Where does wealth come from?

By definition, wealth is “an abundance of resources.”  In other words, you have more than you need.
It may seem counterintuitive, but research shows the primary determinant for wealth is not how much we make (income) but how much we are given (intergenerational transfer). 

This can come in three forms.  

  • Inheritance that is passed down upon the death of a parent or grandparent or other older relative.
  • In vivo transfer. These are gifts made during one’s lifetime. They can include paying for your child’s education (so they don’t have any debt), subsidizing their housing (like providing a down payment for their first home), or making a zero interest loan so they might be able to start a business.
  • Security transfer. This is not referring to stocks and bonds but rather the emotional security that a child has been granted all of their life.  When someone grows up with a strong sense of economic security, they are seeing the world as one that is ripe with opportunity not one that is filled with risk.

This is not to say that many people who become wealthy didn’t earn it – either through their own hard work or ingenuity. 

But research does confirm that the majority of the time, the old adage “it takes money to make money” holds true.
Consider home ownership.  About 65% of adults between the ages of 18-34 expect to receive financial assistance with the purchase of their first home from their family.
What is the impact on wealth for those who can’t afford a down payment?  The average net worth (a proxy for wealth) for a renter is $5200.  The average net worth for a homeowner is 45 times this.
When we look historically at discriminatory housing policies that made it harder for certain groups to purchase homes in certain neighborhoods (and sometimes not at all), they were being denied a generational opportunity to both accumulate AND pass on wealth.   (Watch this brief video about the length’s Cory Booker’s parents had to go through to work around this system.)
There are some interesting policy prescriptions being floated around to deal with this wealth gap – ranging from baby bonds to eliminating student debt.  
But beyond the policy consider the personal. 

What is the story behind your wealth or lack thereof?  What was or wasn’t passed on to you?  What will you be able to pass on to others?  And, finally, is there anything we can do to make sure more people have something to pass down too?
To learn more about the wealth gap, check out this interesting podcast between Ezra Klein and the economist, Sandy Darity from Duke – which inspired this post.

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