Based on this study, the highest quintile of the population is the only group whose wealth is greater than its income. Why might this be?

  • Is it because they are more likely to inherit wealth from their parents?
  • Is it because they invest more money so they generate more wealth faster?

I am simply speculating without any proof, can anyone help?

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closed as off-topic by ChrisInEdmonton, Chris W. Rea, Daniel Anderson, MD-Tech, DJClayworth Sep 2 '16 at 14:39

This question appears to be off-topic. The users who voted to close gave this specific reason:

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  • 3
    Your graph shows shares of wealth and income not absoloute values. – Peter Green Sep 2 '16 at 13:41
  • See the US version of this data, the skew is far, far worse. – JoeTaxpayer Sep 2 '16 at 14:41
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    It is a shame to close this question. It relates very well to personal finance. Not really the same graph @JoeTaxpayer. – Pete B. Sep 2 '16 at 14:46
  • Not identical format, but it shows our top quintile owning 93% of the wealth. That was startling enough. (I agree with the re-open, but the wisdom of crowds deemed it off topic. We'll see if you get enough interest to reopen) – JoeTaxpayer Sep 2 '16 at 18:36
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    The reason is that the lower quintiles spend more of their income on subsistence and have a lower percentage of disposable income for use in wealth building. – Xalorous Sep 2 '16 at 22:44

I think you came up with a worthy Masters/PhD research project, it is a great question.

This is in Australia so it is difficult for me to have complete perspective. However, I can speak about the US of A.

To your first point relatively few people inherit their wealth. According to a brief web search about 38% of billionaires, and 20% of millionaires inherited their wealth. The rest are self-made.

Again, in the US, income mobility is very common. Some act like high level earners are just born that way, but studies have shown that a great deal of income mobility exists. I personally know people that have grown up without indoor plumbing, and extremely poor but now earn in the top 5% of wage earners.

Quid's points are valid. For example a Starbucks, new I-Phone, and a brake job on your car are somewhat catastrophic if your income is 50K/year, hurts if your income is 100K, and an inconvenience if you make 250K/year. These situations are normal and happen regularly. The first person may have to take a pay day loan to pay for these items, the second credit card interest, the third probably has the money in the bank. All of this exaggerates the effect of an "emergency" on one's net worth.

To me there is also a chicken-and-egg effect in wealth building and income. How does one build wealth? By investing wisely, planning ahead, budgeting, delaying gratification, finding opportunities, etc... Now if you take those same skills to your workplace isn't it likely you will receive more responsibility, promotions and raises? I believe so. And this too exaggerates the effect on one's net worth. If investing helps you to earn more, then you will have more to invest.

To me one of the untold stories of this graph is not just investing, but first building a stable financial base. Having a sufficient emergency fund, having enough and the right kind of insurance, keeping loans to a minimum. Without doing those things first investments might need to be withdrawn, often at an inopportune time, for emergency purposes.

Thanks for asking this!

  • 1
    "a Starbucks"... lol. – TTT Sep 2 '16 at 14:58
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    Another data point for the inheritance: for Germany it is reported to be about 1/3 households have inherited. As a fraction of wealth it is most important for the middle 2 income quartiles, though also there much less than what people accumulate personally (note that inheritance typically comes at an age where quite some wealth is already accumulated: the average heir is in their 50s, the median value is a bit above 20 k€ or roughly 1 year average net income. About 1 in 13 inheritances is above 100 k€). – cbeleites Sep 2 '16 at 15:28
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    Your comment about emergency underscores, but does not stress, this is why everyone needs an emergency fund. – Xalorous Sep 2 '16 at 22:46

There are a lot of forces at play here, one of which is addressed in your second bullet point.

Housing, transportation, food, and healthcare are pretty much the staple expenses of a modern day human. While these expenses all have a range from minimum required to function and luxurious all humans incur these costs. The lower rung wage earners earn an amount closer to their actual costs than higher earners. As income scales up these expenses typically also scale up with different lifestyle choices.

There reaches a breaking point though where is so much excess to your income that you begin meaningfully spending on investments; you may also begin to take a meaningful portion of your compensation in securities rather than currency. In times where the economy is booming, folks who hold assets in securities rather than currency really win. In 2008 people in that highest rung really took a wealth hit (and probably an income hit).

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    ... and where the point is when you decide to go for investing rather than increased consumation is very much personal finance. – cbeleites Sep 2 '16 at 15:14
  • @cbeleites I think it's about educating ourselves, and our children, in personal finance. We (people in the US) need to focus on wealth building before instant gratification. I'd love to tell you more, but the phone I've been looking at just went on sale. (j/k) (sorta) – Xalorous Sep 2 '16 at 22:48
  • The concept at work here is disposable income. That is what's left after you pay your expenses. The more you have, the easier it is to invest in wealth building. – Xalorous Sep 2 '16 at 22:50
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    @Xalorous: sure it's about educating ourselves. Still, knowing where one's "working point" is compared to other people is important as well. And wrt disposable income I observe (mostly in Germany) vast differences in what expenses are considered necessary. Over here that means that someone with median income may end up in any welth quintile within approximately 15 - 25 years starting from 0 wealth (completely consuming a median income is possible without wallowing in luxury. OTOH, basic food is inexpensive social insurance subtracted before the money ever hits your account and there are ... – cbeleites Sep 5 '16 at 10:57
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    ... regions where you can buy half a village for the price of an appartment in Munich...) – cbeleites Sep 5 '16 at 10:58

In a business environment, this phenomenon could be easily explained by 'operational leverage'. Operational leverage is the principle that increasing revenues by a small amount can have a disproportionately large impact on net income.

Consider this example: you run a business that rents out a factory and produces goods to sell to consumers. The rent costs you $10k / month, and all of your other costs depend on how many goods you produce. Assume each good gives you $10 in profit, after factoring your variable costs. If you sell 1,000 units, you break-even, because your variable profit will pay for your rent. If you sell 1,100 units, you make $1,000 net profit. If you sell 1,200 units, you double your overall profit, making $2,000 for the month. Operational leverage is the principle that adding incremental revenue will have a greater impact than the revenue already received, because your fixed costs are already 'paid for'.

Similarly in personal finance, consider these scenarios:

You have $1,000 in monthly expenses, and make $1,000 - your monthly savings (and therefore your wealth) will be zero.

You have $1,000 in monthly expenses, and make $1,100 - your monthly savings will be $100 per month.

You have $1,000 in monthly expenses, and make $1,200 - increasing your income by ~10% has allowed your monthly savings double, at $200 per month.

You have $1,000 in monthly expenses, and make $2,000 - your monthly savings are 5 times higher, when your income only increased by ~80%.

Now in the real world, when someone makes more money, they will increase their expenses. This is because spending money can increase one's quality of life. So the incline does not happen quite so quickly - as pointed out by @Pete & @quid, there comes a point where increased spending provides someone with less increase in quality of life - at that point, savings really would quickly ramp up as income increases incrementally. But assuming you live the same making $2,000 / month as $1,000 / month, you can save, every month, a full month's worth of living expenses. This doesn't even factor in the impact of earning investment income on those savings.

As to why the wealth exceeds income at that specific point, I couldn't say, but what I've outlined above should show how it is quite reasonable that the data is as-reported.

  • 1
    The concept at work here is disposable income. That is what's left after you pay your expenses. The more you have, the easier it is to invest in wealth building. – Xalorous Sep 2 '16 at 22:50
  • @Xalorous Exactly - and if you have all of your immediate needs and wants covered with $75k in income (including say $1,000 of savings every year), then $80k in income (an increase of only ~7%) increases your savings every year to $6,000 (an increase of 500%). If spending more money is unnecessary for your immediate happiness (because you have 'enough') then every dollar you earn can go to savings. – Grade 'Eh' Bacon Sep 6 '16 at 12:45
  • I understand and agree with what you're saying. There's a real struggle involved in making the jump from subsistence living, paycheck to paycheck, to budgeted living with one's means. I know it's real because I'm still making that transition. – Xalorous Sep 6 '16 at 16:30

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