Billionaires and the impoverished have one thing in common – momentum. Once you achieve high levels of wealth or debt, it’s very easy for either one to continue to grow.
A recent report by the Institute for Policy Studies highlights this point. The study found that three billionaires – Jeff Bezos, Warren Buffett, and Bill Gates – hold more wealth than the wealth of the lower 50% of the U.S. population combined. The wealth of the top 25 billionaires equals that of the lower 56% of the population, and the wealth of the combined Forbes 400 billionaires list exceeds that of the bottom 64% of the population.
The other end of the economic pool may not be deep, but it is wide. Approximately one in five (19%) of Americans have zero or negative net worth – meaning that they have no safety net to handle financial setbacks and are at high risks for falling deeper into debt.
Minorities are overrepresented in this category. Approximately 30% of African-Americans and 27% of Latinos have zero or negative wealth, compared to 14% of white Americans. The study cites homeownership as a prime contributor, given that home equity is often the largest asset that middle and lower-income Americans possess. The study showed that 71.8% of white Americans own their homes, compared to 45.5% of Latinos and 42.3% of African-Americans.
Retirement funds are not specifically addressed in this study, but separate surveys have shown similar poor results. Adam Carroll, Chief Education Officer and Founder of National Financial Educators, notes a 2016 Time magazine survey showing that one-third of Americans had saved zero dollars for retirement – logically consistent with the number of households at or below zero in net worth.
If you are in a zero or negative net-worth situation, it’s not hard to pinpoint what happened. Collectively, you spent more than you made, and you have fewer assets to show for your spending. It’s that simple – but making the necessary adjustments to get out of that situation is not. You may not be able to fully control the income side of the equation, but you can control the spending side.
Your debt may be from investments in your future such as student loans, bad luck such as medical bills or auto accidents, or simply a lack of financial discipline. How do you turn the tide? Start by tracking your spending and establishing a budget that uses your available income but provides a surplus that you can use to pay down debt. Greg McBride, Chief Financial Analyst at Bankrate.com, calls a budget “your scorecard to tell you whether or not you’re living within your means.”
Carroll’s concept of “offense” and “defense” may help. “Great offense is, ‘How do I make more money?'” says Carroll, citing everything from a raise at work to selling unwanted items. “Defense is, ‘How do I decrease my monthly expenses to the absolute ridiculous?'”
Make sure to budget an amount for unexpected expenses and setbacks, as well as savings for retirement and an emergency fund. McBride calls an emergency fund “the buffer between you and high-interest rate debt.”
A typical emergency fund contains enough for 3-6 months of living expenses, but start slow. To avoid spiraling debt from interest charges, first you need to devote a fair portion of expenses toward eliminating the highest-interest rate debt (usually credit card debt and/or payday loans).
Let a budget and fiscal discipline put you in the right direction, and then let the positive momentum of savings take over. You probably won’t reach the Bezos, Buffett, and Gates level, but you could eventually have enough to meet your needs, both for the present and in retirement.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.