Most of our clients have earned and saved their way to wealth. They neither inherited much nor received large windfalls. They saved a modest percentage of their income over time, and the compounding of their savings propelled them up the wealth ladder.
There’s a growing realisation that this mechanism for becoming wealthy has become more difficult. One reason is that asset owners have become wealthier while incomes have not kept pace with wealth. It’s not about wealth inequality, although that’s an issue too. It’s about the phenomenal growth of wealth in recent decades relative to the mediocre growth of wages.
A recent article in the FT showed that the median household’s disposable wealth in the UK, US, Germany and France has roughly doubled in real terms since the mid-1990s while incomes have grown by only around 30 percent. A generation ago, it would have taken about 20 years of savings from the average salary to earn one’s way from the bottom of the UK’s wealth distribution to the top quarter. It now takes 40. This picture is mirrored elsewhere.
The result is that inheritance and asset windfalls, like owning shares in a start-up at the time of a successful listing or acquiring assets through political connections, have become more important in determining status and financial standing.
We’re noticing this change in current younger-to-midlife clients. The ability to afford property in desirable areas is more often determined by windfalls, like help from parents. Having the ability to borrow is increasingly irrelevant because of the gap between incomes and property prices.
In a meritocratic society, one that rewards ability, effort and achievement, education played a big role in enabling people to climb the wealth ladder in the past. Ironically, the current generation of parents have spent increasing portions of their income on education when it now seems that education may no longer be a reliable indicator of future status or wealth. Neither is hard work. Highly educated and high-earning people may no longer be able to reach the financial standing they desire.
Also, ironically, owning a property in a sought-after area and sending one’s children to prestigious schools are the two most important signals of status in modern societies. These financial status signals are becoming out of reach of even high-income earners, and chasing these status symbols perversely prevents them from saving even modest parts of their incomes.
I know this tension personally. There is always the question of how much to invest in my children’s education versus my own retirement.
All of this means that relative wealth is now more important than relative income for life satisfaction (if satisfaction is measured by progress and status). This leaves a great deal of happiness or satisfaction to luck.
The people who saved their way up the ladder are now sitting across from children who cannot do the same. They ask us what to do about it. There are no tidy answers, but it helps if a family is clear about what financial standing means to them, and how much it should matter.
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Kind regards,
Sunél
