Avoid the Economic Inequality Trap

Income inequality, or the gap between the rich and poor, is a major concern. A recent study discovered that the richest 85 people in the world have as much total wealth as the combined wealth of the poorest 50% of the world’s population (3.5 billion people.) Economic inequality is all around us. In last week’s article a few readers subtly brought up the income gap between men and women. However, just because something is statistically true doesn’t mean it has to be our reality.

Earlier this month General Motors, which is the 2nd largest automaker in the world, announced that its new CEO Mary Barra will be paid a salary of $1.6 million per year. She is the first female to head a global automaker. Woot! Girl power! 😀 She started her career inspecting fender panels on the ground floor of a Pontiac plant at only 18 years old. She used the money she saved up to complete her electrical engineering degree, and returned to GM to work as a senior engineer. She showed so much potential that GM sent her to Stanford Business School so she could get an MBA and become a manager at GM, which she did. In 2011 she was appointed senior vice president for global product development, and now in 2014, she is CEO and taking home the big money 🙂 Congrats Mary!

It may have taken her 33 years to do it starting from the very bottom of the corporate ladder, but it shows that success is not as impossible as some might think. There are many articles out there that discuss the problems of income inequality or wealth disparity, but they don’t propose any good solutions. I don’t have a silver bullet either, but I think we can start by giving everyone the confidence and knowledge that “We can all choose how we want to live.”

Economic mobility can depend on location, but for the most part it’s highly probable that if we consistently work hard then we can improve our financial lives regardless of what kind of background we come from 🙂 I don’t think Mary’s situation is unique to hard working individuals. I believe most people who work their butts off like Mary will become financially successful. The only exception is if they live in a developing region controlled by oppressive regimes. If you are Bongani Nkozanza living in Botswana, Southern Africa making $1.00 a day working at a diamond mine, then I’m sorry, but you probably have a better chance of winning the lottery than ever making a six figure salary 🙁 But chances are, you probably aren’t reading this article either.

We all know I don’t make 6 figures yet today. But if I started to save and invest more aggressively, then my total annual income (rent, dividends, wages, etc,) would be easily over $100,000 a year some time in my 30s. But Mary worked much harder than me. She survived the rigorous MBA at Stanford! She sounds really smart, unlike me. I can barely even spell MBA 😛 I have a friend who is a junior analyst at Raymond James Financial. He works harder than me and will probably make $200,000/yr by his 30s. Lots of medical school graduates make $300,000/yr in their 30s. If these young professionals continue to push themselves throughout their careers, then by the time they reach Mary’s current age (early fifties) they will easily make $500,000 a year, and some will even earn over a million like Mary. 

People often feel trapped if they are born into a lower middle class family, or if they have a learning disability like dyslexia, or they have chronically ill aging parents that cost a lot of money, basically things that they can’t control. But Kevin O’Leary from Dragon’s Den said he used his dyslexia as motivation to work harder and succeed. We can’t all be rich if we are disadvantaged by external circumstances. But if we work hard like Mary or Kevin then we’ll still be way better off than we would otherwise be. Studies that show a growing wealth gap in the world tend to make poor people even more depressed about their chances of being affluent. I’m not saying we should tell people with depression to just cheer up and be more optimistic. But I think if everyone understood that the cards we’re dealt do not have to define us then there will be a lot less people in poverty. In most cases the only trap income inequality brings is the mental cage that people trap themselves in. If you have an African American sounding name, then unfortunately it probably will be harder for you to find a job than someone else with an English or Western European name. However, racism, sexism and other types of discrimination can only delay our goals but do not permanently block us from achieving what we really want in life, as long as we’re determined enough to reach success. Nobody is doomed to a life of financial mediocrity. But as soon as we say, “there is no way I can ever make a six figure income” then we have just condemned ourselves.

But as long as we realize that we can control how much money we make, then the pressure to succeed deteriorates because making six figures a year doesn’t seem impossible anymore. Probably still difficult, but not impossible. Which means we just have to figure out what we’re willing to sacrifice (usually measured in time and effort) to make the income that will give us a relatively happy lifestyle. This gives us the feeling of control, which is an empowering emotion that will lead us to actually do something about it 😀 For me, that’s working 2 jobs, and following my financial freedom plan. If you want to work 3 jobs and retire earlier than me, go ahead, it’s your choice 🙂 If you are happy with a single full time job like most people, but still invest wisely in mostly blue chip stocks, then you can probably retire at 45.

Tip of the day: We mustn’t read too much into inequality statistics and extrapolate the negative sentiment to label our own lives. Those studies are meant to cause a stir and get people talking about the subject, which of course is good because it brings light to the inequality problem. But it’s just ironic that these reports also give the most vulnerable people a false sense of pessimism and futility, that can lead to a self fulfilling prophesy 🙁