Paying yourself first is sound financial adviceMar 04, 2022 12:26PM ● By Bryan Gray
From listening to people, the most common dissatisfaction with life is the inability “to get ahead financially.” Incomes rise, but cost-of-living also jumps. Savings rates are meager, and more families feel like they are pushed out of the so-called middle class.
Some of this has to do with our lifestyle. Compared to our parents’ generation, most of us dine out more, travel more frequently, have a different idea of a “starter home,” drive automobiles with all-inclusive features, and devote a larger portion of our income on phone, internet, television, and other technological devices and services. Our expectations have soared, and with that comes a cost. We are a society that pays for conveniences (bottled water?).
But it is true that there is a growing chasm between the “haves” and “have nots.” Adjusted for inflation, median incomes in Utah have been flat since 2002. Some 20% of Utahns are spending at least half or more of their income on housing. An international report on income claims that 95% of the economic growth since 2019 was grabbed by the wealthiest 1% of Americans while 70% actually lost ground. (Even worse international news: 85 individuals in the world have more combined wealth than the poorest 3.5 billion.)
A Utah financial advisor editorialized last week that the wealth gap partially results from our tax system in which workers are taxed at a different rate than those who invest in stocks and property. (Dividends and capital gains are taxed at a lower rate than paychecks and interest.) Yes, the easiest way to become wealthy is to have wealthy parents or grandparents. A $10,000 investment in the S&P 500 stock index in 1961 is worth more than $3 million today. Yet a majority of Americans still have minimal or no participation in a company 401k or individual Roth IRA accounts.
Even illegal ways of avoiding taxes favor the wealthy. A tax expert for the Americans for Tax Fairness noted that decreased budgets for the Internal Revenue Service have led to severely reduced audits on the wealthiest 1% whom, he said, fail to report an average of 20% of their income. If they are caught, of course, they are penalized with an additional 75% fee. But there’s a silver lining for rich tax cheats. The penalty is capped at $100,000. As the tax expert wrote, “If you’re trying to avoid $50,000 in tax, the threat of a 75% penalty ($37,500) can be daunting. But if you’re trying to avoid $3 million in tax, that $100,000 penalty is trivial.
There will always be a distinct difference between individual incomes. Education, family structure, geography, work ethic, willingness to accept risk, and even dumb luck will consistently be major factors in income levels, and demonizing entrepreneurs will only stall the economy.
None of you reading this will equal the income of Bill Gates, Jeff Bezos, Warren Buffet, or Mark Zuckerberg. But one should heed the advice of the Utah financial expert who notes the advantage of investing in property or a solid stock portfolio. Call it “paying yourself first.” Start small and let volatility in the market work to your advantage.
The decline in the middle class is concerning. It is a middle class that separates us from developing countries. But complaining about “not getting ahead” does nothing about solving the problem, and don’t rely on either political party to solve it either. Pretend you are playing chess…It’s your move.