Monday, May 21, 2007

How to Become Rich

What does it take to become wealthy? Before you answer, let's review a few facts. The first one is no surprise:

It seems that the smarter you are, the more you tend to earn. For each IQ point you have above someone else's IQ, you'll earn between $200 and $600 more.
But this one is more surprising: People with high IQ do not end up with more wealth.

We who are smarter than the average bear (I'm including myself and you) would reasonably assume, then, that smarter people would end up wealthier. But that was not suggested by the study. Instead, people with higher IQs and incomes tended to spend more, maxing out credit cards and paying bills late.
The above two quotations are from a summary of research conducted by Ohio State economics professor Jay Zagorsky. Here is another result from a different study of Professor Zagorsky:

Overweight Americans who lose a lot of weight also tend to build more wealth as they drop the pounds.
And yet another Zagorsky fact:
Regression results show lower net worth is associated with smoking, after holding constant a variety of demographic factors.
Finally, recall this lesson:
Stephen F. Venti of Dartmouth and David A. Wise of Harvard concluded that the primary reason for differences in retirement assets was differences in propensities to save. It is not unusual to see low-income households with high savings rates holding more financial assets at retirement than high-income households who saved a smaller fraction of their income.
The neoclassical theory of distribution teaches us that a person's earnings depend on his or her productivity. But earnings are not the same as wealth. The accumulation of wealth is mostly about the ability to exert self-control.