Sitting on the CTA train from the Loop to O’Hare Airport people were talking about the terrifying financial position that Illinois is in. Like all states Illinois has spent (or has promised to spend in say, pension liabilities) so much more money than they have brought in that there is no legitimate way they can pay their bills.

They owe so much money to their residents and creditors that there is only one source that can pay their $100 billion dollars of debt and that is the federal government.

The U.S. government had no problem creating pretend money out of thin air for banks, it’s hard to imagine they will let Illinois shrivel up and die.

The Feds know that this is just the beginning of course. Each of the 50 states have promised money to people who will retire from the government money which doesn’t yet exist.

Each state will go to the U.S. gov’t and get a “loan” or simply have to pay the bills and obligations. At some point the cards cave in on each other and the word inflation doesn’t begin to cover what will happen. But will it happen this year or next? 2 years from now or 10 years from now?

You can try to predict this but because there is no track record, there’s no stick to measure just when this will occur.

YOU become responsible for YOUR life and future.

In this series or articles I’ll show you likely future scenarios starting with what’s happening in your own personal space.

Fortunately individuals can’t achieve the same level of stupidity as local, state and federal governments.

Today we begin with you, your family, your situation as it would play out in a predictable fashion. We begin with observing what you do today and it’s impact on tomorrow.

Then we’ll go straight to look at what builds wealth for real. You will see the numbers clearly reveall what you can do that predicts your own personal wealth. One life strategy predicts your wealth to be four times than that of the average American. (All statistics courtesy of the U.S. Gov’t)

I suspect the data and key concepts in this article will map over nicely to most nations of the world.

For 2017, we have a situation in the U.S. with a market that has gone straight up for absolutely no “real” reason. (It’s up because the Fed has created enormous amounts of imaginary money and has moved the market.) The market is now quite “expensive” again. I don’t buy a lot of overpriced stuff until it becomes priced right or under-priced. Make sense?

The markets matter because a rising stock market means a rising retirement account for you. It means your 401 K is going up in value. The money you’ve put in your 401K (retirement account) is very important. You WILL pay taxes when you withdraw this money, pretty much like any other income.

But your 401 K and any other retirement vehicles you have is critical to your financial health.

[Special Note for International Readers: A 401K is an investment umbrella that provides tax deductions now in lieu of paying higher taxes when you pull the money out at “retirement.” Recent changes in US law allow individuals to shift their 401K to any plan provider in the United States, but no one does because… well… people are lazy. The 401K is a fabulous supplemental income plan for people’s retirement…for which people often eliminate the word “supplemental.” Everyone in the U.S. can have a 401K and put the maximums allowed by law into the vehicle…and they should almost always get providers outside of their own corporation to hold the money…]

But if someone isn’t regularly analyzing when to buy something and when to sell it, then they will end up with…almost nothing. The median 401K has about $80,000 in it…after taxes, that’s really about $60,000…about enough to live one year in “retirement.”

In a minute I’ll show you exactly “where you are” as far as 401 k savings compared to the rest of the U.S. 401 k holders in YOUR AGE GROUP.

There is a predictable road to financial freedom.

Then I’ll show you that financial FREEDOM has very little to do with your 401K which will crash when the market crashes.

Don’t misunderstand. 401K is a GOOD thing. Even if the stock market does crash again this year (and it will eventually either this year or next), having something in a 401K is better than having nothing in a 401K, and you do get the tax deferred “benefit” til you are old and gray. The problem is that people believe that their company retirement “plans” are going to make them money…enough money to retire on. And that…is disastrous thinking. For about 95% of people this is simply not correct.

I have “a 401K.” and it’s stashed with money all of which I will only see half after taxes and less when tax rates go up…assuming the company the 401K is entrusted to doesn’t go bankrupt.

Wealth won’t come from having a 401K for all but about 0.5% of Americans. It’s a nice thing, but darned unreliable if you come to believe it is your future in and of itself… A lot of this will be about “luck.” When you start taking money out, is the market going to be up, stable or down?

Think: How many people do you know that are wealthy because of their 401K and the geniuses that invested the money for them?

Answer: Zero? I can think of ONE person I know that can retire with what is in her 401 k. ONE.

Think: How many retired people are wealth because of “social security?”

Exactly.

All of that said, it’s CURRENTLY an excellent thing to have to supplement your “social security” someday, and a good thing to use as a deduction on your taxes and maybe have a little something… when you can withdraw it…..like a vitamin at the end of the day.

So what IS your real problem and what IS the answer?

Here is your problem and solution laid out in number form, then you’ll see The Plan.

The pictures that emerge are crystal clear. No ambiguity.

I want to show you how much your neighbor earns; the income of people with various levels of education; how much your neighbor is worth. I want you to see which group of people is the ONLY group of people that make any real money.

(And you as an individual make this ONE wealth choice TODAY!)

But first, really drink in these numbers… then continue…

It’s good to have KNOWLEDGE and WISDOM before making CHOICES that will CHANGE your life.

Let’s start with how much you and those in your household earn each year.

Income Levels in the U.S.

Traveling in Europe this last year gave me reason to break down information into specific info for your specific situation in life.

Every country in Europe is very different from the rest, very much like states in the United States are very different in income, wealth, etc.

The median (half higher, half lower) income for a family (household) in the USA is now at $56,565.

But that number means very little. The U.S. is not really a single entity when it comes to life, income, quality of life, health…anything. And comparing apples to apples is difficult.

For example, the median U.S. household income of a household in 2000 was 57,500. (adjusted for inflation)

(Ever wonder how a stock market can triple but there is no change in the income of the people who buy and sell the stocks? Just think about it…all for next time.)

First point: Nothing has changed in 17 years. “The System” is not going to help you live a better life.

In 2000, there were 273 million Americans in 105,500,000 households

In 2016, there were 125 million households.

(The U.S. official data I’m using is different from Nielsen and other sources. I suspect no one knows whether these numbers are real or not…)

🙂

There were 2.53 people per household in 2016 vs. 2.62 in 2000.

I don’t expect these numbers to continue their downward trend at all. I suspect that we’ll see them rise again and rise soon. Households will get larger again.

9% of American households have a net worth of $1,000,000…not bad. About 1 in 10 households are stable.

The top 7% of all households in the U.S. earn 1/3 of the money.

The top 20% of all households in the U.S. earn 50% of all earnings.

That top 20% of U.S. households tops $100,000 in annual income.

Top 5% earn $157,000+ annually.

Now stop for a moment.

Income is important and I’m going to show you how to increase your income with a couple of simple decisions.

But income is NOT net worth.

The two correlate but high income does NOT cause high net worth. In the end, all that matters is net worth. (What YOU KEEP.)

You need TWO things to be financially free:

1. Higher income.

2. Self Discipline to keep as much as you possibly can over time.

Here’s a chart for you. Figure out your net worth (assets minus liabilities) then see where you are on this chart.

If you have at least x dollars, then you are in the upper y percentile:

$50 ………… 12th Percentile
$8,800 ………25th Percentile
$31,300 …….37th Percentile
$81,200 …….50th Percentile
$168,100 ……62th Percentile
$317,300 ……75th Percentile
$505,800 ……82th Percentile
$941,700 ……90th Percentile
$1,871,800 …95th Percentile

But again this is for ALL of the U.S. Break the numbers down by age and you are closer to comparing fruit to fruit.

Age ———10——-25%……. 50%……. 75%…….. 90% ………99%

18-24 -$20,900 …-$2,860…. $4,400 …..$15,600… $45,521……. $388,350
25-29 -$22,900 ….-$1,100…. $9,460 ….$42,000. .$127,580…… $594,400
30-34 -$16,500 …..$1,600 …$19,400 ….$90,400 .$242,450.. .$1,373,300
35-39 -$6,100 …..$4,300….. $36,320 …$185,806 .$496,000.. $2,814,200
40-44 -$6,140 …..$8,330….. $62,200 …$251,150 .$761,400… $7,282,400
45-49 -$2,500 …..$11,060 …$72,070 …$305,400 .$831,780. ..$5,216,000
50-54 + $0 ………..$14,200…$122,100 ..$440,400. $1,017,000. .$7,222,100
55+ +$2,600 ………$44,300..$194,700 …$548,910 .$1,485,000. $10,814,000

Image source: Getty Images.

The average American’s 401(k) balance?

The average American’s 401(k) balance in 2015 was $96,288. This is according to Vanguard’s annual How America Saves report (link opens PDF). While this study looks only at Vanguard’s 401(k) accounts, with the fund company’s approximately $400 billion in 401(k) assets and 3.9 million participants in plan sizes ranging from tiny to massive, it’s safe to say that this study is a good cross section of American savers as a whole.

This average actually declined by 6% from a year before, due to an influx of new 401(k) plans, as well as an increase in automatic enrollment, which results in more savers with smaller contribution rates (generally, the automatic savings rate is just 2%-3% of salary).

It’s also important to look at the median 401(k) balance because it tells a completely different story. Mathematically speaking, the median marks the midpoint of a set of data, which for Americans ‘ 401(k) accounts at Vanguard is just $26,405. In other words, half of 401(k) savers have less than this amount and half have more.

While this amount sounds a little low (and it is), there are a couple of points that need to be taken into account. First, since it’s becoming more and more common for workers to change jobs every few years, the data likely includes many workers who have multiple 401(k) accounts. For example, the average 401(k) balance of someone who has been at a job for four to six years is $46,120. However, if workers in this group have two or three other 401(k)s from former employers, their savings can be significantly higher than this report makes it look.

Second, the average 401(k) balance varies widely depending on income level and age group, so I’ll take an in-depth look at these categories.

Average 401(k) balance by income and age

As would be expected, the average 401(k) balance is higher for people who earn more, but it’s not exactly proportional. For example, on average, people in the $75,000-$99,999 income bracket have 101% of their annual income saved, while people in the $30,000-$49,999 income bracket have just 63% of their annual earnings put away. In other words, the saving rate appears to be higher for high-income individuals.

Data source: Vanguard.

And, as you would expect, people who have worked more years have more money saved.

A Masters Degree averages $90,000 base salary.

Because having a 401 k pretty much requires you have some income, let’s see who is earning what. It’s very easy to see the differences in people’s education choices.

If a household is headed by someone with a Doctorate Degree you can expect $100,000 average income.

The average family household income headed by someone not finishing high school? 22,700

The average family household income headed by a High School Grad is 36,800

The average family household income headed by a person with a Bachelor’s Degree is $73,000

Professional degrees (m.d., d.o., j.d., d.v.m., d.d.s.) $100,000 average

Notice how much higher the average income is vs. the median.

Remember I told you the U.S. is a very diverse nation. Check this out:

The median income of a household in New Hampshire or Alaska is $75,000 vs. Mississippi at $40,000

Where you really want to be is in the highest 20% of income earners who gross $100,000+ per year.

Quick side note:

If 3 people are in a room and one earns a single dollar bill, another earns $100,000 and a third earns $1,000,000 per year,
the average is $367,000 dollars;
the median (middle family) is $100,000.
Make sense?

Easy enough, realizing neither the median or mean/average tells the whole story!

The government tells you flat out what will make you wealthy…

Note: The stats on this page are best viewed using Internet Explorer or Safari browsers.

Here are the annual income averages and medians for a household in various groups:

Group                Median (000's)   Avg. (000's)

0-20%                   11.1            10.8
20-39.9%                25.7            26.1
40%-59.9%               43.2            43.4 (middle class)
60- 79.9%               68.1            69.1
80-89.9%                104.7          106.5
90-100%                 184.8          302.1


So if you earned $100,000 last year, you just missed being in the upper 20%.

But there are no secrets revealed in that graphic.

KEY Question: How important is education of the head of household to income?

Group             Median household income       Mean income
in thousands

No diploma                19.4                     25.9
High School Grad          35.6                     44.8
Some College              41.1                     56.0
College Grad              73.0                     117.5

ANSWER: Send your kids to college. Get them to graduate and they make twice as much as their non College Grad friends. This is not optional, they ARE going. That’s the first key. The second key for them and for you is ultimately going to be the SAME.

None of those numbers predict financial freedom but they do predict POVERTY.

What about YOU?

What IS the one key factor in predicting Financial Freedom?

Answer: It’s WHO you work for…. check it out…

Annual income by WORK STATUS for head of household
(Who do you work for?)

Group                    Median Household Income        Mean

Work for someone else      49.3                           70.1
SELF EMPLOYED              66.7                           141.5
Retired                    24.4                           43.2

So Self Employed people earn more a lot more on average than those who work for someone else. That doesn’t seem to mean much at all. Besides it’s what you KEEP…

I dug a little deeper…

If you are self employed, your income is on average more than DOUBLE the person who has a “real job.”

Now. Let’s move from income and evaluate the present big picture. The numbers that matter are NET WORTH for your household.

Net Worth

Here's a picture of the U.S.

Group      Median Household Worth in thousands of dollars

25th percentile         13.3
50th                    93.1
75th                   328.5
90th                   831.6

Now, let's look at the education numbers as far as net worth:

The numbers on the LEFT are the MEDIAN (middle), the numbers on the RIGHT are AVERAGES (for all households in the US.)

Family net worth by education of head of household 

High School Only      68.7             196.8
College Grad          226.1            851.3

For your kids….
The college grad is worth FOUR TIMES the non-college grad.

This is now significant. You can live on 851,000. You can’t live long on 226,000. So a LOT of college grads are ALSO good at keeping money but a LOT of college grads are only good at EARNING money. Yes, that education pays off for many and 3 times as much as the non-grad. This is all important. But it doesn’t give us a PREDICTOR of financial freedom.

$850,000 of net worth only lasts so long when it’s not being added to by income generation…

That’s the average. The median is 226,000. The middle college grad is worth only 226K. That’s NOT going to cut it.

For you…
What is the most important factor in wealth accumulation?

Where does the millionaire mind BEGIN?

Current WORK STATUS of head of household (Who do you work for?)

The chart below is very simple. The numbers on the left are median (middle) numbers. The numbers on the right are average numbers, in thousands. There is only one group of people that can live beyond retirement and it’s the SELF EMPLOYED. Only the self employed group is worth more than a million dollars on average. (The very necessary retirement figure for people who will live normal life spans or more.)

Work for someone else     67.2         268.5
SELF  EMPLOYED           335.6       1,423.2

Self employed are WORTH 5-7 times what “normal people” are both at the median (middle) AND average!

That spread is dramatic. Being self employed is a clear predictor of the highest success possible as far as data given to you by the U.S. government.

The SINGLE BIGGEST FACTOR in WEALTH…

If you work for yourself, you are (or soon will be) worth, on average, 6 TIMES what someone who works for someone else is worth. WOW! 1.4 million dollars….

The headline should read:

Self employed net worth on average, 1.4 MILLION dollars.

Work for someone else net worth… 268,000.

Self employed…sounds so “iffy” on an application.
There’s nothing iffy about it.

Self employeds don’t fill out applications for jobs.

Self employed ==> Wealth

The data are crystal. Being self employed predicts wealth.

It is the SINGLE BIGGEST FACTOR by far. Race, gender, education, none of it, NOTHING comes close.

Every person who works for someone else should seriously consider having a small coffee table business on the side. A service business produces money quickly. A well thought out and planned online business produces money long term and with stability. And both allow you to determine your own income.

There is nothing wrong with having a “job.” It’s respectable to be sure. BUT there is a LOT WRONG with believing that the average person can live 15 years on 268,000 dollars when these numbers are DECREASING. Even if they weren’t decreasing….I guess, 268K saved is about 10 years living in a tiny apartment, 5 years in a modest home with some degree of comfort.

Looking at the big picture, the median net worth of a family in America is a skimpy $93,000. Half the families in the USA are worth less than $93,000.

One bad thing goes wrong and the family is done, usually for life.

It’s very scary.

The median net worth of the top 10% in the USA raised to $924,100. (assets minus debt). BUT the bottom 20% in net worth in the USA dropped by more than 10% to $7,500. The poorest people are not saving anything. They are building no equity and accumulating junk debt (toys) instead of quality debt (things that can go up in value like real estate, education, career related expenses, or a small at home business).

The Illusion of Balance

The ongoing problem is simple:

People are self-sabotaging their lives.

Someone once told me and hundreds have told me that they wanted to be “successful” and live a “balanced life.”

I was recently asked in an interview what a balanced life is. “How does that translate into building wealth, Kevin?”

I hate the “balanced life” metaphor for precisely what it means, does, forebodes and installs into human thinking and behavior.

The answer is that it MUST come down to having time each day for your work, time for entertainment, time for friends, family, leisure, and sleep.

But if someone believes that every week will afford all of these that simply is not true. Each week these aspects will be different. Some years will feel more “balanced” (fun) than others.

What really matters is in your work, which is going to require 1/3 of your week…is it something that rewards you in multiple ways? Yes or no?

And this is where being self employed pays off.

The core problem is that there are very few “jobs” that provide enough income to offset future financial hardship (bad quality of life) in someone’s life.

In other words, when someone in the family gets disabled, divorced, sick, dies, gets fired (downsized, sorry) everything exponentially gets worse. All of these things devastate families and remove “achievement” from any picture. Survival becomes the issue. Credit becomes stretched and becomes extinguished.

Because someone had a leisurely non-work life, they didn’t have further education to prepare them for their next career; education which is necessary in the 21st century.

They didn’t start that coffee-table business.

One single event can cause a mess….Remember how much the divorce cost you, not only for the attorneys, but what happened afterward when you had to live by yourself?!

(Hospital bills, rebuilding the house that burned down, etc.)

So in the present, the person/family lives a life of hating their job then going home and vegging out. They go putter in the garden or go golfing or go to the club…

Then they have to leave their job because technology gave them the boot, or they are forced out when the rainy day hits. They can’t get a new job that pays what the old one did. The entire family suffers, and usually for years.

What was a seemingly OK trade-off (the job you hate for the leisure time), the “balance” is actually a short term illusion. When the disaster hits, no one is going to be home long with the child that needs help because both parents (if there are both parents) will now be working two jobs to replace the one better paying job they had. The parents essentially can replace their income if they are still together, but they will rarely see their children or watch a TV show again.

It’s the illusion of “balance.”

How many people does this happen to?

And is it happening to YOU?

What are the chances it will happen to you?

It happens to 77% of adults living in the United States. In other words, it is going to happen to you.

This is why I encourage people… you MUST start a small business, preferably one you find compelling. Something that is fun, or rich with meaning for them. If not in meaning than something where the reward is great by comparison to the work. Most small businesses cost almost nothing to start and can cause an income much higher than any job they ever had, in just a few years time…sometimes faster.

Most simple service jobs pay quite well (better than a college education) for being able to start today.

Starting a business can be done incredibly quickly in 2017. Incorporate, tax ID, open an account. You are in business.

The only expenses you want to make in your younger years (pre retirement) are tax deductible expenses (home, business, and educational programs, which can include college though as you can see the self-employed does much better than college.) Optimal? Programs that will change how you think and what you do which will pay off shortly after the expense is incurred. That’s it.

Today’s balanced life (9 hours of hell balanced by a 1/2 hour commute and home time later) is truly a David Copperfield style illusion….

But let’s look at today.

If someone loves their job, they are in a potentially good life situation. Work that is meaningful that is secured by the individual’s overwhelming skills that make them almost irreplaceable is a nice beginning.

What’s missing?

Focus

Life doesn’t need to be balanced if it is focused.

If it is focused, it is self-balancing both short, medium and long term.

A focused life is one where the person (family) can take care of the rainy day today while they love what they do.

The focused life is often self-balancing because ALL DAY you are engaged in meaningful, important, fun, and/or interesting activity that is taking care of you and your family today and into the future. You are living the life of YOUR choosing. (This can include working at a job you love and find important, or, your own business.)

And for you?…What about YOU?

This is the ONLY life that leads to security. It’s the only life that brings people stability, safety and long-term happiness.

Someone who strives for balance is trying to balance good and bad, and that result *always* ultimately loses. (It’s simple math.)

People who live a focused life, *almost always* win and have a fulfilled and meaningful life.

Both lives will have their disasters and devastation, but the focused life will weather it. The person who strives for balancing bad and good is unlikely to do well at any level.

To achieve you must have focus. Focus causes achievement. Achievement most easily happens when you are working for yourself, for your family.

Remember there is NOTHING wrong with working for someone else. In many respects we all do. There is also nothing wrong with working WITH someone else!

But to not protect yourself and give yourself a chance at building safety, security and financial freedom when it is so easy is …well…you know.