Economists just released a gigantic study of 90,641 worldwide households, looking at what wealthy families in developed countries do differently.
No surprise, they found a big gap between wealthy and poor people in capitalist countries like the United States. But if you drill down on their findings on just the American part of the study--about 6,000 U.S. households--there's a very clear takeaway that might help you make some key life choices.
Here are the details, and how these decisions can help you become an average of roughly four times as wealthy as you otherwise would be.
Your home and your work
The two big decisions themselves are unsurprising. But, the specific degree to which they impact ultimate wealth is striking: an 8x and 4x difference in wealth accumulation, according to the study.
Decision No. 1: Own your home (and eventually pay it off).
This is a big focus of the study, published as a working paper for Austria's Oesterreichische Nationalbank (link opens as .pdf): how much better off people are if they own homes, as opposed to renting. Yes, homeowners turn out to be wealthier than renters worldwide.
In the U.S., it's an 8x difference between homeowners and renters. That said, this is the less compelling of the two conclusions, because it's likely the decision to own a home results from having money as much as it could cause greater wealth.
So let's set this aside for the second, as the other decision described in the study is more compelling.
Decision No. 2: Start (or at least own) a business.
For those of us who weren't born into money, there's only one way to cultivate it: Start a business. What's interesting about this study is that it has quantified exactly how much these two decisions likely net out, on average.
In short, someone in the United States who both owns his or her home and also owns a business is likely to accumulate four times as much wealth as everyone else in America. Crucially, this includes a comparison to all the homeowners out there who work for other people.
So, if you're renter and an employee, you should theoretically be on the path to the equivalent of tripling your salary by making these two decisions.
The fine print
Here's the tricky part from the perspective of an individual, as opposed to an economist: What if you fail?
Most businesses do fail, for sure. Frankly, it took four or five reads of this study for me to realize the obvious point: Most entrepreneurs who fail the first time don't just give up. They keep trying. So, over time, the odds are that they'll ultimately succeed with at least one business keep growing.
It's also worth remembering that the researchers looked at how these two factors interacted with each other. They divided people into three classes:
- Homeowners who also owned their own business. This was the top 15 percent. The authors separate landlords and business owners, but for our purposes, we can lump them all in together. If you're a residential landlord, you're in the housing business.
- Homeowners who primarily worked for someone else. This was the middle 55 percent of society. If you have a job and a mortgage, you're in this class.
- Renters who work for someone else. This was the bottom 40 percent. And you'll notice that we're sort of missing a category: renters who are entrepreneurs. (I was in that category myself for years.) However in the U.S., most people who become successful in business eventually buy their own home. Maybe more than one.
The choice is clear
So, what to do with this information? I can imagine seeing this and just concluding that the deck is stacked. Start a business and buy a house when you're just starting out? With what?
As The Washington Post, which reported on this study, points out, the vast perception is that it's getting harder and harder to climb the wealth ladder.
The clear answer to my mind (and frankly the one that I personally followed, not that it was really a plan) is to focus on the business first, and the home ownership second.
You need a place to live, certainly. And if you have a family, you have to take their needs into consideration. But consider your housing as if it's a temporary situation.
And then put your energy into starting, building, and owning a business. Everybody talks about being an entrepreneur, but there more wannapreneurs out there than anything else.
So, if you can defy the odds and join the group that actually makes the choice and executes, you'll come out far ahead statistically over everyone else.