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Well-educated people can lag in wealth

Mar 19 2017 06:00
Paul Leonard

Johannesburg - Imagine that you go to your 20-year school reunion and are catching up with old school friends.

You speak to John, who says that he got a three-year qualification in mechanical engineering and now owns an engineering workshop.

You also speak to Steve, who studied for 14 years and is now a specialist physician with his own medical practice. John was an average scholar and Steve was the top pupil in your matric year.

Who is likely to be the wealthier of the two by the time you see them at the reunion?

Studies have shown that John, with his mechanical engineering workshop, is likely to be wealthier. There are a number of reasons for this interesting situation.

The first is that John, after getting his three-year technical qualification, started generating an income, while Steve still had another 11 years to go before he started getting paid as a fully qualified specialist physician.

While John saved money during those 11 years, Steve spent most of what he earned as he worked and studied to complete his qualification.

Let’s say that, once fully qualified, Steve ultimately generates an income three times more than John and they both save 10% of their respective incomes.

Once he starts working, it would take Steve 10 years to catch up with John. They would have been out of school for 24 years before Steve caught up with John’s wealth position.

In reality, though, it would probably take longer. Steve would not be able to save 10% from the beginning of his career because of student debt, and he would probably incur even more debt to set up his private practice.

Ultimately, Steve’s superior income would give his wealth the potential to catch up and overtake John’s wealth. But there is another obstacle for Steve to overcome before he achieves that.

This hurdle has to do with the status ascribed to Steve. Doctors and others with advanced degrees are expected to fulfil the role of an upper-class citizen.

John would not be out of place living in a modest home and driving a nondescript bakkie or sedan.

The cost of setting up and maintaining his domestic situation is much lower than servicing the high-status lifestyle that Steve would expect.

Professionals often say that society expects them to live in expensive homes, wear expensive clothes and drive expensive cars. We judge a book by its cover – therefore often judging professionals by their outward appearance rather than their net worth.

And, unfortunately for them, the pressure to maintain an impressive outward appearance can restrict the growth of the professional’s wealth.

Another disadvantage of living in affluent neighbourhoods is that you are bombarded with cold calls from so-called investment experts.

In a survey conducted by the authors of The Millionaire Next Door, Thomas Stanley and William Danko, some professionals said they had bad experiences with these cold-callers – to the point where they would no longer invest in equity investments, thus further impeding their wealth.

Research shows that people who spend their money on luxuries tend not to be price sensitive about things, but they ironically become very price sensitive about paying for good legal and financial advice, which would help them get ahead.

Successful wealth accumulators, on the other hand, are price sensitive to most things, but, interestingly, less price sensitive when it comes to buying services that will help them control their family’s consumption behaviour.

They will also happily spend good money on legal and financial advice that they know will help them.

Surveys show that the more time you spend on the purchase of luxury items, the less likely you are to become wealthy.

The reason for this is that time and energy are finite resources, and research has shown that, when you allocate a lot of that resource to the activities of researching and purchasing big-ticket items, you have less time available to plan your investments.

This sounds obvious, but what is not so obvious is the inverse correlation between time spent purchasing luxury items and wealth accumulation.

Many purchasers of luxury cars spend a disproportionate amount of time researching (sometimes for months at a time) a particular vehicle before buying it. If they had spent even 25% of that time planning their investments, they could be much wealthier today.

Such buyers often argue that they got the vehicle at cost or even below cost, but when they talk about paying as much for a car as you do for your house, they are still hugely out of pocket – despite the discount.

It’s all a question of focus.

Leonard is a qualified financial planner and regional head at Citadel Wealth Management

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