Monday, December 27, 2010

Rich and Poor

My original purpose in this blog was to talk about the idea of a flat tax to replace the current stepped tax brackets that are used in the United States presently. I want to first talk about the relativity of wealth or poverty. It’s always interesting to me that nearly everyone thinks of themselves as ‘middle class.’ I knew a guy once that made $400,000 plus per year. When confronted with the opinion that he was rich, he said “no, I know a lot of guys that have way more money than I do.”

Others, like myself, may live in poverty, making far less than the established guidelines for poverty, and yet, we consider ourselves middle class. The idea of class originates in Europe from what I know, and was used in a time when class positions were not easily changed. Here and now many of us may make minimum wage when we are teenagers or even in the twenties, and make more than $100,000 per year later in life. Of course class wasn’t and isn’t just about income. It’s about culture. And in any case I hate class. The idea of some people being better than others because of the way they were raised. It continues to exist to some degree here, but thankfully, I believe it is much less prominent than in previous times or in other places. In any case it is all relative.
An Alexander the Great or a Julius Caesar did not have the internet. He did not have air conditioning. He did not have his choice from hundreds of different food items at any given time. He did not have a car. He didn’t have living quarters free from bugs. He didn’t have over the counter pain killers. While he may have had tailor made clothing, there weren’t a wealth of materials to choose from. He didn’t have TV or movies or video games. These are differences between him and us, and it is us in the enviable position of being the “haves”. Not only are these differences between peoples in ancient times and us, they are differences between us and others that are living and breathing right now. There are people that don’t have any of these things, and there are probably hundreds of millions of them. I just put $10,000 into the annual income cell at If I’d made that amount last year then I would be richer than 86.69% of people on planet earth. The reason that this is the case is that money is not evenly distributed… AT ALL!!! Look at the income graph below:
Graph from:
According to this site, anyone that makes more than $47,500 per year is within the top 1% of income earners on the planet. The median income, which would be the one at the number 3 on the graph, is $1,700 per year.

Looking at annual income is one way to look at the disparity. Looking at ‘wealth’ is another. Looking at wealth, we look at the total value of assets minus total value of debts. There is some correlation with annual income, but not as much as you’d think. 40% of Americans own 1% of America’s wealth. 1% of Americans owns 38% of America’s wealth. The 40% (like me right now) are not saving any money, and have roughly equivalent income and expenses, and if they start making 100 times more money, they will start having 100 times more expenses. The other groups actually save and invest money in most cases, or have an inheritance in a few cases.

So the question is, are you getting compound interest, or paying compound interest? It’s not entirely coincidental in my opinion that the graph showing the increase of money with interest over time looks a lot like the annual income graph above. $100 per month for a year isn’t $1,200. At 7% interest, it’s $1,284. Not much right? At 5 years it’s $7,384. At 10 years it’s $17,740. At 20 years it’s $52,638. At 40 years it’s $256,331. At 50 years it’s $521,983. At 60 years it’s $1,044,560. That is $72,000 in money you put in over 60 years, and $1,044,560 you get out. Do you have $100 per month? Once I have a career job later this year, I’m going to put a lot more than $100.00 into savings/investments per month.
When I was in my second year of college, after my mission to Colombia, I had a friend that was single and raking in the money, and he didn’t know what else to spend it on. I was taking a personal finance class at Utah Valley State College (now Utah Valley University) and showed him the magic of compound interest. When he moved out, he had been getting interest on $1,000 per month invested for a number of months. If he does that for 40 years at 7% interest, he’s up to 2.6 million dollars. I should have charged him for my services.

I think having money helps, whether you want it for yourself or you want to help others. It won't bring happiness, but it can allow you to do a lot of good in the world. Anyway, there’s a major huge ginormous article split into 10 parts called “The United States of Inequality” by Timothy Noah on I’m going to read it now. It sounds interesting. More interesting to me than writing more blog.

1 comment:

Bonnie said...

It's all very interesting, Jeff. I think you are very wise to invest what extra money you have in a safe place that gives you interest for it. You might talk to Bob about some options when the time comes. Happy New Year! Mom