I’m fascinated by innovation, entrepreneurship, and intrapreneurship (entrepreneurship within companies). That is one of the reasons I joined Wilhelmsen as a Digital Trainee this January. I’m working on many mindblowing projects where one is 3D printing, and another is Smart Ropes (putting sensors within ropes to measure tension and give live feedback to the crew of a ship). But one project I’m working on is closer to my heart; creating a process for innovation within the company. A process where all employees can propose new ideas and concepts, big as small. The ideas can be small improvements in their day to day tasks, or larger concepts for creating new products or services.
I’ve studied entrepreneurship and have a B.Sc. in Entrepreneurship and Business, but I’ve dug deeper into literature for handling innovation & human resources in large corporations (Wilhelmsen has 18 000 employees worldwide). I’ve recently finished a book by Laszlo Bock, HR boss of Google, called “Work Rules!” I was expecting to read about their HR-strategy and tactics, but in chapter 12 called “Nudge… a Lot” he refers to an interesting study done by Steven Venti and David Wise – professors at Dartmouth College and Harvard’s Kennedy School of Government. In 2000 they examined why households have different levels of wealth at retirement.
Income is obviously a big factor. When a family has earned more money for 30 years than another family, it’s reasonable to believe that they will have more wealth at retirement age. Doctors typically end up with more savings than baristas, as Bock writes.
From the book (p. 303-304):
“Venti and Wise sorted households into ten equal-sized groups called deciles, based on lifetime income as reported to the US Social Security Administration through 1992. The 10 percent of households with the lowest lifetime income were in the first decile, the second 10 percent were in the second decile, and so on, up to those in the top 10 percent of households who made up the tenth decile. Households in the fifth decile reported lifetime earnings of $741,587, twenty times higher than the first decile ($35,848) and less than half the tenth decile ($1,637,428).
But when they looked at the range of wealth within deciles, which allowed them to compare people with similar lifetime earnings, the results were shocking.
Households in the fifth decile average $741,587 in lifetime earnings. But their accumulated wealth – their savings, their investments, their houses – ranged from roughly $15,000 to $450,000. In other words, when you hold earnings constant and look only at households with roughly the same lifetime income, the most wealthy have accumulated thirty times as much money as the least wealthy. And this general pattern persists at every income level. Look at the spread between the highest and lowest wealth levels for each decile. Even in the first (or lowest) decile, where substantially all income comes from government support, some households are able to accumulate $150, 000 in wealth. This is a phenomenal achievement, requiring tremendous discipline at that income level.”
This information surprised me. I could not believe that there were such high discrepancies between income and wealth at retirement age. People in the first decile can even end up with more wealth than people in the tenth decile. How is that possible?
Venti and Wize explained their findings with: “most of the dispersion could be attributed to choice; some people save while young, others do not.”
Households differ in the extent to which they can exercise self-discipline over the urge to spend income. That made me feel comfortable with what we are trying to accomplish on Hacked.com. We want to help our members reach financial freedom, and I’ve written many articles on the same topic (and here is another one!). But it’s good to have facts to base my – and our – presumptions upon. Data can help you underline the importance of your message.
The book continues:
“Therefore, to improve savings rates early in life, which is the biggest determinant of wealth at retirement, households need to be somehow dislodged from their existing habits. In a forthcoming paper, professors James Choi (Yale University) and Cade Massey (University of Pennsylvania), together with Jennifer Kurkoski of Google and Emily Haisly of Barclays Bank, argue that “a nontrivial portion of the variation in household wealth accumulation may be caused by variation in the savings cues individuals have been exposed to in their lives.”
This is a crucial fact that everyone should chew on for a few minutes. I created the 33% club to invest 33% of my monthly income in an asset that I think is a good investment. And this is exactly how I, and you, can reach financial freedom way faster than the “average Joe,” that isn’t even saving any money on a monthly basis – but is living on paycheck by paycheck.
I’ll continue to remind our members on why they should save and invest money, instead of spending them on useless shit like a new TV or clothes. I bet you can save and invest even more money than you are currently doing, and spend less on consumables. Am I right?