Believe it or not, most Americans are in better financial shape as a result of the pandemic. America has a cash glut. Is this the moment to shift the tides of wealth inequality?
Both the Trump and Biden administrations have pumped trillions of dollars into the economy via stimulus packages. Home values are exploding, a windfall for existing homeowners. The stock market has been absolutely crushing it, inflating the net worth of investors and widening the wealth inequality gap between investors and non-investors. Plus, with pandemic restrictions, we’ve simply been spending less.
Those that are home owners, stock market investors, and beneficiaries of the 2020 and 2021 stimulus checks have seen their income and net worth rise dramatically since 2019.
Who’da thunk it? And where do we go from here?
Is Wealth Inequality Real?
In short, yes it is.
But first, a little recent history…
In February and March of 2020, I was expecting a 2008-style rodeo ride on the stock market bull. It was wild for a second, but strictly in terms of finances, many Americans are now in good shape.
As usual, those that are in the best shape were already in the best shape (i.e., home owners and investors). Meanwhile, those at the bottom of the socio-economic ladder are probably falling further behind, save for the financial incentives of stimulus packages provided from presidents Trump and Biden.
As of Q2 2021, the top 1% of wealthy individuals or entities holds 32.3% of the total U.S. net worth.
Are there systemic issues at play? Of course! We’ve been on a glide path for decades of increasing wealth inequality. As of Q2 2021, the top 1% of wealthy individuals or entities holds 32.3% of the total U.S. net worth, a level never seen before.
There are wealth differences based on gender, race, and even generations. For instance, this post shows how each successive generation is falling further behind in wealth creation. Examining the wealth at each generation’s midpoint age of 32-34, we see that (on average) millennials are lagging in wealth creation compared to their boomer parents, edged out slightly by Gen Xers.
The root causes are complex and varied, but one thing is clear: the wealth distribution between those who do and do not hold stocks is stark.
Wealth Distribution: Who Owns Stocks?
Who owns the largest share of stocks? Mostly white boomers who made high incomes. No surprise there.
Those who are lagging in wealth creation are less likely to own stocks, property, or some other appreciating asset class. In the absence of appreciating assets, our cash savings fall further and further behind the rising prices of goods and services, a process known as inflation.
…The wealth distribution between those who do and do not hold stocks is stark.
Let’s talk about inflation for a second.
We’ve historically seen about a 2-3% yearly rate of inflation. For example, we can expect milk, cars, apartments, and marbled steaks to generally appreciate in price at about 2-3% each year.
So, how’s inflation looking currently? We’re riding at an inflation rate of 5.4%! It’s going to take at least a 5.4% yearly salary raise just to keep pace with those steaks*. Because most kind folks can’t rely on salary bumps like this, our dollars buy us less and less each year.
As our dollars lose value, we are forced to spend more of them for the same stuff. We are hamstrung in our ability to save and generate wealth. This is the wealth necessary to sustain us in our later years or provide the financial freedom to pursue more meaningful work, not buy Rolexes.
Relying on cash as a means of savings makes us vulnerable to inflation. Today’s dollars buy less of tomorrow’s goods and services. We can go that route, but we’ll need to save a lot more cash.
*It should be noted that many believe this level of inflation to be a temporary condition. Hurray?
Let’s talk about poverty for a second.
Now I get it: there are groups of people who can barely get food on the table. A fixation on the news might lead one to believe that large shares of the American public live in poverty. That’s misleading.
In 2020, at the height of the pandemic (but before stimulus checks were issued), the U.S. Census noted that 11.4% of Americans lived in poverty. Put in another glass-half-full way, we can say that nearly 89% of Americans are not in poverty. That said, bobbing just above the poverty level doesn’t mean that funds are available for investment. As savings have increased in the last year, however, more folks in the middle of the bell curve are now in a position of increased financial margin.
Why Aren’t We Talking About Saving and Investing?
The message of saving is strong amongst millennial and younger generations (perhaps including Gen X folks). We value financial security, meaningful work, and experiences. But 53% of millennial respondents to this survey said they wouldn’t feel comfortable investing in the stock market.
Can we really be surprised?
The 2008 financial crisis chewed up and spit out the wealth of our parents right at the cusp of retirement age, at least on paper. That said, those investors who sat on their hands and let the rough waves wash over them have enjoyed an incredible rising tide of stock market appreciation marred only slightly (and temporarily) by the pesky bug in early 2020 (See S&P 500 chart above).
As a generation, millennial and younger folks continue to view the stock market with trepidation. The reasons are complex and varied. Some potential investors understand the benefits, but can’t handle the stress of market volatility. Meanwhile others carry the bad taste of the greed and incompetence of the large institutions that contributed to the devastating financial collapse some 13 years ago. Finally, some simply see the creation of wealth to be a character flaw of materialistic culture. We’ll discuss the important semantic differences below. Regardless, the 2008 financial crisis looms large to this day.
Remember though, those dark days did come to pass, just as we’ve seen so many times before. Financial markets get a little weak in the knees from time to time, but we have yet to see a knockout.
Related Post: The Long Approach to Being Scared of Investing
How can we generate wealth and reduce wealth inequality?
So, what can we do to help reduce (but admittedly not eliminate) wealth inequality? We need improved education on the benefits of money in an appreciating asset class, particularly for those in the median income brackets.
Of course, those with the highest incomes will always benefit the greatest, able to (theoretically) save more and therefore buy more shares.
That said, if more folks are educated on the benefits and real risks of investment, we have an opportunity to increase wealth for those that have even a small degree of financial margin. In today’s cash-heavy environment discussed above, perhaps the margin is even greater for many individuals and families.
For our money, we find passive index fund investing to hit the trifecta of suitability:
1. It’s easy. Automatic contributions buy index funds every month while we sleep. Or at least that’s what we did when we were working our W2 jobs. More on our investing strategy that led us to financial independence can be found here.
2. It’s low risk. Not risk-free, but compared to entrepreneurship, real estate, or other forms of active investing, buying a piece of the global economy historically has been a very good “bet.”
3. It works. See above. As long as you hold onto your butts during (admittedly terrifying) bear markets, it’s been a “so far, so good” approach. That said, if you know or believe that you cannot hold on to said butt, be mindful of investment aggressiveness. Or avoid it all together.
As individuals with cash to spare, we can simply invest in a broad-market, low-fee index fund. Even $50 a month could change the course of a lifetime.
A Note on What Wealth Means
Let’s pause on semantics for a moment. Among younger generations, the term wealth seems to have gathered a little crust; a bit of grime.
We (rightfully) see the pursuit of riches and materialism as a flawed character trait of previous generations. Instead of “making it,” we see hedonism and greed. As a result, we are (speaking generally, of course) trading the material forms of hedonism for a life rich in experience and meaning.
I’m certainly in the camp that says experiences are better than things, but are we accomplishing our goals? We have to examine one reality: despite a generational embrace of experience over materialism, we’re not any happier.
So, it begs the question: are our lifestyles in traditional pursuit of wealth leading to discontentment? Is there really a path where all of us can live and work in dream neighborhoods, with dream jobs, and unparalleled flexibility of time and location?
Or more complex still, are we living in search of freedom from the natural and unavoidable level of discontentment that inherently has always been a part of the human experience? Are we now wired to believe, through endless scrolling of highlight reels, that our life can and should always be better? I for one am still struggling to learn that contentment is the greenest grass of them all.
The Critical Difference Between Wealth and Spending
Let’s separate “wealth” from “spending.” Wealth provides freedom and choice: the freedom to leave a toxic workplace or relationship, the choice to do meaningful work, or the flexibility to live in a town far from the corporate office.
Meanwhile, those who routinely spend most, all, or beyond their means do not have freedom or choice.
Let’s view wealth as a vehicle for choice, freedom, and flexibility. Let’s put a little shine back on the term, and separate it from the spendthrift culture of more money = more spending.
Wealth inequality doesn’t end only with taxing the mega-rich or closing loopholes, although I’m in favor of many of those measures. We also must educate folks who are able to do the following:
How Individuals Enhance Wealth
- Spend less than they earn. This is number one by far.
- Invest the difference in an appreciating asset class. This is optional, but arguably necessary to fund our later years or to provide near- to mid-term lifestyle flexibility.
- Recognize the difference between wealth and a spendthrift culture of material possessions. Wealth provides a level freedom and choice not available to those who spend all or more of their earnings.
If we can move the ledger in our favor, we can, as a society, reduce the wealth inequality gap. Sure, we can do more to even the salary playing field and address housing affordability. These are major issues, but those measures face extensive uphill political and social hurdles. No one is stopping any of us who save money from getting the compound snowball rolling.
What do you think? Is there potential to reduce wealth inequality in lieu of (or in tandem with) government intervention? Let me know in the comments below.
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