Financial Independence can be one of the greatest accomplishments for an individual, but it’s not an easy one. Plenty of financial influencers preach about the simplicity of realizing financial independence (I’m looking at you FIRE community), but rarely take into account the reader’s personal financial situation.
That’s a massive problem because no one has the same income, opportunities, and time.
So let’s chat about financial independence…
I’m not talking about the financial independence that your mom nagged you about when you were just trying to enjoy some Netflix on a Thursday night. We’ve already got the data on that, with under 24% of young adults (22 or younger) being independent of others financially – that’s not a great number compared to 1980s 34%. I’m talking about the financial independence that comes from not being reliant on W2 income (working for someone else) to live your normal life. That fact is that both definitions of financial independence are becoming more challenging to reach for the majority of Americans.
But Why?! Simply put – Income and accessible financial knowledge
The median income in the U.S. is $44,225 and the median U.S. household income is $61,937. With costs of living outpacing income, the amount left over (disposable income) for investing in something that would build your wealth is decreasing every year. There are ways to increase your annual gross income, which include multiple W2 jobs, ‘side-hustles,’ W2 jobs that have performance based income (sales), but then you run into issues of time. As mentioned above the median U.S. household income is $61,937 meaning there are children that are being raised and multiple schedules are thrown into the mix so there is a need to maximize the $ per hour. This all segues into the impact it has on wealth – without the discretionary income generational wealth slumps
In the first quarter of 2022, 69% of the total wealth in the United States was owned by the top 10 percent of earners. In comparison, the lowest 50% of earners only owned 3% percent of the total wealth. Wealth is the outcome of your actions or reactions – your actions or reactions with your income, which means after you’ve created a source of disposable income you then have to identify where to put that money. Which should be easier than finding the income at this point thanks to the ‘known’ ways to build wealth… but it’s not.
So is the easy answer improving financial literacy? It’s a portion of it! Financial literacy is defined as the ability to understand essential financial concepts in making informed decisions about saving, investing and borrowing by S&P’s Global Financial Literacy Survey. That same survey shows that only 57% of United States adults feel they are financially literate, which does align well with the bottom 58% only holding 2.8% of the country’s wealth.
Understanding basic concepts is extremely important and one step that needs to be addressed, but education on the critical thinking that is required to identify how specific information is relevant to your unique situation is even more important. It’s going to be really hard to do what the influencer making $500,000 a year says for someone making $50,000 a year – the disposable income there is slightly different.
What do we do about this?
The income and wealth gaps are not new – it’s been increasing for some time so the issue is going to take work from everyone. By identifying two problems that directly affect the income and wealth gap we can begin working towards a solution. Financial literacy and relevant information is a key point based on the data as well as improved opportunities to earn additional income.
1) As individuals we can practice being more open about our income, investing wins and losses, and other ways we’re making money. Money conversation has become a taboo topic and it’s really hard to improve financial literacy and transparent information if no one wants to talk about it. That changes when more individuals are open to taking the first steps and being more transparent about what went well, wrong, and everything in between.
2) Content creators (large groups and individuals) can begin creating more relevant content for a wider audience. Not just a story related to the top 50%. That’s something we’re doing at The Investing Circle and creating a community around this.
3) Continue to develop income opportunities as technologies change and work becomes more accessible to more people. This will be affected by the ability to talk more openly about money because once someone finds a good way to make some money and talking about it is no longer taboo the knowledge will continue to spread.