Normally, I focus on the selection of individual investments that hold the promise of the greatest returns over a particular holding period. This is because I recognize that earning an extra percentage point on your investment returns over the course of a lifetime can lead to outsized wealth creation effects. For someone who invests $1,000 per month over a working career, an extra percentage of compounding could have a million-dollar impact.
But it is also true that the net aggregate amount that you save has outsized effects as well. I was reviewing data pertaining to the Silent Generation, which encompasses those born between 1925 and 1945 who are roughly 75-95 years of age. In 2010, it was predicted that the millennial generation would wield more wealth than those in the Silent Generation age cohort by 2020. Now, that date has been revised to 2027, and even then, the figure is based more upon mortality rather than dissipation of assets from spending.
The data for these older Americans is something I consider highly impressive. The average member of the Silent Generation had 13 years of their lives in which over 20% of net income was saved. That is phenomenal. Given that group averaged slightly over $60,000 in annual earnings per year adjusted for inflation, that implies the best thirteen years of their lives resulted in $156,000 dedicated to the investment markets.
It is the underpinning of all of investing, but living below one’s means is the one necessary condition to building wealth. It needs to be repeated over and over again so as to become part of the fabric of the typical American household because it is what translates stagnating life circumstances to getting ahead.
Personally, I think there needs to be a reorientation away from finding satisfaction in the purchase of personal property (namely, depreciating assets like cars) in favor of investing.
The reason I was drawn to income investing as the premise of this site was that it is one of the very few areas of life where you can turn time on its head. If you buy a car and put 10,000 miles on it over the course of a year, you are worse off a year later because the car is holder and worth less. The average American will work 8,920 days in a lifetime. Every time you go to work, you are receiving income from the work but in exchange you another day withdrawn from what will amount to your cumulative lifetime labor output.
A well-tended investment, in contrast, is a positive offset against these inevitabilities. If you earn $60,000 and save 20%, you have $12,000 to invest. If you buy 240 shares of Coca-Cola stock, you get $393 in cash payments in addition to any price increase in the stock as earnings grow. The next year, you might get to collect $425 in addition to the price increase. The accumulation of savings, and translating it into specific investments, is the one domain where the passage of time can become a positive phenomena to you.
Most of us have more discretionary income than we might think. When we convert our labor into the purchase of personal property, we are taking our output and depreciating it alongside time. When we try to maintain a high savings rate and turn it into investments, we are now taking past labor and turning it into an appreciating event that grows stronger over time.
Napoleon once had a saying where he said that if you want to understand a man, you must endeavor to understand what the world was like when he was 20. For those surviving members of the Silent Generation, the lean times (to say the least) of the Great Depression and the uncertainties that accompanies the post-war boom encouraged high savings rates as a cultural component of survival. Even as many of their incomes have become fixed, they continue to maintain high savings rate. Meanwhile, millennials continue to save about 6% of their income, even as they climb the corporate ladder (a Deloitte study indicated that millennials earning $100,000 only saved 8% whereas those earning $65,000 only saved 6.5%).
I think this all could be fixed by focusing the cultural component of saving. Labor is tough. You are giving up a part of your life, which is about 25,000 days on average, in exchange for some amount of income. If you are going to make that sacrifice, you better have something to show for it. Setting aside an extra $10,000 for Hershey is going to have a lot more to show for it ten years from now than upgrading to a nicer car today compared to a more baseline model.
Appreciation for business ownership can be taught by emphasize the perpetual nature of a corporate share of stock. When you buy shares of Stock X, you get to collect all of the dividends and capital gains that the business is able to throw off for the rest of your life. There is no expiration to it. It can grow alongside without end as long as obsolescence and overleveraging are avoided. To me, it is a point of civic price that America’s oldest are able to maintain such a high savings rate even as their incomes have plummeted. And yet it is the oldest among us that are making the most forward-thinking decisions with their income. It is a treasure they are still with us because many of these old-fashioned values that drive the civilization forward are not being replicated in the lower age groups.