In order to invest, you must earn enough that you can meet your living expenses and still save money at the end of each month. One of the biggest complaints I hear from new investors is that they are simply unable to come up with extra cash. That got me thinking. Have you ever wondered what is considered wealthy? How about where you and your family fall in total household income? Today, we’re going to be looking at the research of Leonard Beeghley and examining class levels in the United States. By finding out where you are in the spectrum of household income and class, you can better determine if your inability to invest really is due to a lack of income or whether you don’t have a handle on your finances when compared to your neighbors.
The Purpose of Investing
Before we begin talking about class in the United States, we need to discuss the purpose of investing. In my opinion, the purpose of investing is to make your money work for you so that it generates cash regularly instead of (or in addition to) you having to sell your labor.
To illustrate my point: Imagine the case of two men, Greg and John. Greg is a medical doctor and earns approximately $300,000 per year. He has to show up to work regularly, using the rare skills he’s acquired through a very expensive medical school education and years of on-the-job training. If he dies, or goes into a coma, his family will receive little or no income because he’s unable to work. John, on the other hand, owns a $3,000,000 limited service hotel that generates $300,000 per year for him. He doesn’t have to run it or be involved in any way because he pays a management firm to set rates, staff the property, and maintain the standards required by his franchise agreement. If John suddenly passes away or is incapacitated, his property will continue to mint money, drowning the family in cash. The family also has the option of borrowing against the equity they have in the property to acquire another hotel or expand, increasing profits further.1
The Power of Compounding In Determining Wealth
Building up your assets so that they are large enough to produce meaningful income is the challenging part; if it were easy, everyone would have already done it. That’s why the power of compounding is so important. Coming up with a large chunk of money at once is overwhelming. But you’ve already learned that $1 can grow into a substantial amount over time. Consider that at 10% growth, a $10,000 investment would compound to to $25,937, $67,275, $174,494, and $452,593, respectively, over 10, 20, 30, and 40 years. If you’re smart enough to make the investment in your twenties and hold on until your seventies, that one stake would grow to nearly $1,173,910. If you were able to save $10,000 per year, at a 10% rate of return, you’d have $11,639,085 by your seventies (that may sound like a tall order, but if you make more than $50,000 per year, it’s possible). That’s enough money to generate income of between $400,000 and $600,000 annually without ever touching your principal, plus leave a huge estate for your children, grandchildren, or favorite non-profit.
What Constitutes a Household When Calculating Household Income in the United States?
Household income is based on people living under the same roof. If you are single, your household income will include only your income. If you are married and both you and your spouse work, the household income will include both incomes.
With that said, let’s look at Leonard Beeghley’s research on household income in the United States and break it down according to class. Once you've examined the chart (you may want to print it for easy reference as you go read the rest of the article), I'm going to walk you through each class and explain what you may want to be doing to help build your wealth.
