If you could have just one piece of information on somebody to predict their future wealth, what would it be? Would you ask for their IQ? Whether they went to college? How about their parents' education level? All of these are great choices, but they aren't what I would ask for.
I would ask for their current income.
For someone of working age, income is the best leading indicator of wealth. I can prove it too.
Last week I released my 2nd book The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life. In it, I examined the ironclad relationship between income and wealth. We can see this relationship clearly if we look at the median income of U.S. households within each wealth level of The Wealth Ladder:
As you can see, those with more wealth tend to have higher incomes (and vice versa). This led me to conclude that:
It's rare to have high income with low wealth or low wealth with high income.
This data comes from the Federal Reserve's Survey of Consumer Finances (SCF) and is a snapshot of U.S. household wealth. It's great for understanding wealth as a whole, but not for understanding changes to wealth over time. For this, I found another dataset called the Panel Study of Income Dynamics (PSID) which tracks the same households and their financial status over time.
And in the PSID data, it's quite clear that current income is predictive of future wealth. For example, if we look at the wealth of the same U.S. households from 1984 to 1994 (a period without major economic crises), this becomes readily apparent.
At the start of this period, the average income of households that started in Level 3 ($100k-$1M) and were still in Level 3 a decade later was $98,905 (in 2021 dollars). However, the average income of households that started in Level 3 but made it to Level 4 ($1M-$10M) a decade later was $150,185, or 52% higher. In addition, those households that made it to Level 4 saw more inflation-adjusted income growth compared to those who stayed in Level 3 (43% vs. 27%) over the same time period.
Households with higher income and higher income growth end up building more wealth than households with lower income and lower income growth.
While this might seem obvious to you, unfortunately, this information isn't well known in the personal finance community. How do I know?
Because when you ask people, "What builds wealth?" you get a wide variety of answers. Some will tell you it's mindset. Some will say work ethic. Some will say it's spending. And a host of other explanations.
While I won't deny that all of these things matter, it's difficult to prove how much they matter. We can't easily run experiments on someone's mindset or work ethic. We can't force people to follow certain financial habits for decades. We don't have any solid data on these things.
But we do have data on income and wealth. And the linkage between them is undeniable.
I'm going to be straight with you. I'm not an authority on building wealth because I've built a ton of wealth for myself. I've done fine, but that's not my selling point. Any expertise I have comes from large, aggregated datasets and various forms of research that I summarize. That's it.
So, if there were a randomized controlled trial that demonstrated the importance of mindset or financial beliefs, I'd be the first in line to say I was wrong. But, no such study exists.
However, we do have great information on people's financial profiles over time. And this data suggests that the best leading indicator of wealth is income. Yes, your education can influence your income. So can your work ethic or your habits. But I can't prove how much they matter. That's the rub.
So, if you want to build wealth, you'll need to focus on your income. But how do you raise your income? For that, we turn to our next section.
Four High Income Paths to Consider
Income leads to wealth. But, what leads to income? There are many answers to this question, including hard work, connections, and even luck. While all of these play a role, I've noticed that high earners tend to follow one of four distinct paths. These paths won't guarantee success, but they are where high incomes tend to cluster. So, if you want to increase your income, consider one of the following:
- Sales and Persuasion
- The ability to sell is the most direct path to income. Since most salespeople are paid commissions, your income is directly linked with the revenue you generate. So whether you are selling enterprise software or luxury real estate, if you do your job well, you can outearn many other high-paid professions (such as doctors and lawyers). Sales isn't easy, but it's a skill that scales very easily.
- Technical/Analytical Skills
- Though large language models (LLMs) like ChatGPT have made it much easier to do technical work, having these skills is still quite valuable. I can't tell you how important it is to understand what you are doing when working with such tools. The recent Tea app leak, where tens of thousands of women's personal information was leaked online due to poor cybersecurity, reinforces this point. I'm not the only one who thinks this either. Real programmers know AI's coding limitations.
- Whether you are considering software engineering, data science, finance, or another technical field, I'm confident that analytical fluency will continue to command a premium in a world dominated by technology.
- Advanced Degrees/Credentials
- Historically, one of the most reliable paths to high income was to get an advanced degree. Professions like law, medicine, and finance still confer high earning potential to those willing to put in the time. While the ROI varies across these industries, elite credentials can still accelerate your income, especially when paired with another high-income skill on this list.
- Entrepreneurship and Business Building
- Though this path is the riskiest among the four, it's also the one that has the highest upside potential. There's a reason why households in Level 6 ($100M+) of The Wealth Ladder have over half of their assets in their own businesses. Whether you start a business, acquire one, or build a profitable side hustle, entrepreneurship combines control over your time, income, and equity in a way few jobs can match.
Though there are other ways to increase your income, these are the ones that I've seen succeed on a consistent basis.
While there's no perfect formula for building wealth, the data shows a clear trend—your income today is the foundation of your wealth tomorrow. If you want to climb The Wealth Ladder, focusing on how to earn more is often the most direct and reliable way to get there.
This doesn't mean that you should only care about money, but you should be intentional with your career choices. Ask yourself: Are you on one of the four paths above? Is your income growing or stalling? What skills could increase your income over the next few years?
You don't have to have this all figured out right now. Just get started on a path and see where it takes you.
Happy investing and thank you for reading!
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This is post 461. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data