You’re out walking on your allocated once a day stroll and you spot a person about your age closing the door of their BMW 5 series. They stroll up their nice house (broken into flats), fumble in their leather briefcase for their keys,
And you say to yourself, “wow, how the other half live!”
Is all it seems? Is this person really wealthy or is it just for show?
Those of us pursuing FIRE are acutely aware of our expenses, income and total net worth. I for one have become ever more alert to what it takes to build wealth. This is no overnight success story and that is fine.
Have you ever wondered where you fit in on the grand scheme of things? Hint: it’s probably not where you think.
I am aware that comparison can be the thief of joy, but I want to take a moment to pull the veil back on where we all stand on this topic.
The mainstream media regularly uses income as a way to compare how wealthy people are. I believe that while there is merit in doing this, it is a deeply flawed way of measuring how wealthy someone is. That is because how wealthy you are is really a function of how many assets you own rather than how much you earn.
As people who are pursuing FIRE, we know we need to purchase income generating assets so that we do not need to work any longer. Therefore, the important thing we measure is savings rate which is effectively the portion of your income you are using to purchase assets.
Then we measure our net worth in relation to the 25 times expenses that means we have achieved financial independence. In fact, my income doesn’t come into play when working this out. It’s my expenses and the number of assets I own that are important.
It is also possible for someone to be earning a large income but have little assets and a large debt. Take a reasonably well-off late 20s/early 30s person who earns £70k a year, but decides they want the latest BMW 5-series and takes out a £45k PCP loan to pay for it. They are paying around £700 a month of their income for this. As they rent their nice Zone 2 London flat, and have only been contribution a minimum to their pension, have an outstanding student loan, and have couple of credit cards, they have a total net worth of under £20k.
They feel like they are well off because their salary is in the top 6% of incomes which allows them to spend money well. In fact, they love going to expensive restaurants and bars which make them feel rich. Overall, they are in the bottom 12% of the country for wealth once their debts are taken away.
Looking at the figures from the Office for National Statistics on the Institute for fiscal studies website. The median income in the UK is £29,600, and the mean is £35,900.
I put in my after-tax income as £5750 which includes my salary, rent and pension contribution from my employer into the calculator, it says I am earning more than 95% of the population. It should be noted that the table above is before tax.
Wow, that’s great news for me; however, I do not feel that I am rich. I live in a small flat in a good area, but my neighbours live in large houses worth upward of £1m. Who are they?
There was a gentleman on the BBC’s Question Time around the time of the 2019 general election who was widely mocked for saying he didn’t feel well off on £80k/year. I can understand where he is coming from to some extent although, he is still well off. I have enough money to live my life now reasonably well and invest, but I am not wealthy because of my salary.
I believe the government of this country wants us to consume products such as cars and mortgages, and income is important in deciding how much you may buy using these financial tools; however, that is not a measure of my wealth in my book. Also, as in the example above, it is easy to make people feel like they are wealthy, when in fact they are not at all
On that counter intuitive point, we shall now look at less publicised Office for National Statistics figures for total wealth. They do an biennial report which can be found here.
The data spreadsheet which I have taken info below from (and is the most interesting part) is found here.
The amazing thing about the statistics is they reveal why the mainstream media use income as a gauge for wealth. It’s because these statistics can make you feel really shitty about your position in society.
Let’s use my max net worth that I achieved in Feb of this year as an example. It was £321k (thanks to the stock market crash, it’s around £300K now).
The ONS splits wealth into four categories; financial, physical, private pension, and property.
Private pension and property wealth are self-explanatory. Financial wealth covers ISAs, bank accounts, money under the bed less any consumer debts. Physical wealth includes the (self-evaluated) value of household contents, possessions and valuables owned such as antiques, artworks, collections and any vehicles owned by individuals (including the value of any personalised number plates).
The median (the middle household in the UK) wealth is £286,600. The mean wealth is £564,300. The fact the mean is higher shows that there is wealth inequality in the UK. That is the ONS’s words and not mine.
Graphically this looks like this:
As you can see I probably, at a push, may scrape into the 6th wealth decile.
If we want to look at the overall picture in % terms. Note: I kept in the stats regarding the type of relationship for interest only.
I slip into the just above middle part. That means that there are about 40% of people in the UK who are wealthier than me.
Again, let’s look at that from an age point of view. This graph shows percentage of households in a given wealth band by age.
For my age group, I’m in the 64% + percentile. I’m 36 so fall into the 35 to 44 categories. That’s OK but it goes to show that as you get older, people generally get wealthier. 6% of people in my age range are millionaires.
There are many other ways to look at this, but I think that this gives you a truer picture of where you stand wealth-wise in society.
You will have heard of the phrase, ‘how the other half live’. Now I can say I’m in the ‘other half’ (but only just as my net worth is above median) if you go by population. If you go by mean wealth I’m well and truly in the bottom half by about £200k below the mean.
It’s been an interesting way to look at this and also revealing how much wealth is in this country. Many people are probably not honest about their true wealth from the outset as it can be embarrassing to be poor or indeed wealthy. Others will inherit money which will explain the sudden rise as people get older. Many also are investing wisely in their pensions and that is shown too. Some outliers will make a lot of money by establishing successful businesses or by rising up the ranks in companies and earning fortunes.
Predictions for my wealth
I have made a large spreadsheet which I’m using to model my wealth accumulation. If I assume a 7% return on investments (clearly this won’t be a smooth journey), I should hit £1m by age 47. I would be joining around 18% of the UK’s population at that age. Hardly exceptional, but still very good.
I’m not interested in becoming the 1% but I do want to have nice things and live well, and eventually retire early. There is a long way to go here. I am not going to get hung up on comparing myself to others as this will drive me crazy; however, it is very useful knowledge to have.
I will keep on trucking, looking for ways to increase my income and save as much as I can to get to Financial independence.
I’d love to know what you think. Please let me know below.