population of 300 million people. Canada has 30 million. Western Europe and Japan a few hundred million more (these are the ‘wealthiest’ nations). So the number of people with a net worth of $1 million or more is very small and impossible number for most to achieve.