In earlier eras, when wealth was synonymous with land, and “investing” meant buying hard assets like head of cattle instead of clicking numbers on a screen, the skills of growing and keeping wealth existed on a much tighter continuum.

But there’s one big difference.

Keeping money means controlling your appetite and not breaking what’s already working.

Growing money on some level involves taking on risk to reveal more value.

Smart investors and owners try to mitigate risk in clever ways, or even eliminate it entirely. But even in those scenarios, risk is the central factor. Either measuring and accepting it, or removing it entirely.

Keeping wealth is tactical

I say that only because the strategy is super simple: spend less than you make.

The tactics for “spending” and “making” are all the conventional wisdom:

• Make a budget and stick to it
• Invest 10% of every paycheck
• Max out retirement accounts
• Use compounding interest to make sure your investments are beating inflation
• Etc.

All good stuff. But in an age where wealth is mostly abstracted to numbers in a ledger, and you’re not watching your wealth graze in a field or seeing the your wealth consume coal and output goods, then the skill of wealth creation matters more.

“Number go up” is not wealth creation

This is easy to confuse. Number go up has been wealth creation for a very long time.

Let me show you a few graphs though:

“Historically, the average cost of a house in the US has been around 5 times the yearly household income. However, during the housing bubble of 2006, this ratio exceeded 7. In other words, the average single-family house in the United States cost more than 7 times the US median annual household income.” – Longtermtrends

Housing is the most important metric in terms of talking about wealth because that is the primary vehicle of wealth storage for most Americans.

For Boomers, it was twice as easy in the 70s to “get in the game” of home equity than it is for anyone now. Getting in the game is crucial because you can ride the equity wave up, even if your income isn’t increasing as dramatically.

When housing is cheaper too, it also diminishes a lot of the risk of buying. Now, not only is it more expensive, but it is more volatile. Volatility increases the costs of consideration for what, when, and where to buy.

If you buy something expensive and it goes down 10%, that’s worse than buying something cheap and it going down 10%. Ironically, if more people are buying when it’s cheap, that also reduces the likelihood of your home value going down in the first place.

Okay. Pause.

What does this have to do with wealth creation

All the above on housing is just to say the stakes are higher.

Equally, a higher percentage of everyone’s income is going towards that single savings vehicle. Its a vicious cycle.

Housing is not a wealth creation vehicle. It’s a wealth storage vehicle. The above chart from FRED shows the median price in the $30-40,000 range in the 70s, and in the $400,000+ range now. Is the quality of houses 2x, 5x, or greater than 10x as good as they were in the 70s? Or have the incentives of housing, the creation of money, and more all converged to make this the defacto means of keeping wealth?

Growing money and keeping money are two different skill sets 

Categories: Economic History

Tags: Economic History, Economics, Finance, Philosophy, Politics, Psychology, Socialist Finance, Third Place, Work-Standard