Toward a Positive Trend of Wealth Career

Owning a house is important as it provides asset value protection as well as give a function as a shelter to the occupants. A house can be converted into cash allowing families to support themselves during a period of low income such as in pension age, or unexpected events such as economic crisis. 

Hence, some people push themselves to own a house even they must borrow money or a mortgage. The mortgage, combined with other kinds of debts (like education credit, consumption credit) can reduce households' ability to support themselves during financial hardship as mentioned above. 

Therefore, supporting families to have a higher asset accumulation is important as it can lead to a higher ability for households to deal with a crisis.

Wealth Career  

A wealth career indicates the changes of wealth level during one person's age that is accompanied by the changes in income and debts.

In general, a person has zero wealth (and zero income and debts) during his/her school age. As soon as he/she finishes school and enter the job market, a person starts to earn money, buy assets, and make debts if required. 

A formation of a household due to marriage or union can increase wealth level as there will be a merge of individual wealth for the couple, ability to share assets, and the availability of two-income earners in the household.

For some reasons, households can borrow money, for example, to pay the living cost or buy items that have use value like vehicles and houses.

It is expected wealth levels increase over time as households can use a fraction of their income to purchase an asset that gives stable or increasing value over time or some assets that give a return on investment.

However, there is also a possibility of a drop in wealth due to a significant increase in expenditure and debts. 

One problem occurs when someone reaches pension age, where a significant drop in income is not accompanied by a high level of wealth. This implies heavy reliance of pensioners on external funding such as government, family, or donations.  

 

Problems in Wealth Career

In the progress of wealth accumulation, some problems may occur due to the unsynchronised pattern between wealth and income, some of them are:

First, the increase of wealth level might be slower than the increase of income. This is caused by a high living cost that prohibits households to accumulate wealth or a high inflation rate that reduce real wage.  

Second, negative net wealth can be found at the beginning of wealth careers. The cause is the occurrence of debts, e.g. education debts that must be paid back by the student or debts inherited from parents or older generations.

Third, low, zero, or negative net wealth at the end of productive age. The cause is the sudden drop in assets' value in the productive age due to asset conversions to financing other household members (e.g. for study, marriage, or buy properties), person's inability to work makes him/her convert assets or withdraw savings to pay the living cost, or other unexpected reasons (e.g. disaster, war).

More specifically, different problems in wealth career can be identified between low- and high-classes households.

First, the increase of wealth level is probably slower among households in the low class than the high class. The cause is asset selection in low-class households that tend to be low quality, low-value over time, and focused mainly on basic needs. While richer households have higher purchasing power enable them to buy assets of higher quality, give stable value over time, and give a higher return.

Second, persistent low, zero, or negative net wealth among low-class households during their productive age. The cause is their inability to find high-earning jobs due to lack of skill, limited opportunities, and a not-supporting environment.

Third, high debts might be found in households in the middle and upper classes due to their ability to access (formal) credit sources. On the other hand, low debts among poor households are mainly caused by restrictions to access credit.

Fourth, any unexpected financial shocks may significantly affect poor households, shown from a drop in standard of living and reduction in wealth. On the other hand, financial shocks may give a less significant effect on wealth level among middle- and upper-classes-households for them to maintain their standard of living.

Inflation Inequality

Inflation hits poor and rich households differently. Recent studies found that inflation hit poor households harder than richer households. In 2022, a 7% inflation in America was equal to a 7.2% increase in prices for the lowest income households—higher than for any other group. For the highest-income families, the rate of change was 6.6%. 

The cause of the inflation gap between the rich and poor is the differences in typical spending in each group. Low-income groups are more likely cannot escape from housing-related costs like food shopping and energy bills which take a larger proportion than wealthier people. On the other hand, a price increase in nice-to-haves like restaurants and hotels, recreation and luxury goods which are commonly found in high-income groups are far easier to cut if the price rises.

The inflation gap potentially brings different effects on wealth careers for poor and rich households. 

People in low-income groups will find it harder to accumulate assets as inflation shrinks their real wages harder than wealthier groups. Hence commodities become more unaffordable for poor people and divert their energy from asset accumulation. In contrast, expenditure on luxury goods held back by wealthier households diverts money from expenditure to investment and asset creation.  

Inequality itself should be avoided or at least minimised as R. H. Tawney noted in his book The Acquisitive Society, inequality “diverts energy from the creation of wealth to the multiplication of luxuries.”

Toward a Positive Trend of Wealth Career

Policies' orientation toward the increase of wealth level should be treated differently among rich and poor households.

First, maintaining high economic growth and a low inflation rate is essential as they are beneficial for households in all classes to fulfil their needs and maintain their standard of living. Besides, high economic growth can reduce the inflation gap between the poor and the rich. Further, a social protection scheme is needed to maintain purchasing power for low-income households especially during economic crises and pandemics. 

Second, it is needed to change the consumption pattern among poor households as well as richer households so they can have positive-effect-on-wealth expenditure. For example, rather than buy items in large quantity but low quality, they should buy items in small quantity but with high quality so they can have rigid value, low procurement cost, and less time involved for transactions. Households should also avoid consumption that give a negative impact on their health and wellbeing as they require high cost and opportunity costs for the recovery process.

Third, creating a low cost of living through enhancing necessities supply, giving subsidies, and increasing public spending. One example is providing water to be more accessible. In 2016, approximately 12.6% of the Indonesian population live without access to safe water. This figure is slightly better than Azerbaijan (13%), Nicaragua (13%), and Ecuador (13.1%) but worse than Micronesia (11%), Ghana (11.3%), and Moldova (11.6%).

In Indonesia, national averages hide large income-related disparities in access to clean drinking water. The use of bottled water, for example, varies substantially across income segments. More than half of those in the richest quintile of Indonesian households rely on bottled water, while only 8% of the poorest quintile in rural areas use bottled water (World Bank, 2020) (Figure 1). 

Figure 1. Household primary access to drinking water by income and area, 2017 (%)

The reliance on bottled water for drinking is particularly prevalent in the richest quintile, indicating that affordability is a key determinant of access to this water source. While bottled water has become a popular source of drinking water in general, the main users remain only those who can afford it. Poorer households still depend on traditional sources of water, both in urban and rural areas.

Similarly, disparities in access to improved sanitation across both income and geographic differences remain. Only 49% of Indonesians in the lowest-expenditure quintile have access to improved sanitation facilities, compared with 87% in the top quintile (World Bank, 2020) (Figure 2).

Figure 2. Household access to sanitation by income quintile, 2017 (%)

 

Significant differences between urban and rural areas also remain: in 2017, 91% of the richest urban population had access to improved sanitation, compared with 74% in the richest rural population. Similarly, 64% of the poorest urban population had access to this service, versus 41% in the richest population quintile. 

Conclusions

Wealth can reflect households' standard of living and can be used to support households during periods of low income. To make a wealth creation, we need strategies to make a positive wealth accumulation, reduce inequality, and create different strategies for different classes.

References

https://theconversation.com/inflation-inequality-poorest-americans-are-hit-hardest-by-soaring-prices-on-necessities-174853

Tawney, R. H. (1961). The acquisitive society (Vol. 598). Courier Corporation.

WaterAid. (2016). Water: At What Cost? The State of the World’s Water 2016

World Bank. (2020). Indonesia Public Expenditure Review 2020Kajian Belanja Publik Indonesia: Belanja untuk Hasil yang Lebih Baik: Spending for Better Results.