First 2 things

A study that reinforces what we already know, but that doesn't mean it's wrong. Also, 7 other things worth your time.

Steve Martin used to have a bit that went something like this:

You can be a millionaire and never pay taxes!

You say: ‘Steve, how can I be a millionaire and never pay taxes?’

First, get a million dollars…

I read about a big study of 90,641 households all around the world, published as a working paper for Austria's Oesterreichische Nationalbank (link opens as .pdf), looking at what wealthy families in developed countries do differently from less wealthy families. 

No surprise, they found a big worldwide wealth gap. And, if you drill down on the findings on the American part of the study—about 6,000 U.S. households—you’ll see two specific decisions they say are the difference between wealthy and not wealthy.

I mentioned that Steve Martin bit because there’s a bit of “first, get a million dollars” involved in their conclusions. But, let’s examine what they came up with.

Decision No. 1: Own your home (and eventually pay it off).

This is a big focus of the study: how much better off people are if they own homes, as opposed to being renters. 

Homeowners turn out to be wealthier than renters worldwide; in the U.S., it's an 8x difference between homeowners and renters.

That said, this is the less compelling of the two conclusions, because it's likely that the decision to own a home results from having at least some wealth, as much as it could ultimately be the cause of greater accumulation.

The other decision is a bit more compelling.

Decision No. 2: Start (or at least own) a business.

For those of us who weren't born into money, there's only one way to cultivate it: Own a business. Sure enough, that’s the second conclusion.

(I’m conveniently throwing large-scale investing into this bucket, since that’s partial ownership, even if we don’t always think of it that way.)

Here's the tricky part from the perspective of an individual, as opposed to an economist, however: What if you fail in trying to start a business?

Frankly, it took four or five reads of this fairly opaque study for me to realize the obvious point: Most entrepreneurs who fail the first time don't just give up.

They keep trying. So, over time, the odds are that they'll ultimately succeed with at least one business keep growing.

The researchers also looked at how these two factors interacted with each other, like a matrix, divided into three classes:

  1. Top 15%: Homeowners who also own a business. 

  2. Middle 55%: Homeowners who primarily work for someone else. 

  3. Bottom 30%: Renters who work for someone else. 

You'll notice also that we're missing a category: renters who are entrepreneurs. (I was in that category myself for years.)

However in the U.S., most people who become successful in business eventually do own at least one home. Maybe more than one.

What to do with this information? As The Washington Post points out in its report on this study, the vast perception is that it's getting harder and harder to climb the wealth ladder. 

I can imagine many people seeing this and just concluding that the deck is stacked. Start a business and buy a house when you're just starting out? Sure thing, maybe I’ll also flap my arms and fly to the moon.

The answer seems to be, to focus on the business first, and the home ownership second. Maybe especially now, while the housing market is utterly insane.

You need a place to live, certainly. And if you have a family, their needs likely come first. But, even though we have 30-year mortgages as the norm in the United States, it might make sense to look at housing as a temporary situation. 

Thoughts? Is the deck stacked? Is this all obvious? Let us know what you think in the comments.

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7 other things worth your time


Thanks for reading. Photo courtesy of the Yooperann on Flickr. I’ve written about the study before at Inc.com. If you’re not a subscriber, please sign up for the daily Understandably.com email newsletter—with thousands and thousands of 5-star ratings from happy readers. (Want to see all the things I’ve gotten wrong? Click here.)

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